2 Annual Report 2010

3

Table of Contents Page

Section 1 – Organisational Overview

1. Map of the Magalies Water Area of Supply 4 2. Magalies Water’s Mandate 5-7 3. Chairperson’s Report 8-10 4. Chief Executive’s Report 11-12 5. Corporate Governance 13-17 5.1 Financial Misconduct 16 5.2 Risk Management 16 5.3 Directives from the Minister 17 6. Organisational Performance Highlights 17

Section 2 – Performance to Achieve Strategic Objectives

7. Performance to Achieve Strategic Objectives 18-40

Section 3 – Audit Reports

8. Report of Independent Auditors 42-47 9. Report of the Audit and Risk Committee 2010 48

Section 4 – Financial Statements

10. Magalies Water Annual Financial Statements 50 for the Year Ended 30 June 2010

- Statement of Financial Position 53 - Statement of Comprehensive Income 54 - Statement of Changes in Net Assets 55 - Cash Flow Statement 56 - Accounting Policies 57-60 - Notes to the Annual Financial Statements 61-69 - Schedule of Operating Expenses 70 - Annexure to the Financial Statements 71

Key

MW = Magalies Water CoT = City of Tshwane RLM = Rustenburg Local Muncipality WTP = Water Treatment Plant WWTP = Wastewater Treatment Plant CSI = Corporate Social Investment EIA = Environmental Impact Assessment GDACE = Gauteng Department of Agriculture, Conservation and Environment TRU = Transformer Rectifier Unit RWST = Rustenburg Water Services Trust Organisational Overview

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Magalies Water’s area of supply spans 42,000 square kilometers. The main bulk water supply activities of the Board are undertaken in the North West, Gauteng and Limpopo Provinces. The Municipalities located in the Magalies Water area of supply are indicated on the map above. 4 Value Add To Core Function

Figure 1

Catchment Raw Water Storage Industrial Final Effluent Use Abstraction Solid Disposal Treatment Process Water Treatment

Treatment Process Bulk Storage

Wastewater Effluent Distribution to Customers Households

Magalies Water’s involvement in the water management value chain is depicted by Figure 1 above

2. Magalies Water’s Mandate

The mandate of Magalies Water is derived from Section 29 of the Water Services Act (Act 108 of 1997), which provides that: “The primary activity of a Water Board is to provide water services to other water services institutions within its service area”. Magalies Water also provides other water related services to other water services institutions in accordance with Section 30 of the Water Services Act (Act 108 of 1997).

Magalies Water Overview

Magalies Water was established in 1969, mainly to supply the needs of the platinum mines in the Rustenburg and Thabazimbi areas. For this purpose, the Vaalkop Water Treatment Plant was constructed next to the Vaalkop Dam with an initial capacity of 18 Ml per day. Growth in water demand in the area of operation has resulted in the growth of the organisation’s infrastructure and footprint in order to supply bulk water to new demand areas. Currently, our infrastructure traverses three provinces - the North West, Limpopo & Gauteng Provinces.

The Board currently owns and operates the Vaalkop, Wallmannsthal, Klipdrift and Cullinan Water Treatment Plants, together with bulk reservoirs and pipeline infrastructure. The Board also operates the Temba and Roodeplaat Water Treatment Plants on behalf of the City of Tshwane (CoT), and the Bospoort and Kloof Water Treatment Plants, as well as Rustenburg, Boitekong, Monakato and Lethabong Wastewater Treatment Plants on behalf of the Rustenburg Municipality. Figure 2 shows details of the infrastructure operated by Magalies Water.

5 Figure 2: Infrastructure operated by Magalies Water

Plant Ownership Catchment System Design Capacity [Kl/day] Capacity Utilisation (%)

Potable Water

Crocodile River system (Vaalkop, Vaalkop WTP MW 210000 84* Hartebeespoort, and Roodekopjes Dams)

Temba WTP CoT Leeukraal Dam – Apies River 60000 91

Roodeplaat WTP CoT Roodeplaat Dam – Elands River 60000 81**

Klipdrift WTP MW Roodeplaat Dam – Pienaars River 18000 113*

Bronkhorstspruit Dam – Wilge River Cullinan WTP MW 16000 68 system

Walmannsthal WTP MW Roodeplaat Dam – Pienaars River 12000 100*

Bospoort WTP RLM Bospoort Dam – Hex River 12000 97

Kloof WTP RLM Dorpspruit River 2000 28

Wastewater

Rustenburg WWTP RLM 36000 89**

Boitekong WWTP RLM 8000 133**

Lethabong WWTP RLM 1500 112**

Monakato WWTP RLM 0,900 100**

Legend: * There are plans to increase the capacity of these Plants

NB: Vaalkop Plant’s extension is at an implementation stage while Wallmannsthal and Klipdrift Plants are at a feasibility stage

** The decision to address capacity constraints rests with the respective Municipalities

6 2. Magalies Water’s Overview (continued)

Staff Complement

The total staff complement of Magalies Water is 383 and is divided between section 29 and 30 activities:

Figure 3: Magalies Water Staff Complement

Section 29

Water Treatment Services 215

Section 30

Madibeng Local Municipality 23

Moretele Local Municipality 11

Rustenburg Local Municipality

Municipal Services 3

Water Treatment Services 11

Wastewater Treatment Services 33

City of Tshwane Metropolitan Municipality

Municipal Services 60

Water Treatment Services 27

Total Section 30 employees 168

Total number of employees 383

Vision, Mission and Corporate Values Values Vision Service Excellence We endeavour to maintain service excellence and unparalleled To be the leading provider of quality water services. delivery through innovation, entrepreneurship, creativity and Mission commitment.

Professionalism The Mission of Magalies Water is to deliver and supply affordable, We are deeply committed to maintain and exceed all performance reliable, and good quality water and related services to all benchmarks in a responsible manner. stakeholders through:

Integrity • Optimising operational resources and technologies We seek to deliver value by maintaining trustworthy, long-lasting • Influencing and contributing to an eco-efficient environment associations with all our stakeholders in order to foster open and • Complying with employment equity and supporting human balanced relationships. resource development • Complying with relevant legislation, standards and guidelines Customer Care • Building customer and stakeholder relationships We are deeply committed to improving customer care and services • Contributing to the building of sustainable communities and throughout all our operational areas. economic development

Social Responsibility We seek to deliver and create sustainable improvements in the quality of life of all our stakeholders through corporate social investment and community participation.

Developmental Orientation We seek to deliver to and contribute to government objectives.

7 3. Chairperson’s Report

Professor Mohammed Jahed Chairperson

Reflections on the Global Economic Going forward, South Africa will still maintain its ability to spend on Environment infrastructure development and water remains a critical focus area of such activity. Effective water and sanitation delivery is one of the Government’s key priority areas. The country’s continuing focus on Over the past year, we have witnessed a global fiscal fall-out in the infrastructure development will ensure that we experience essential world’s economy created mainly by the bubble of assets, such as growth, that we create vital jobs and that we provide quality essential property, effectively bursting. Although this has negatively affected services for our people. the economies of Europe and the US, there has also been an adverse effect in terms of their ability to support the developing world. The result has been a global fiscal crisis that has impacted on economies Our Role in the Community around the world including South Africa, impacting on jobs, growth and inflation. In spite of this, our country has weathered the storm The Board of Magalies Water was established in 1969, mainly quite well, although austere fiscal and monetary policies have been to supply the needs of platinum mines in the Rustenburg and experienced. Thabazimbi areas. The capacity of the Vaalkop Water Treatment Plant has evolved from a mere 18 Ml per day as a response to In terms of fiscal policy over the past year, we have seen South Africa growing water needs of other consumers such as Sun City, more focusing on considerable infrastructure development to support mines, industries and various communities in the area. events such as the Soccer World Cup. We have also seen fiscal spending on transport, water and energy. The result has been a Over the years, Magalies Water has also become involved in the slowing down of the fiscal impact on the country. operation and maintenance of other Water Treatment Plants at the request of the Department of Water Affairs. The organisation has In monetary terms regarding inflation, our economy has fared quite since taken over and upgraded the Klipdrift, Wallmannsthal and well, staying within the band of 3% to 6%. In addition, regulation Cullinan Water Treatment Plants. in our banking sector has maintained our monetary austerity. All these factors have protected South Africa from the major fall-out Magalies Water became involved in retail water supply services experienced by developed economies around the world. during 1996 when it was requested to operate, maintain and supply retail water services in the Mankwe, Moretele and Odi areas of the former Bophuthatswana. To date, Magalies Water has significantly expanded its retail water services operations.

8 Chairperson’s Report (continued)

The Board of Magalies Water also took a strategic decision to local supply and delivery takes place. In terms of our stakeholder expand its core business to include retail water services following the relationships with Government and SAAWU (the South African promulgation of the Municipal Structures Act and Municipal Systems Association of Water Utilities), our input into the policy development Act. As a result, this has further enhanced its retail services offering and decision-making process on important water issues has been to the benefit of communities in the organisation’s area of supply. critical.

With the changes in legislation during 2000, transferring the status of Another key area of stakeholder engagement has seen our Board Water Services Authorities to Municipalities, Magalies Water started members participating in important industry conferences, contributing negotiations with various Metropolitan, District and Local Municipalities inputs on specialist areas of interest for both our organisation and regarding Water Services Provider agreements. Agreements and/or the country as a whole. Our government relations drive in the North Memoranda of Understanding (MoUs) have since been concluded West Province, in particular, has focused on greater collaboration or are in the process of being extended with Rustenburg Local between Government and the Local Water Boards and the formation Municipality (RLM) and Royal Bafokeng Administration (RBA) for the of strategic partnerships that will benefit the local area. Magalies provision of sanitation services and bulk water services. Water is also proactively engaged with policy at a strategic level, helping to shape the discourse that is taking place in the country Overview of Magalies Water’s around important water issues. Performance Over the Past Year Over the course of the year under review, Magalies Water was involved in supporting the local Municipalities with preparations for In terms of our fiscal sustainability, we have tried to maintain it within the prestigious Soccer World Cup. Activities centred particularly a manageable framework. We have ensured that our audit and risk around National Water Week when the provincial launch seminar on issues are taken seriously throughout the organisation. the region’s state of readiness for this important event took place.

Magalies Water was involved in ensuring water quality, reliability of Over the period under review, a key focus has been on ensuring supply and provisioning for the event in the City of Rustenburg, which that our human resources are taken care of. Skills development is a was one of the chosen host cities for the Soccer World Cup. challenge that still remains for the organisation and, indeed, the water services sector as a whole. However, over the past year, Magalies Another highlight of our stakeholder engagement activity over the Water has strived to improve the skills base of internal personnel and past year was the hosting of six major customer visits from Sun thus a total of 138 people have been trained by the organisation in City to tour our Vaalkop Water Works Plant. The aim of the visits essential skills. was to provide stakeholders with a better understanding of the work of the organisation and to encourage the formulation of strategic In terms of quality performance, the organisation has been recognised marketing partnerships on initiatives such as National Water Week. for its excellent work and awarded the prestigious Blue Drop status The building of such strategic relationships has also been a critical in three categories for water quality. This serves as a good indicator success factor for local CSI initiatives that are supported by Magalies to stakeholders of Magalies Water’s ongoing commitment to quality Water, together with other regional strategic partners, to benefit service delivery throughout the organisation. communities in the area.

The past 12 months have also seen significant levels of engagement Over the past year, Magalies Water has continued its commitment to with our key customers and stakeholders on the finalisation of social upliftment through its corporate social investment programme. contracts as part of a strategic business development process. This initiative has positively impacted on local communities in the This new engagement process has replaced the previous ad-hoc North West Province and beyond in terms of addressing identified approach to business contracting and replaced it with new, highly water and sanitation backlogs. Over the period under review, specific professional, service level agreements. projects have included the installation of 70 rain-water harvesting tanks in rural villages, the refurbishment of toilets in 5 local schools, I’m pleased to report that we have also concluded the process for the creation of 4 school-based community food gardening projects, the appointment of the Chief Executive Officer for the period under the provision of 100 school sanitation kits as part of the WASH review. programme, and the installation of 210 home-owned VIP toilets in Engaging our Stakeholders and local communities. As a Board, and of course as a country, we are committed to ensuring that we achieve our Millennium Development Customers Goals and that Magalies Water continues to play a leading role in this regard. Stakeholder engagement is critical to the success of our organisation. One of the areas which has seen us achieve our goals during the year under review is the completion of service level agreements with our customers. This includes local authorities, businesses, mines and local communities where we are building important working relationships and formulating viable agreements on how our

9 3. Chairperson’s Report (continued)

Future Challenges for the Organisation

A critical issue for the organisation is to ensure that the new leadership is in place to meet current and future challenges. The role of the Board going forward is to unite as a strong team to provide the necessary oversight, governance and strategic direction to the organisation. As a group of Board members, we need to build a close link to management, providing ongoing support, specialist industry expertise and a depth of business experience. Through such a holistic and practical support mechanism, a strong management team can be developed to take Magalies Water forward into a new era.

Such an approach is in the best interests of the organisation to ensure it can achieve its business objectives and remain a sustainable organisation in a South African context. The key to success for Magalies Water lies in ensuring that effective and high quality service delivery takes place in order to meet the challenges of the industry, the region and the country over the coming years. It is going to be a challenging few years ahead of us as an organisation and an industry. Our success depends on making the necessary changes now that will prepare us to meet those challenges in the future. The Board needs to act as a change agent, whilst at the same time, practically helping to address the current issues facing the industry. The challenge of service delivery will remain, but as a Board, we are committed to becoming activists in the water sector in terms of stimulating debate and promoting better service delivery to make a real difference to the citizens we serve.

Professor Mohammed Jahed Chairperson

10 4. Chief Executive’s Report

Sustainable Water Supply

A number of infrastructure development projects were undertaken in the year under review in order to ensure sustainable water supply to communities. These projects included the refurbishment, upgrade, augmentation or creation of new infrastructure. The projects are listed below:

• Commissioning of a new 350mm diameter pipeline from the Roodeplaat Water Treatment Works to the Wallmannsthal Reservoir in order to augment water supply in the Wallmannsthal system • Reinstatement of vandalised cathodic protection of the bulk main to Modimolle and Bela Bela • Upgrading and extension of the existing telemetry system to improve remote communication and control in distribution systems • Construction of a booster pump station to Ruigtesloot, as part of the Moretele Local Municipality Refurbishment Programme • Refurbishment of infrastructure in 15 Moretele Villages as part of the Moretele Local Municipality Refurbishment Programme Mboniseni Dlamini • Bulk water connections to Lekgalong, Rankelenyane Chief Executive and Maumong in the Rustenburg Local Municipality area of jurisdiction. Operating Environment • Commissioning of a new 31km 750mm diameter bulk water supply pipeline and Tuschenkomst Reservoir • Supported CoT with the installation of new water lines, metered Currently, Magalies Water is a regional operator, providing bulk yard connections and remedial work on existing water lines in water services across various provincial and municipal boundaries Suurman/Majaneng and Ramotse/Marokolong in Gauteng, Limpopo, and North West Provinces, covering a supply • Upgrading and extensions programme (first phases) for the area of 42 000km2. Its strategic location in the North West province Wallmannsthal Bulk Water Supply System means that the organisation can make a meaningful contribution over a diverse region and assist in the achievement of equity, In terms of key objectives relating to industry standards for quality sustainability and efficiency in supply over a much larger area. This water supply, a critical business priority, we welcome the introduction gives the organisation further opportunity to expand its core services of Blue Drop (for potable water quality) and Green Drop (for waste and contribute to the economic development of the nation. water quality) as national indicators of the quality of water. Our commitment to achieving excellent product quality was rewarded Magalies Water serves a diverse stakeholder network that includes with 2 prestigious Blue Drop status awards for bulk potable water mines, municipalities, agricultural operations and government supplied to Rustenburg Local Municipality and City of Tshwane. Our institutions. On average, the organisation processes and distributes performance in this area of activity brought Magalies Water official approximately 400 Ml/d of bulk potable water from its own water recognition as one of the Top 10 Water Service Providers in the treatment plants and those plants being operated on behalf of country. Tshwane and Rustenburg Local Municipalities. Magalies Water also purifies 50 Ml/d of wastewater, servicing the needs of approximately We continue to implement systems that improve our operational 1,2 million consumers and users in its area of supply. competence and this has resulted in our plants being ISO14001 certified. The Potable Water Treatment Plants achieved an average of There have been many challenges faced at a macro level, the global 99.4% compliance to SANS 241 Class 1 standards. The Wastewater economic crisis having provided the most prominent challenge. At Treatment Plants achieved an average of 81.4% compliance to DWA a local level, Magalies Water has also been faced with the problem Effluent Discharge Permit. of dealing with deteriorating raw water quality. This continues to challenge the resilience of our treatment facilities in their efforts to treat such deteriorating levels of raw water quality. This factor, Collaboration with our Customers combined with depleting raw water resources, has prioritised our Our commitment to provide joint solutions with our customers has led focus on the effective treatment and disposal of effluent as the first to a number of initiatives aimed at improving water service delivery. barrier to be addressed in ensuring safe drinking water quality and Such initiatives include: return flows to rivers.

11 4. Chief Executive’s Report (continued)

• Upgrading Donkerpoort Dam and maintaining bulk system and Financial Performance boreholes in Modimolle Local Municipality • Constructing a reservoir and a waste water treatment project in The Year under Review yielded an increase in Water Sales Volumes Nokeng Tsa-Taemane Local Municipality of 2% to 76 447 000 kl year-on-year. While Water Volumes sold • Constructing a waste water treatment plant in Thabazimbi Local increased slightly during the year, the economic downturn, together Municipality with increasing financial pressure on the Municipal customers, • Maintenance on bulk water system in Moses Kotane Local resulted in severe downward pressure on tariff increases. Our Municipality proposed tariffs for 2009/10 were reduced by 5% following the Minister’s directive to drop the proposed tariff by the mentioned • Sanitation and water project in Rustenburg Local Municipality percentage. • New development water needs project in Bela Bela Local Municipality Input costs increased significantly, due to sharp increases in the price • Expansion of water supply in unserviced areas in City of of electricity and water treatment chemicals, as well as increases in Tshwane Metro Municipality other overhead expenses. This resulted in a decline of the financial • Infrastructure refurbishment in Kgetleng River Local Municipality position of the Water Board. • Additional water supply to the Royal Bafokeng Administration in order to cater for water demand to their new hotel facility, a Cost of Sales increased by 26% to R127 109 000 (2009: R100 607 000). host venue for one of the teams during the 2010 Soccer World This reduced the Gross Margin on Water Sales to 32% in 2010 from Cup tournament 40% in 2009, resulting in an adverse impact on earnings.

Corporate Social Investment (CSI) and The entity reports declining Operating results, recording an Operating Stakeholder Support deficit for the year of R24 068 000 (2009: R6 238 000).

CSI programmes that were undertaken during the year under The Year Ahead review were aimed at enhancing the sustainability of the benefiting communities. The nature of the projects ranged from school food Magalies Water will enhance its partnerships with Water Service gardens and household basic sanitation facilities, to rain-water Authorities in our area of operation. We believe that strengthening harvesting programmes in local villages. At Magalies Water, we of such partnerships will facilitate effective water service delivery. believe it is through such CSI programmes that we can further We will also enhance the coordination of infrastructure planning in enhance the livelihoods of communities within Magalies Water’s our area of supply. We will maintain as a minimum current level of Area of Supply. performance those areas where we are doing well and improve in areas where unsatisfactory performance has been identified. Our intensification of Water Conservation and Demand Management and general Water Awareness campaigns has resulted in a significant Acknowledgements increase in the number of schools, institutions and municipalities visiting our water purification plants. The achievements we have recorded and the progress we have made over the past year are testimony to the dedication and hard Magalies Water has further cemented its collaboration with Nkana work done to deliver quality water services to our valued customers Water from Zambia. This collaboration was initiated by the Executive and the communities we serve. Authority and has now culminated in a clear identification of areas of collaboration that will benefit both Nkana Water and Magalies I would like to express my gratitude to the Chairman of the Board Water. and the Board as a collective for guidance and leadership during this period. My gratitude to all Magalies Water employees, to Organised Current Financial Position Labour, to the leadership of all our customers at all levels of interaction with them, to the Executive Authority, to the suppliers of our goods Magalies Water experienced challenging circumstances in its trading and services, and finally to our local communities for their valuable during the year. While Water Volumes sold increased slightly during input and participation in our various programmes. the year, the economic downturn, together with increasing financial pressure on the Municipal customers, resulted in severe downward Appreciation is also given to the Honourable Minister of Water Affairs, pressure on tariff increases, while input costs increased significantly, together with her dedicated and highly professional team, all of whom due to sharp increases in the price of electricity and water treatment have provided both support and inspiration over the past year. A chemicals, and increases in other overhead expenses. As a result, further vote of thanks is also extended to the Portfolio Committee on the financial position of the Water Board has declined, and the value Water Affairs for their positive and highly constructive engagement in real terms of the financial capital base of the Water Board has not throughout the year under review. been maintained to compensate for inflation.

The Board of Magalies Water has commissioned measures to address the negative trend in the financial performance of the entity, and a Mboniseni Dlamini turnaround strategy is being developed for implementation. Chief Executive

12 5. Corporate Governance Board Members

Professor Mohammed Jahed Chairperson

Magalies Water adheres to the principles of good corporate Ms Talitha Zondi governance including compliance with applicable legislation and best practices as highlighted below: Mr Lesiba Gwangwa

Legislative Mandate Ms Mpho Hlahla

Legislation that governs Magalies Water is the Water Services Act Ms Zora Madikizela – (resigned on 30 June 2010) (WSA), No. 108 of 1997. The objective of the WSA is to provide for the rights of access to basic water supply and basic sanitation by Cllr William Mahlangu setting national standards and norms. Mr Clement Mannya – (resigned on 1 June 2010) The Board’s Mandate Mr Rapula Mokua

The Board is appointed by the Honourable Minister of Water Affairs Mr Letlhogonolo Motlhodi (Acting CEO) in terms of schedule one of the Water Services Act,1997. The term Ex Officio of office is for a period not exceeding four years. The Board is constituted by ten Non Executive members and one Executive Board Ms Priscilla Nkwinika member. The Mandate of the Board includes the following:

Mr Diswai Sibanda • Ensuring that the objectives of the shareholder are achieved • Contributing to and adopting the business plan • Striving to achieve financial viability of the organisation Committees of the Board • Ensuring that there is an effective risk management system • Ensuring that the Annual Financial Statements are The Board of Magalies Water is the Accounting Authority, supported prepared for each financial year which fairly represent the by four Board Committees, namely Technical, Finance, Human affairs of the organisation Resources & Remuneration, and Audit and Risk. These Committees • Complying with legislation and applicable best practice consist of members with relevant experience and knowledge. In • Being responsive to perceptions that affect the reputation of the addition, the Audit and Risk Committee includes external members, organisation in line with the terms of the provisions of the PFMA.

Shareholder’s Compact Chairpersons of Committees

Magalies Water has concluded a shareholder compact for the year Mr Lesiba Gwangwa – Technical Committee under review as required by the PFMA (Act 1 of 1999). This compact sets out performance parameters for Magalies Water. Ms Zora Madikizela – HR and Remuneration Committee

Strategic Objectives Mr Rapula Mokua – Audit and Risk Committee

Mr Diswai Sibanda – Finance Committee The Board has established a set of strategic objectives through which it carries out its mandate. These objectives include: Date of Appointment of the Board • To ensure the availability and supply of sustainable water services The Board was appointed with effect from 01 July 2009. • To contribute to sustainable and equitable access to basic water and sanitation services to Water Services Authorities • To contribute to the extension of the supply of water services to un-serviced areas • To foster strong relationships and collaboration with all Magalies Water stakeholders • To optimise the organisation’s operational performance • To ensure financial sustainability

13 5. Corporate Governance (continued)

Technical Committee Three external Audit and Risk Committee Members also serve on the Audit and Risk Committee namely: The purpose of the Technical Committee is to consider technical matters of Magalies Water and to advise the Board on such technical Mr Elias Mabena matters. Ms Sarah Makinta Mr Rob Theunissen Four Board Members serve on the Technical Committee namely: Bankers Mr. Lesiba Gwangwa – Chairperson of the Technical Committee Ms Mpho Hlahla Standard Bank of South Africa Limited Ms Zora Madikizela Cllr William Mahlangu External Auditor

Finance Committee Office of the Auditor General

The Finance Committee makes recommendations to the Board on all matters related to Finance issues.

Four Board Members serve on the Finance Committee namely:

Mr Diswai Sibanda – Chairperson of the Finance Committee Ms Mpho Hlahla Mr William Mahlangu Ms Priscilla Nkwinika

Human Resources and Remuneration Committee

The purpose of the Human Resources and Remuneration Committee is to consider all important matters related to the Human Resources of Magalies Water and to make recommendations to the Board on such matters.

Four Board Members serve on the HR and Remuneration Committee namely:

Ms Zora Madikizela – Chairperson of the HR and Remuneration Committee Mr Clement Mannya Cllr William Mahlangu Mr Diswai Sibanda

Audit and Risk Committee

The Audit and Risk Committee is a standing Board Committee, but is established in terms of the Public Finance Management Act.

Three Board Members serve on the Audit and Risk Committee namely:

Mr Lesiba Gwangwa Mr Rapula Mokua – Chairperson of the Audit and Risk Committee Ms Talitha Zondi

14 Figure 4 – Schedule of Board Meetings

Six Board meetings and two special meetings were held during the period under review.

The attendance of Board Members was as follows:

Board Meetings 6/8/2009 29/8/2009 29/09/2009 19/11/2009 21/1/2010 13/5/2010 B W Mahlangu ✓ ✓ ✓ X ✓ ✓ Z B Madikizela ✓ ✓ X ✓ ✓ ✓ D R Sibanda ✓ ✓ ✓ ✓ X ✓ T F Zondi ✓ ✓ ✓ ✓ ✓ ✓ M I Jahed ✓ ✓ ✓ ✓ ✓ X C M Mannya* ✓ X ✓ ✓ ✓ X R S Mokua ✓ ✓ ✓ ✓ ✓ ✓ L C Gwangwa ✓ X ✓ ✓ ✓ ✓ P N Nkwinika X ✓ X ✓ ✓ ✓ M A Hlahla X ✓ ✓ X ✓ ✓

Special Board Meetings 11/2/2010 26/5/2010 B W Mahlangu ✓ X Z B Madikizela* X ✓ D R Sibanda ✓ ✓ T F Zondi ✓ ✓ M I Jahed ✓ X C M Mannya* ✓ X R S Mokua ✓ X L C Gwangwa X ✓ P N Nkwinika ✓ ✓ M A Hlahla ✓ ✓

✓: ATTENDED X: DID NOT ATTEND

Changes to the Board

* Ms Zora Madikizela – (resigned on 30 June 2010) * Mr Clement Mannya – (resigned on 1 June 2010)

* Mr Clement Mannya was replaced in the Audit and Risk Committee by Ms Talitha Zondi * Ms Zora Madikizela was replaced on the HR Remuneration Committee by Ms Priscilla Nkwinika

15 5. Corporate Governance (continued)

Figure 5 – Schedule of Committee Meetings

Technical Committee

08/9/2009 10/11/2009 25/2/2010 18/3/2010 29/4/2010 L Gwangwa √ √ √ √ √ W Mahlangu √ √ X √ √ M Hlahla √ X √ √ √ Z Madikizela X X √ X X Finance Committee

18/1/2010 27/1/2010 26/3/2010 23/4/2010 30/4/2010 18/6/2010 P N Nkwinika √ √ √ √ √ √ M A Hlahla √ √ √ √ √ √ D R Sibanda √ √ √ √ √ √ B W Mahlangu √ √ √ √ √ √ Audit & Risk Committee

19/8/2009 6/10/2009 9/11/2009 18/11/2009 24/11/2009 2/12/2009 29/1/2010 R Mokua √ √ √ √ √ √ √ R Theunissen X √ √ X X X √ S Makinta X √ √ X √ √ X L Gwangwa √ √ X X X √ X E Mabena X √ X √ √ √ √ T Zondi X √ √ √ √ X √ C Mannya √ X X X X X X HR & Remuneration Committee

18/8/2009 28/9/2009 15/10/2009 30/11/2009 20/04/2010 P N Nkwinika √ √ √ √ √ D R Sibanda √ √ √ √ √ B W Mahlangu √ √ √ √ √

Statement of Responsibility of the Board • Assessing, identifying, evaluating and monitoring or elimination of actual and potential risks. The Board accepts final responsibility for the integrity and reliability • Accepting, reducing, mitigating or eliminating risks by of the financial statements and meets at least once a quarter to implementing appropriate internal controls. ensure that delegated responsibilities are executed by management. • Reviewing controls to test their effectiveness. The Board also has the responsibility for the establishment and • Identifying opportunities that contribute towards strengthening implementation of internal control systems. Internal control systems and improving controls. and internal audits are reviewed to comply with the PFMA. During the period under review, the Board has identified fifteen top 5.1. Financial Misconduct risks that are relevant to Magalies Water. These risks are: • Good Governance, Risk Management and Compliance (GRC) There were no instances of financial misconduct identified during the processes and systems at all times 2009/10 Financial Year. • Ability to remain in business and financially sustainable • Ability to provide and ensure bulk potable water in appropriate 5.2. Risk Management quantities • Ability to provide and ensure appropriate potable water quality The Board, through the Audit and Risk Committee, oversees the based on minimum local and international standards – poor risk management process within Magalies Water. Our approach to water sources risk management, as outlined in the approved Risk Management • Condition of bulk water supply infrastructure (including plant Strategy, is that it is not a single event, but rather a series of activities and equipment) that comprises: • Water resource availability to meet demands • Attraction and/or retention of critical and key staff

16 5. Corporate Governance (continued)

• Business process and system effectiveness, efficiencies and Magalies Water and two Municipalities in their area of supply, namely scales of economy that make a difference to the bottom line City of Tshwane and Rustenburg Local Municipality, were awarded • Appropriate stakeholder management three Water Quality Management Excellence Awards, primarily due • Business, operations and information technology failure – to scoring 95% and above, during the Blue Drop assessments. business continuity and disaster management • Ability to accurately and proactively measure and Boitekong Wastewater Treatment Plant was amongst the 51 Plants monitor business performance against a balanced scorecard or (Project 51) that were randomly selected for auditing by DWA. This any similar business performance management system and the Plant was rated as one of the best operated and maintained in the Shareholder Compact North West and amongst one of the best nationally. Plants operated • Cost of controls versus risk exposure is not known on behalf of CoT obtained ISO 14001 certification during the year • Business and financial models not keeping pace with the under review. business and asset life cycles • Undertaking risky business ventures and or processes in a The Vaalkop WTP retained its ISO 14001 certification. manner that exposes the Board to third-party, reputation and financial risks due to an extended mandate and business In partnership with the Royal Bafokeng Administration, a bulk water philosophy as per the Water Services Act connection was made to the Royal Marang Hotel in preparation for • Water tariffs not staying abreast of continued price and the FIFA 2010 Soccer World Cup. operational increases Low Volume Growth These risks are being managed as indicated above. Only two percent (2%) year-on-year volume growth was achieved for 5.3. Directives from the Minister Magalies Water-owned Plants during the year under review. This was mainly due to Plants operating at or above design capacity. Plans are There was a Ministerial Directive to reduce the proposed water tariff in place to address the capacity constraints. for the 2009/10 financial year by 5%. Applications for Raw Water Abstraction Licences 6. Organisational Performance Applications have been made to the Department of Water Affairs to Highlights increase current water abstraction licences as indicated below:

Highlights recorded for the year under review Plant Volumes per annum

3 The quality of water services delivered was commendable, despite Wallmannsthal 11 000 000 m per annum challenges faced in the treatment of water. These challenges include Klipdrift 5 900 000 m3 per annum the deteriorating raw water quality caused by the ever-increasing Cullinan 2 800 000 m3 per annum pollution of our water resources and the consequential increase in New Klipvoor Dam Scheme 15 000 000 m3 per annum water treatment costs. The Potable Water Treatment Plants achieved Vaalkop’s abstraction license was approved for an additional 70 an average of 99.4% compliance to SANS 241 Class 1 standards. million litres per day The Wastewater Treatment Plants achieved an average of 81.4% compliance to DWA Effluent Discharge Permit.

Magalies Water is presented with the prestigious Blue Drop Awards for water quality

17 Successful projects require a Performance to Achieve Strategic Objectives sound strategic and operational relationship between all divisions, working in harmony together to achieve the same end goal.

18 Successful projects require a sound strategic and operational relationship between all divisions, working in harmony together to achieve the same end goal.

19 7. Performance to Achieve Strategic Objectives

During the year under review, the Board determined the following six key strategic objectives:

• To ensure the availability and supply of sustainable water services • To contribute to sustainable and equitable access to basic water and sanitation services to water services authorities • To contribute to the extension of the supply of water services to un-serviced areas • To foster strong relationships and collaboration with all Magalies Water stakeholders • To optimise the organisation’s operational performance • To ensure financial sustainability

Strategic Objective 1

To Ensure the Availability and Supply of Sustainable Water Services

Performance of Magalies Water-Owned Potable Water Treatment Plants

The actual sales (in kilolitres) for Magalies Water-owned Plants were one percent (1%) above budget for the financial period under review. The graph below (Figure 6) depicts actual cumulative sales versus budgeted sales.

Figure 6 – Magalies Water-Owned Plants

Magalies Water-Owned Potable Plants - Cumulative Actual Sales vs Budgeted Sales in kl

90 000 000

80 000 000

70 000 000

60 000 000

50 000 000

40 000 000

30 000 000

20 000 000

10 000 000

0 Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May June

Actual Sales (kl) 3 927 69 10 823 9 16 706 8 22 724 7 30 388 8 36 480 0 42 313 5 48 881 1 56 248 3 61 911 7 68 983 5 76 547 78

Budget Sales (kl) 3 991 67 10 768 4 17 287 3 23 338 4 30 806 4 36 867 1 42 929 4 49 438 5 55 811 6 62 281 1 68 151 4 75 695 9

Vaalkop Plant 3 Provincial Water Week 2010 Raw Water Pumpstation

20 Performance of Municipality-Owned Potable Water Treatment Plants

Cumulative actual sales (in kilolitres) for potable water Plants operated on behalf of CoT and RWST combined was eleven percent (11%) below budget for the period under review. Refer to Figure 7 below.

Figure 7 – Municipality-Owned Potable Water Plants

Municipality-Owned Plants (Potable) - Actual Sales vs Budgeted Sales kl 50 000 000

45 000 000

40 000 000

35 000 000

30 000 000

25 000 000

20 000 000

15 000 000

10 000 000

5 000 000

0 Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May June

Actual Sales (kl) 2 292 31 6 377 52 9 776 79 12 666 0 16 100 1 18 886 1 21 853 5 25 059 4 29 124 1 31 671 8 35 043 1 38 942 3

Budget Sales (kl) 2 395 80 6 588 45 9 942 57 13 314 2 17 528 8 20 900 4 24 271 4 27 642 3 31 912 6 35 231 2 39 444 9 43 899 3

Figures 8, 9 and 10 on the next page depict year-on-year sales volume growth for Magalies Water potable Plants, CoT and RWST potable water Plants, as well as wastewater Plants respectively. Both Magalies Water-owned and Municipalities-owned potable water Plants showed a year-on- year (1%) and (0.6%) decrease respectively.

Volumes from waste water Plants grew by (14%) year-on-year.

Vaalkop Plant 3 with Control Room

21 Figure 8: Bulk Sales Volumes (in kilolitres) for Magalies Water-Owned Plants Plant 2009-2010 2008-2009 Volume increase % Increase CULLINAN 3522518 3488492 34026 1.0% KLIPDRIFT 6557404 7340612 -783208 -11.0% VAALKOP 62157761 60884578 1273183 2.0% WALMANNSTHAL 3948090 3815820 132270 3.0%

Totals 76185773 75529502 656271 1.0%

Figure 9: Bulk Sales Volumes (in kilolitres) for CoT and RWST Plant 2009-2010 2008-2009 Volume increase % Increase BOSPOORT 4264465 3661873 602592 17.0% KLOOF 207918 261710 -53792 -21.0% ROODEPLAAT 16322877 17040400 -717523 -4.0% TEMBA 18372684 18425174 -52490 -0.3%

Totals 39167944 39389157 -221213 -0.6%

Figure 10: Bulk Sales Volumes for RWST-Owned Sanitation Plants Plant 2009-2010 2008-2009 Volume increase % Increase RUSTENBURG 11685189 10642406 1042783 10.0% BOITEKONG 3878339 3313235 565104 17.0% LETHABONG 613409 292000 321409 110.0% MONAKATO 329400 255500 73900 29.0%

Totals 16506337 14503141 2003196 14.0%

Actual sales from waste water Plants operated on behalf of RWST were (8%) below budget. Figure 11 shows cumulative actual sales versus budgeted. This drop in sales is attributed to the economic downturn experienced during the year under review.

Figure 11: Municipality-Owned Wastewater Treatment Plant Performance

Wastewater Plants - Cumulative Actual Sales vs Budgeted Sales in kl 20 000 000

18 000 000

16 000 000

14 000 000

12 000 000 10 000 000

8 000 000

6 000 000

4 000 000

2 000 000

0 Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May June

Actual Sales (kl) 1 117 926 2 390 329 3 610 927 4 824 751 6 415 116 7 739 012 8 995 529 10 317 334 11 857 421 13 148 783 14 914 517 16 506 337

Budget Sales (kl) 1 548 000 3 182 000 4 749 200 6 094 800 7 718 800 9 018 000 10 317 200 11 616 400 13 240 400 14 539 600 16 163 600 17 880 400

Production exceeded targets set for the period under review. Figure 12 below depicts specific achievements against the set targets.

22 Figure 12: Strategic Objectives and KPIs

Strategic Objective Output Measure Target Achievement Achievement F0809 F0910 Water Quality SANS 241: Class1 >95.0% 99.3% 99.3% Compliance Maintain Treatment Process Internal Control >80.0% 94.2% 90.4% Bulk Potable Performance Standard Water Delivery Plant Water Water Quantity Delivered >90.0% 93.0% 91.6% Performance Balance Budgeted Cost Effectiveness <100% Within Budget 86.5% Treatment Cost Effluent Quality DWA Effluent >90.0% 84.0% 81.4% Maintain Bulk Compliance Discharge Permit Sanitation Treatment Process Internal Control >80.0% 79.0% 80.0% Performance Performance Standards Cost Effectiveness Treatment Cost <100% Within Budget Overall 88.0% Develop & Implement Develop Internal Procedures Procedures and Procedures and and Standards >80.0% 82.0% 95.0% Standards Standards Implemented Water Quality SANS 241: Class1 >98.0% 99.4% 99.4% Compliance Distribution Water Quantity Delivered >90.0% 93.0% 95.6% Maintain Distribution Balance and Reticulation Customer Performance Customer Satisfaction Complaint <12hrs <12hrs <12hrs Response Time Update Strategic Asset Plan Developed Completion Yes Yes Development Plan and Implemented Plan & Implement Water Supply Future Asset Asset Availability >95.0% 95.0% 93.5% System Available Development Asset Management Plan Developed Completion 50.0% 75.0% Improvement Plan and Implemented Maintain Assets Scheduled 80% 82% 84% Compliance Maintain Bulk Operational Reliability Potable Water and Unscheduled 80% 92% 92% Bulk Sanitation Compliance Performance

Rustenburg Wastewater Purification Unit

23 Asset Performance Review Strategic Objective 2

There is a dedicated Asset Management department within Magalies To Contribute to Sustainable and Equitable Water responsible for asset care and infrastructure planning for Access to Basic Water and Sanitation other departments. Amongst the critical Key Performance Indicators (KPIs), the following are monitored: Services to Water Services Authorities

• Plant Availability: The time the plant assets are ready for production and are able to generate income.

• Scheduled Compliance: The number of completed preventative maintenance work orders against the total issued over a specific period.

• Unscheduled Compliance: The number of corrective and breakdown maintenance work orders completed against the total issued over a specific period.

• Plant Utilisation: This refers to the rate a plant is operating compared to the plant design capacity. Plant utilisation can be used to gauge whether there is a need to expand the plant in question.

Overall actual performance is consistently above set targets in all KPIs, as depicted by the actual percentage achieved in Figure 13 below. Overall performance against these KPIs indicates efforts are being made by Magalies Water to extend the life of the assets and maximise the Return on Investment (ROI) from these assets.

Figure 13: Asset Performance Metrics

Asset Performance Metrics 100

90

80

70

60

50

% 40

30

20

10

0 Plant Availability Scheduled Compliance Unscheduled Compliance Plant utilization % Target 90 80 80 70 % Achieved 93 84 92 63

24 Retail Water Supply Operations

The Retail department of Magalies Water is a Section 30 activity, undertaken on behalf of the City of Tshwane (CoT), Moretele Local Municipality (MorLM) and Madibeng Local Municipality (MadLM). Figure 14 below depicts Magalies Water activities per Municipality.

Figure 14: Magalies Water activities per Municipality

Municipality Scope of services Area coverage Contract period Milestones Challenges rendered City of Tshwane Customer Care Temba Expires in June 2011 Response times over Unauthorised (CoT) Operations and Hammanskraal 85% for the year connections Maintenance Babelegi Cost recovery ratio Cost exceeding Financial Management Refilwe at 65.3% above the income – Cost Recovery Mandela village agreed target of 60% Surging payments for Optimum Resource Ramotse services Management and Loss Marokolong 45% of residents are Reduction Sekampaneng indigent Project Management Dilopye Interruptions of supply Kromkuil due to the vast number Trust Farm of projects that are Stink water underway. New Eesterus UAW around 35% Suurman Majaneng Moretele Local Operations and Mogogelo Expires in June Response times over Surging payments Municipality Maintenance Mmotla 2013 80% over the past Ageing infrastructure (MorLM) Optimum Resource Mmaukanyane year Lack of as-built Management Ratjiepane Refurbishment of drawings Project Management Moeka motorised boreholes Noroki Extension of Bosplaas reticulation Mathibestad Makapanstad Moretele Kontant Kgomo-kgomo Tladistad Mmatlhwaela Greenside Dihibidung One & Ten Opperman Thulwe Prieska Potwane

Roodeplaat Dam

25 Madibeng Local Operations and Kwariekraal Under negotiation Response times over Surging payments Municipality Maintenance Klipvoorstad 80% over the past Ageing infrastructure (MadLM) Optimum Resource Ga-Rasai year Lack of as-built Management Fafung Electrification of drawings Project Management Legonyane borehole schemes Masebolane Pump house Jericho sheltering to deliver Rooiwal quality water Vaalboschsloot All borehole Waterval equipment sites were Jonathan re-fenced for safety Dikgopaneng and security Makgabetlwane Rabasula Sephai Madinyane Rietgat Maboloka Ramakgotla Moiletswane Shakung Shakunyaneng Lekgema Madidi Dipompong Oskraal Moti Rantlapane

Strategic Objective 3

To Contribute to the Extension of the Supply of Water Services to Un-Serviced Areas

Capital Projects

The Projects Division targets performance on all bulk water supply infrastructure. The Projects Division is accountable for all Capital Projects undertaken by Magalies Water. All engineering projects involve the following approach:

• Project Identification and Initiation • Feasibility Study • Preliminary Design • Final Design and Tender • Construction • Commissioning • Guarantee Period

26 Key Projects and Targets

Summary

The following key projects were in the implementation phase during the 2009/2010 financial year. The progress is summarised in Figure 15 below:

Figure 15 – Projects in Progress

Project Name Project Description Original Budget Progress Brief Description Roodeplaat / Construction of a 350mm R4 469 925.70 100% Construction of a 4.3 Wallmannsthal Rising Ø pipeline from the km 350 mm diameter Main Roodeplaat WTW to the pipeline from the City of Wallmannsthal Reservoir Tshwane Metropolitan Municipality’s Roodeplaat Water Treatment Works (operated by Magalies Water) to the Magalies Water Wallmannsthal Reservoir started in April 2006. This pipeline will transfer a maximum of 10 Ml per day into the Magalies Water network supplying the Roodeplaat area of the Nokeng Tsa Taemane Local Municipality. Construction work was completed and the pipeline was commissioned in November 2009 with Final Completion in May 2010. Roodeplaat / Construction of Road R 450 000.00 100% Wallmannsthal Rising Crossing of Road D2106 Main with a 1,5m Ø concrete sleeve pipe

Vaalkop Dam Vaalkop DAF Unit Bospoort Dam

27 Klipdrift River Weir Increase water level R 450 000.00 7% The raising of the river of abstraction point to weir wall at the raw water prevent cavitation of abstraction point in the pumps Pienaars River at the plant is intended to reduce cavitation of the raw water pumps. EIA studies and Floodline survey were completed by the end of the 2008/2009 financial year. A revised EIA Report was submitted to GDACE and final EIA approval is awaited before DWA will consider licensing of the river structure and storage. Construction will be combined with the extension of the plant. Klipdrift – Modimolle Re-instate vandalized R 739 557.50 95% Transformer rectifier units pipeline: Cathodic cathodic protection on the Magalies Water Protection system to avoid supply system from accelerated corrosion of Klipdrift to Modimolle and pipeline Bela Bela. Eskom’s power supply to the vandalized TRU-sites was reinstated. Final energizing of TRU-sites awaits completion of continuous bonding repairs. 95% progress was achieved by the end of the financial year. Telemetry System: Refurbish, upgrade and R 1 381 721.86 100% The aim was to refurbish, Upgrade and Extension extend existing telemetry upgrade and extend system existing telemetry system in order to improve remote communication and control over vital elements in distribution systems. The project was completed by the end of the 2009/2010 financial year. Bulkline from Northam to Condition assessment R 200 000.00 0% Assessment can only Spitskop and cathodic protection be done when the line is out of operation. This will only be done once the Pilanesberg Scheme’s pipelines become operational.

28 Raw Water Pipeline at Cathodic protection of R200 000.00 100% Integration of the Cathodic Vaalkop pipeline Protection of DWA Raw Water Infrastructure with Magalies Water CP System in progress. Moretele LM Drought Source development R14 880 000.00 100% The Moretele Drought Relief Programme to avoid future drought Relief programme induced water shortages progressed according to plan. Moretele LM Refurbishment of R2 280 000.00 95% Construction of the Refurbishment infrastructure to bring booster pump station to Programme it back to construction Ruigtesloot elevated tank standard to be financed by the LM. Completion achieved by November 2009 with only the pressure test still outstanding. Madibeng LM Drought Completion of Jonathan R3 125 000.00 58% Work has been placed Relief Programme Reverse Osmosis Plant on hold. Awaiting further instructions from Madibeng LM to resume work. DWA was requested to intervene. Moretele LM Refurbishment of R4 372 010.00 100% The completion date for Refurbishment infrastructure to bring this project was revised Programme Phase 5 it back to construction and extension of time standard. +/- 15 Moretele approved - changed to Villages identified February 2010. Rustenburg LM Bulk water connections to R851 778.34 100% The project commenced Lekgalong, Rankelenyane and was completed in the and Maumong 2009/10 Financial Year.

Brief Description of Some Key Projects

Pilanesberg Bulk Water Supply Scheme

Bulk water supply to a number of platinum mines in the Pilanesberg area initiated the upgrading of Vaalkop Water Treatment Works’ distribution network and storage facilities. The affected areas were located north and south of the Pilanesberg. An agreement was reached between Magalies Water and the mines for the swift implementation of the Pilanesberg Bulk Water Supply Scheme. Total expected cost is estimated at approximately R895 million for the Pilanesberg North scheme and approximately R300 million for the Pilanesberg South Scheme.

Pilanesberg Bulk Water Scheme – Completed 35Mℓ Tuschenkomst Reservoir

29 Bulk consumers that will benefit from the Pilanesberg North Scheme include two new platinum mines, Moses Kotane Local Municipality and Thabazimbi Local Municipality. Construction has already commenced on some parts of this scheme and construction on the remaining sections of the scheme will commence during the 2010/11 financial year. Bulk consumers that will benefit from the Pilanesberg South Scheme include two new platinum mines, Moses Kotane Local Municipality and Rustenburg Local Municipality.

Drought Relief and Refurbishment Programme Projects

Figure 16: Retail Projects in Progress Refurbishment Programme in Moretele and Rustenburg Local Municipalities

Project Name Original Budget Progress

Phase 3C: R 4 000 000.00 Upgrading of Suurman/Majaneng water reticulation Phase 3C & 3D 85% Phase 3D: R 4 000 000.00 8: R 6 206 599.73 98% Upgrading of Ramotse/Marokolong water reticulation Phase 8, 9 & 10 9: R 8 356 248.00 95% 10: R 8 500 000.00 80%

Upgrading of Ramotse/Marokolong water reticulation Phase 11 & 12 R 8 500 000.00 90%

Upgrading of Kudube water reticulation Phase 1 R 6 000 000.00 100%

Upgrading of Nuwe Eersterus water reticulation Extensions 0, 4, 5, 6 & 7 R 34 118 483.73 95%

Moretele and Rustenburg Local Municipalities have retained Magalies The pessimistic macro economic outlook lead to delay in the Water’s appointment as Implementing Agent for their Refurbishment implementation of the first phase of the Pilanesberg Water Scheme. Programme. It is anticipated that this water scheme will be fully commissioned by end 2014. Retail Projects in City of Tshwane (CoT) Wallmannsthal Bulk Water Supply System Suurman/Majaneng and Ramotse/Marokolong In order to supply the growing demand of the Roodeplaat Development The projects are implemented by City of Tshwane (CoT) within Area within the Nokeng Tsa-Taemane Local Municipality, the the Magalies Water area of supply. The contract consists of the Wallmannsthal Bulk Water Supply System needs major upgrading installation of new water lines, metered yard connections and remedial and extensions. The first phases of these upgrades and extensions work on existing water lines, as well as removal of unauthorised have been completed, namely the 10 Ml Baviaanspoort Reservoir connections. and the 10 Ml/day Roodeplaat-Wallmannsthal Rising Main. These upgrades were completed and commissioned by the end of the Infrastructure Development and Planning 2009/10 financial year. (Capital Expansion Programme) – Budget & Duration Additional storage reservoirs for the Wallmannsthal-Roodeplaat area are planned by Magalies Water and by Nokeng Tsa-Taemane Local Municipality. Magalies Water is planning an additional 25 Ml Reservoir A number of new bulk infrastructure projects are currently either in at the Wallmannsthal Reservoir site. The capital expenditure for the the implementation phase (under construction or in tender stage), or 25 Ml Magalies Water reservoir is estimated at approximately R29 due for implementation during the next financial year. million, and it is expected that this reservoir will be constructed over two financial years. Vaalkop Bulk Water Supply System

Further bulk water supply network upgrades in excess of R27 million The Vaalkop Bulk Water Supply System (pipelines, pump stations will also be carried out during the 2010/11 financial year. Magalies and storage reservoirs) is currently upgraded and extended to supply Water is in the process of appointing Professional Service Providers an additional 70 Ml/day to the north and south of the Pilanesberg for the implementation of these projects, which are scheduled to start to four mines and three Water Services Authorities (Moses Kotane in the current financial year. Local Municipality, Thabazimbi Local Municipality and Rustenburg Local Municipality). The Vaalkop Water Treatment Works will, however, only be extended with two 30 Ml/day modules to treat an additional 60 Ml/day.

30 Klipdrift Bulk Water Supply System Corporate Social Investment Initiatives Undertaken in the Year Under Review have included: The Klipdrift Bulk Water Supply System needs to be upgraded with an additional 10 Ml on-site storage reservoir at Steve Bikoville. A • School-based community food gardening projects new pump-station and rising main from the Klipdrift Water Treatment • School sanitation facility refurbishment programme Works needs to be constructed to supply the Nokeng Tsa-Taemane • Rainwater harvesting programme in rural villages demand for Steve Bikoville. The total expected capital expenditure • School sanitation kit distribution as part of the WASH over two financial years amounts to approximately R12 million. programme Plant extension and additional on-site storage capacity is also • Household VIP sanitation facility installation programme planned at approximately R52 million over the next three financial • 90,000 bottles of water were donated in the year under review years. to various community groups, schools, religious organisations and the needy in Magalies Water’s area of supply Strategic Objective 4 Strategic Objective 5 To Foster Strong Relationships and Collaboration with all Magalies Water To Optimise the Organisation’s Operational Stakeholders Performance

Developmental Projects Sludge Disposal at Rustenburg Wastewater Treatment Plant in March 2010 Magalies Water is currently in discussion with Municipalities to support them on various projects as indicated below: Expenditure on sludge disposal at Rustenburg Wastewater Treatment Plant was approximately R6 398 million. Magalies Water managed • Upgrading Donkerpoort WTP and maintaining Bulk system and to source a service provider that would carry out sludge handling boreholes in Modimolle Local Municipality and disposal at no cost to Magalies Water. This initiative has led to • Constructing a reservoir and a waste water treatment project in savings on sludge handling and disposal. Nokeng Tsa-Taemane Local Municipality • Constructing a waste water treatment plant in Thabazimbi Local Chemical Usage Municipality • Maintenance of bulk water system in Moses Kotane Local The chemical consumption for the last 5 years is shown in Figure Municipality 17. There was a sharp volumetric increase of one thousand percent • Sanitation and water project in Rustenburg Local Municipality (1000%) on Polymeric Coagulants between 2005/06 and 2006/07 • New development water needs project in Bela Bela Local which stabilised at around zero percent from 2007/08 to 2009/10. This Municipality initial sharp increase was due to the change-over from Ferric Chloride • Expansion of water supply in unserviced areas in City of to Polymeric Coagulants by most of the Plants. Powder Activated Tshwane Metro Municipality Carbon (PAC) usage dropped by approximately forty percent (40%) over this period due to the drastic reduction of this chemical usage in Vaalkop Water Treatment Works. Lime dosage dropped by twelve percent (12%) over the period due to Ferric Chloride replacement by Polymeric Coagulants. The conclusion from this data is that Plants are reasonably optimised.

A school visit to a Water Treatment Plant Celebrating National Water Week Vaalkop Plant

31 Figure 17: Chemical dosages in mg/l for all potable water treatment plants for the past 5 years.

Chemical Dosage for Potable Water Treatment Plants

16.0

14.0 Chlorine

12.0 PAC 10.0 FERRIC CHLORIDE 8.0 POLY 6.0 LIME Dosage in mg/l 4.0

2.0 KMn04

0.0 BENTONITE 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010

Safety

The reportable occupational incidents (medical incidents, as well as disabling incidents, and lost time incidents) that occurred during the 2009/2010 financial year have decreased from 22 to 5 incidents which is a positive improvement. This is attributed to safety awareness training programmes that have been conducted throughout the organisation.

Disabling Incident Frequency rate for Magalies Water has improved from 1.6 to 0.7 compared to the previous financial year.

Figure 18 – Incident Statistics

Magalies Water 2008/2009 2009/2010 First Aid Cases 5 3 Medical Cases 14 2 Lost Time Cases 8 3 DIFR 1.6 0.7

Human Capital Management

Key Vacancies In the year under review, the organisation had to contend with a number of key vacancies that could not be filled due to:

• Scarcity of skilled candidates in the labour market Figure 19 – Staff Turnover Per Job Category • Remote location of operational centres Job Category Staff Turnover Staff Turnover Professional/Specialist 1 Junior Management 1 Staff turnover per job category was recorded in Figure 19 as Technically Skilled Staff 8 follows: Semi/Unskilled Staff 8 Total 18

• Total staff turnover is 18, equating to 4,7% of total complement, which is less than the industry benchmark of 5%.

32 Figure 20 – Employee Breakdown by Age and Race for Magalies Water

MALE FEMALE

Age Group African Coloured White Indian Total African Coloured White Indian Total

21 - 30 56 0 0 0 56 21 0 1 0 22

31 - 40 91 2 5 3 101 46 1 4 0 51

41 - 50 69 0 10 0 79 18 0 0 0 18

51 - 60 34 0 8 0 42 5 0 2 0 7

61 - 65 6 0 3 0 9 0 0 1 0 1

Total 256 2 26 3 284 90 1 8 0 99

Human Capital Development

Learnerships Internship Programme

Magalies Water commits itself to creating a life-long learning The aim of the internship programme is to provide practical and environment for its employees and the public through the accelerated learning programmes that build essential occupational implementation of the National Skills Development Strategy and the competencies required by the workplace. These programmes Organisational Human Resource Development Strategy. complement theoretical classroom-based learning for tertiary students and unemployed graduates. In the year under review, 27 A learnership is a mode of delivering a learning programme that interns were appointed. combines work-based experience with structured learning. A person who successfully completes a learnership will obtain a South African Interns were appointed in the followings field of study, as shown in Qualification Authority (SAQA) accredited qualification that signals Figure 21 below: occupational competence and which is recognised throughout the country. Figure 21 – Intern Fields of Study

Field of Study No of Interns Bursary Scheme Water Care 7 The aim of the bursary scheme is to address the skills shortage Maintenance Planner 1 and representation in scarce occupational skills categories in the Electrical Engineering 1 technical and scientific fields. It also provides employees with financial GIS 1 assistance to improve their skills through accredited institutions. Micro-Biology 3 During the reporting period, twenty-two bursaries have been awarded Mechanical Engineering 1 to permanent employees in the following fields of study. Fitting and Turning 1 Production Management 1 Figure 22 – Bursary Scheme Fields of Study Human Resources 2 Field of Study Duration of Study Internal Audit 2 Engineering 4 years Financial Management 3 Water Technology 3-4 years Safety Health and Environmental Quality 3 (SHEQ) Finance 3-4 years Human Resources 3 years Management 3 years

33 Skills Development Learners enrolled on the following key learning areas during the period under review, as indicated in Figure 23 below: In the year under review, Magalies Water conducted a skills audit amongst its employees to achieve a number of key objectives Figure 23 – Learnership Programme Learning Areas of Study including: Learning Area Level of Study No of • To determine the qualifications and certification of its employees Learners • To determine training and development needs Numeracy and communication Level 1 19 • To prioritise training that is critical to improving production Numeracy and communication Level 2 8 • To determine the relevance of placement in terms of personal Numeracy and communication Level 3 5 attributes, skills and expertise Technology Level 3 9 A total of 138 employees from senior to lower level, attended various Technology Level 4 8 short courses and conferences based on their individual development plans to enhance their job specific knowledge and skills. Employment Equity

ABET Learnership Magalies Water strives to achieve equity in the workplace through the Employment Equity Plan by promoting equal opportunities and fair Magalies Water strives to improve the knowledge, literacy and treatment. Magalies Water views employment equity as an imperative numerical skills of its human resources at the lower levels of the strategic priority and recognises it as an important measure against organisation. A total of 49 employees have attended the ABET which the transformation of the organisation can be measured. Learnership Programme during the course of the year under review. Workforce Profile The ABET Learnership Programme is based on three key learning areas, namely: All employee categories as at 30/06/2010, are listed overleaf in Figure 24 and 25. • English Communication • Numeracy • Technology

Out of 49 employees that originally enrolled for the ABET Learnership Programme, 39 completed the programme, graduated and continued their studies to the next levels.

ABET Learnership Programme

34 Figure 24 - Employees with Disabilities

Occupational Level Male Female Foreign Total Nationals African Coloured Indian White African Coloured Indian White Male Female Top Management 0 0 0 0 0 0 0 0 0 0 0

Senior Management 0 0 0 0 0 0 0 0 0 0 0

Professionally 0 0 0 0 0 0 0 0 0 0 0 qualified & experienced specialists & mid- management

Skilled technical 1 0 0 0 0 0 0 0 0 0 1 & academically qualified workers, junior management, supervisors, foremen & superintendents

Semi-skilled & 0 0 0 2 0 0 0 0 2 discretionary

Unskilled & defined 0 0 0 0 0 0 0 0 0 decision making

Total Permanent 1 0 0 2 0 0 0 0 0 0 3

Temporary employees 0 0 0 0 0 0 0 0 0 0 0

Grand Total 1 0 0 2 0 0 0 0 0 0 3

Scientific Services Laboratory technicians at work

35 Figure 25 – Employment Equity Representation Graph

150.0

112.5

75.0 A Males C Males I Males

37.5 W Males A Females C Females I Females 0 W Females Top Mng Senior Mng Prof Q & Ex. Skilled Semi Skilled Unskilled Temps & Interns

Workforce Profile Outcomes of the Programme

Employee Wellness • Understanding HIV and its challenges • Assist in counseling and providing support in the workplace to Magalies Water’s HIV/Aids Employee Wellness Programme is aimed their fellow employees infected and affected by HIV at improving the quality of life of employees and their families by • Perform basic life support and first aid procedures in the providing a supportive system that alleviates the impact of everyday workplace work and personal challenges. The Employee Wellness Programme recognises that short-term personal and psychological-related Labour Relations problems may adversely affect an employee’s wellbeing and ability to function on the job. As a result, Magalies Water provides such Magalies Water strives to achieve and maintain sound labour programmes and interventions aimed at promoting and maintaining a relations with all our employees through consultation and negotiation balanced lifestyle for its employees, as well as improving productivity at the Local Labour Forum. There was, however, a deadlock in and the effectiveness of service delivery. negotiations between employer and employee parties during wage negotiations for the 2009/10 financial year which resulted in industrial Two service providers were appointed to provide emotional and action that lasted for one day. Essential services were not disrupted psychological counseling, as well as medical and health awareness by this industrial action. to employees. Two cases of Unfair Labor Practice have been referred to the HIV/AIDS Programme CCMA as of 30/6/2010.

20 Peer Educators were trained to:

• Deliver knowledge and information about HIV to their fellow employees and also to encourage employees to learn their HIV status through voluntary counseling and testing • Encourage fellow employees to enrol in the wellness programme or impart knowledge about the availability of anti- retroviral therapy (ART) with their colleagues

36 Strategic Objective 6 that the cost drivers impacting on the tariffs are market driven, and To Contribute to Financial Sustainability significant cost increases have been effected by suppliers, notably in electricity. A tariff consultation process was carried out with the Customers and the Department of Water Affairs, National Treasury The mandate of Magalies Water includes financial viability, requiring and the South African Local Government Association. Subsequent to that the Water Board should, while delivering on its core mandate as the consultation process with the Stakeholders, the Minister of Water a Bulk Water Services Provider, ensure that it is in a position to repay Affairs and Forestry advised some of the Water Boards, including and service its debts, recover its capital, operational and maintenance Magalies Water, to decrease the tariff increase proposals by 5% costs; make reasonable provision for depreciation of assets; recover across the Board and the bulk water tariffs were then determined costs associated with repayment of capital from revenues over time; as follows: and make provision for future capital requirements and expansion. Magalies Water experienced challenging circumstances in its trading Figure 26 during the year. While Water Volumes sold increased slightly during the year, the economic downturn, together with increasing financial pressure on the Municipal customers, resulted in severe downward Scheme Approved Proposed Tariff Approved Approved tariffs increase proposal tariff tariffs pressure on tariff increases, while input costs increased significantly, 2008/9 2009/10 2009/10 2010 due to sharp increases in the price of electricity and water treatment Vaalkop R2.38/kl 11% R2.64/kl 6% R2.52/kl chemicals, and increases in other overhead expenses. As a result, Wallmannsthal R2.68/kl 19% R3.19/kl 11% R3.06/kl the financial position of the Water Board has declined, and the value Klipdrift R2.33/kl 15% R2.68/kl 10% R2.57/kl in real terms of the financial capital base of the Water Board has not been maintained to compensate for inflation. Cullinan R2.30/kl 11% R2.56/kl 6% R2.44/kl

Magalies Water has commissioned measures to address the negative Other Activities trend in the financial performance of the entity. Other Activities, being the business related to the activities other Bulk Water Supply than the provision of Bulk Water Supply, comprised administration and management fees received for services rendered, and the value The Year under Review yielded an increase in Water Sales Volumes charged for such activities reduced by 5% to R109 318 000 (2009: of 1% to 76 447 000 kl against the budget, with increased tariffs R115 159 000). contributing further to an increase of Revenue of 12% to R187 251 000 (2009: R166 985 000), while Cost of Sales increased by 26% to Operating Result R127 109 000 (2009: R100 607 000). This reduced the Gross Margin on Water Sales to 32% in 2010 from 40% in 2009, with an adverse The entity reports declining Operating results, recording an Operating impact on earnings. Deficit for the year of R24 068 000 (2009: R6 238 000).

Tariff Increases Finance Income

Magalies Water owns four bulk water schemes. Tariffs for each Magalies Water holds significant Investments, mainly in Zero-based Bulk Water Scheme are independently determined and are scheme coupons. The declining interest rates, together with a reduction in specific. The tariff increases for the 2009/10 financial year have been the amount of the Investments held, resulted in a decline of Finance determined to take into consideration the macro-economic factors Income by 26% to R27 935 000 (2009: R37 694 000). whilst complying with Section 42 of the Local Government: Municipal Finance Management Act, 42 of 2005. Whilst it is ideal to keep increases within the Government Inflation targets, the challenge is

Vaalkop Dam Vaalkop DAF Unit Bospoort Dam

37 Surplus for the Year Working Capital

Finance Income of R27 935 000 (2009: R37 694 000) results in a Major movements in working capital were the amounts due from surplus for the Year of R4 121 000, this represents a decrease from customers, which increased by 15% to R105 742 000 (2009: R9 2009 (R31 306 000) surplus. 158 000), and funding from Trade Creditors was reduced by 14% to R47 503 000 (2009: R62 946 000).These increases in working Investment in Fixed Assets capital requirements were funded mainly by reduction in Short-term Investments to R302 319 000 (2009: R311 199 000), and reduction Investment in productive fixed assets has been constrained to only in Bank to R301 000 (2009: R15 047 000). minor investments during the year, and the declining trend in the value of fixed assets continues.

Figure 27 – Corporate Social Investment

Water and Sanitation Initiatives Beneficiary Villages & Schools (Local Municipalities) Improving access to water for un-serviced areas in partnership Carousel View – 1800 households connected with Municipalities as a CSI initiative (Moretele Local Municipality) 25 Jojo tanks in Villages (Madibeng Local Municipality

School sanitation rehabilitation through CSI programmes 72 ablution facilities upgraded – 9 schools (Thabazimbi, CoT, Modimolle, Madibeng)

VIP sanitation facilities to villages in partnership with Local 210 VIP toilets provided (Bela Bela Local Municipality) Municipalities as a CSI initiative

Bulk Waste Management (CSI) Refurbishment of pump station (Kgetleng/Rivier Local Municipality)

Rain harvesting programme Jojo tanks at ten villages (Moses Kotane Local Municipality)

Food gardening project at Hans Kekana Rainwater harvesting project National Sanitation Week 2010 High School in City of Tshwane

38 Figure 28 – Value Added

The Value Added Statement for the year is set out below:

Value Added Statement

2010 2009 Gross Income received 301 086 284 449 Paid to Suppliers (207 955) (179 281) Value Added 93 131 105 168 Income from Investments 27 935 37 694 Total Wealth created 121 066 142 862 Distributed as follows: Employee Costs 90 192 79 951 Depreciation 26 730 31 455 Profit for the year 4 121 31 306 Interest paid 23 150 Total wealth distributed 121 066 142 862

The value added decreased by 11% during the 2009/10 financial year to R93 131 000 (2009: R105 168 000). This is mainly due to increased cost of sales, increase in overhead expenses, and a decline in profits. It is noteworthy that 97% (2009: 76%) of the value created has been distributed to employees.

Post- Balance Sheet Events

The management of the Finance function of Magalies Water is in the process of being strengthened. The former Chief Financial Officer has left the employ of the Water Board, and a competent replacement is being sought.

Magalies Water is planning to invest in a major new Bulk Water Supply Scheme, the Pilanesberg Water Scheme. This Scheme, once in operation, will increase sales of bulk water by some 25 550 000 kl per annum, and will require an investment of some R1 100bn in Fixed Assets. Provisional approval for additional Debt financing of R400m has been sought from the Department of Water Affairs, in order to fund this Pilanesberg Water Scheme.

Future Outlook and Prospects

Magalies Water has commissioned appropriate measures to address the declining financial performance.

39 Figure 29

Five year financial review

2010-2006 2010-2009 R’000 2010 2009 2008 2007 2006 Growth Rate Growth Rate FINANCIAL POSITION Capital Employed 997 315 982 721 951 415 938 497 907 328 1.9% 1.5% Fixed Assets 590 430 590 090 605 396 609 456 608 334 -0.6% 0.1% Investments 38 551 33 202 34 205 26 539 21 735 12.1% 16.1% Short term investment 302 319 311 199 295 905 256 675 249 481 3.9% -2.9% Bank & Cash Balances 301 15 047 21 402 57 556 32 935 -60.9% -98.0% Current Liabilities 47 503 66 146 71 109 50 164 39 976 3.5% -28.2% Total Assets 1 043 667 1 047 572 1 022 524 988 661 947 304 2.0% -0.4% Total Liabilities 47 503 66 146 71 109 85 190 86 795 -11.4% -28.2% Equity 997 315 982 721 951 415 903 471 860 509 3.0% 1.5% Net Assets Value 1 045 620 1 035 048 1 005 593 967 983 915 744 2.7% 1.0%

FINANCIAL PERFORMANCE Revenue 187 251 166 985 158 046 145 322 140 108 6.0% 12.1% Other income 113 835 117 464 80 017 129 013 103 463 1.9% -3.1% Operating Costs 274 546 247 783 183 754 196 206 152 836 12.5% 10.9% Net Operating Income (24 114) (6 238) 14 844 40 085 14 680 -210.4% 286.6% Income from Investment 27 935 37 694 35 079 30 717 19 100 7.9% -25.9% Finance Charges 23 150 1 351 27 892 4 993 -65.9% -84.7% Net finance charges (27 912) (37 544) (33 728) (2 825) (14 107) 14.6% -25.7% Net Surplus 4 121 31 306 48 572 42 910 28 787 -33.3% -87.9%

FINANCIAL RATIOS 2010 2009 2008 2007 2006 Gross profit percentage 73.12% 74.31% 75.03% 73.82% 45.72% (Gross profit/sales) Net profit percentage 2.03% 18.75% 30.73% 29.53% 20.55% (Net Profit/sales) Return on Asset (Net 0.38% 3.19% 5.11% 4.57% 3.17% income/total assets) Return on equity (Net 0.40% 3.32% 5.33% 4.97% 3.51% income/equity) Current ratio (current 8.73 6.41 5.39 7.03 7.94 asset/current liabilities) Debtors days (debtors/ 128 118 93 45 43 (sales/365)) Creditors days (creditors/ 53 79 116 72 55 (purchases/365)) Debt to assets (total 8% 10% 11% 13% 13% debt/total assets) Debt to equity (total debt/ 9% 11% 12% 15% 16% total equity) Asset turnover (sales/ 0.18 0.16 0.14 0.14 0.15 total assets) times a year

40 41 The importance of strategic partnerships Audit Reports internally at Magalies Water is recognised to be a key contributing factor to the long- term success of essential bulk capital projects.

42 The importance of strategic partnerships internally at Magalies Water is recognised to be a key contributing factor to the long- term success of essential bulk capital projects.

43 Section 3 - Audit Reports

8. REPORT OF THE AUDITOR-GENERAL circumstances, but not for the purpose of expressing an opinion TO PARLIAMENT ON THE FINANCIAL on the effectiveness of the entity’s internal control. An audit also STATEMENTS OF MAGALIES WATER FOR includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates THE YEAR ENDED 30 JUNE 2010 made by management, as well as evaluating the overall presentation of the financial statements. REPORT ON THE FINANCIAL STATEMENTS 6. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion. Introduction Basis for qualified opinion 1. I have audited the accompanying financial statements of Magalies Water which comprise the appropriation statement, Property, plant and equipment the statement of financial position as at 30 June 2010, and the statement of financial performance, cash flow statement for the 7. The entity did not provide sufficient appropriate audit evidence year then ended, and a summary of significant accounting to support property, plant and equipment of policies and other explanatory information. R590 431 420 disclosed in note 2 to the financial statements. I was unable to observe the count of physical assets of Accounting Officer’s responsibility for the financial statements R159 599 238 due to limitations placed on the scope of my work by the entity. The entity did not provide sufficient 2. The accounting officer is responsible for the preparation and appropriate audit evidence to support additions of fair presentation of the financial statements in accordance to R 21 736 240. Computer equipment and furniture and fixtures International Financial Reporting Standards as set out in note from the floor could not be traced to the asset register. 1 to the financial statements and in the manner required by the Public Finance Management Act (Act No. 1 of 1999) (PFMA). 8. Depreciation of R26 730 000 was incorrectly calculated. This responsibility includes: designing, implementing and Had the depreciation been correctly calculated, the asset for maintaining internal control relevant to the preparation and fair property, plant and equipment in the statement of financial presentation of financial statements that are free from material position would be increased, the depreciation expense on the misstatement, whether due to fraud or error; selecting and statement of comprehensive income would be decreased and applying appropriate accounting policies; and making net profit would be increased with R5 778 834. accounting estimates that are reasonable in the circumstances. 9. The disclosed balance for property, plant and equipment of Auditor-General’s responsibility R590 431 420 does not agree to the balance of R590 321 705 per the asset register. The entity did not reconcile the difference 3. As required by section 188 of the Constitution of South Africa of R109 715 between the financial statements and the and section 4 of the Public Audit Act of South Africa (Act No. 25 underlying accounting records. Assets of R144 980 were not of 2004) (PAA), my responsibility is to express an opinion on recorded in the accounting records of the entity. these financial statements based on my audit. 10. The entity did not provide sufficient appropriate audit evidence 4. I conducted my audit in accordance with the International to support additions of R 21 736 240. I was not able to obtain Standards on Auditing and General Notice 1570 of 2009 issued invoices to support assets of R174 748 recorded in the in Government Gazette 32758 of 27 November 2009. Those asset register as payments were made based on quotations. standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance 11. The entity did not provide sufficient appropriate audit evidence about whether the financial statements are free from material to support journal entries of R30 421 268 and R15 622 242 misstatement. debited and credited, respectively to property, plant and equipment. 5. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial 12. The entity’s records did not permit the application of alternative statements. The procedures selected depend on the auditor’s audit procedures. judgement, including the assessment of the risks of material Consequently I was unable to verify the rights and obligations, misstatement of the financial statements, whether due to fraud completeness, existence, valuation and allocation of property, or error. In making those risk assessments, the auditor plant and equipment of R590 431 420 disclosed in note 2 considers internal control relevant to the entity’s preparation to the financial statements. and fair presentation of the financial statements in order to design audit procedures that are appropriate in the

44 Investments correctly unrecognised, expenditure would be reduced, net profit would be increased and the asset in the statement of 13. The SCMB Zero Coupon Investment of R11 109 732 disclosed financial position for overpayment of the expenses would be in note 3 to the financial statements matures on 30 June 2011. increased by R8 449 548. South African Statements of Generally Accepted Accounting Practice, IAS 01, Presentation of Financial Cash and bank Statements requires that an entity shall classify an asset as current when it expects to realise the asset within twelve 19. The entity did not provide sufficient appropriate audit evidence months after the reporting period. Had the balance been to support cash and bank of R301 214 disclosed in note 8 to the correctly classified as a short term investment, the financial statements. non-current asset for investments in the statement of financial position would be decreased and the current asset 20. The entity did not provide sufficient appropriate audit evidence for investments in the statement of financial position would be to support the reconciling items totalling R1 676 329 between increased by R11 109 732. cash and cash equivalents stated in the statement of financial position at R2 034 741 (overdraft) and the cash at banks Trade and other receivables amount stated on the year-end bank reconciliation at R13 835 826. 14. The entity did not provide sufficient appropriate audit evidence to support the trade and other receivables balance of 21. Cash at banks of R282 234 indicated on the bank reconciliation R101 829 086 disclosed in note 7 to the financial statements. does not agree to the amount of R27 700 330 confirmed by the The disclosed balance of R101 884 626 does not agree to the financial institutions. debtors age analysis. The entity did not reconcile the difference of R55 540. The entity did not provide sufficient appropriate 22. Included in cash and cash equivalents is R2 034 741 which audit evidence to support journal entries of R536 107 debited to constitutes an overdraft. IAS 01, Presentation of Financial trade receivables. I was therefore unable to verify the rights and Statements requires that an entity shall not offset assets & obligations, existence, completeness, and the valuation and liabilities. allocation of trade and other receivables disclosed in note 7 to Had the overdraft been correctly classified as a liability, the the financial statements. asset and the liability in the statement of financial position for bank and cash would be increased by R2 034 741. 15. Included in the trade receivables is R1 056 000 which constitutes credit balances, and included in the trade payables 23. Consequently, I did not obtain sufficient appropriate audit is R1 722 551 which constitutes debit balances. The South evidence to verify the existence, rights and obligations, African Statements of Generally Accepted Accounting Practice, completeness, and valuation and allocation of cash and cash IAS 01, Presentation of Financial Statements requires that an equivalents of R301 214 disclosed in note 8 to the financial entity shall not offset assets & liabilities. Had the balances been statements. correctly classified as a liability and an asset respectively, the asset for trade and other receivables in the statement of Reserves financial position would be increased and the liability for trade and other payables in the statement of financial 24. The entity did not provide sufficient appropriate audit evidence position would be decreased by R 666 551. to support the revaluation reserve of R40 468 000 (2009: R40 468 000) disclosed in note 9 to the financial 16. IAS 39, Financial Instruments – Recognition and statements. Measurement, requires measurement after initial recognition of The entity’s records did not permit the application of alternative loans and receivables at amortised cost using the effective audit procedures. I was therefore unable to verify the existence, interest method. Trade receivables were not measured at rights and obligations, completeness, and valuation amortised cost in the financial statements, resulting in the trade and allocation of reserves disclosed in note 9. and other receivables amount being overstated by R1 185 715. Expenditure 17. Invoices of R1 368 344 were not recorded in the accounting records. Had the invoices been correctly recorded in the 25. The entity did not provide sufficient appropriate audit evidence accounting records, the asset for trade and other receivables in to support operating expenditure of R198 045 000 disclosed in the statement of financial position and income on the statement the statement of comprehensive income. The entity’s records of comprehensive income and net profit would be increased did not permit the application of alternative audit procedures. with R1 368 344. Consequently, I did not obtain sufficient appropriate audit evidence to verify the occurrence of operating expenditure 18. Included in expenditure is an amount of R8 449 548 resulting disclosed in the statement of comprehensive income. from duplicated purchase orders. Had the expenditure been

45 26. Included in expenditure is an amount of R8 449 548 Opinion (2009: R263 213) resulting from duplicate purchase orders. The South African Statements of Generally Accepted 31. In my opinion, except for the effects of the matters described Accounting Practice’s Framework for the Preparation and in the basis for qualified opinion paragraphs, the financial Presentation of Financial Statements’ definition of expenses statements present fairly, in all material respects, the financial encompasses expenses that arise in the course of the ordinary position of the Magalies Water Board for the year ended 30 activities of the entity. The duplicated purchase orders that were June 2010 and its financial performance and its cash flows for recorded in the entity’s accounting records do not meet this the year then ended are prepared, in all material respects, definition. Had the expenditure been correctly unrecognised, in accordance to International Financial Reporting Standards as expenditure would be reduced, net profit would be increased set out in note 1 to the financial statements and in the manner and the asset in the statement of financial position required by the PFMA. for overpayment of the expenses would be increased by R8 449 548 (2009: R263 213). Additional matters

27. Also included in expenditure is an amount of R630 086 resulting 32. I draw attention to the matters below. My opinion is not from duplicated accruals. As above, the accruals recorded in modified in respect of these matters. the accounting records of the entity do not meet the definition of expenses. Had the accrual been correctly reversed, Unaudited supplementary schedules expenditure would be reduced, net profit would be increased and the liability in the statement of financial position for accrual 33. The supplementary information set out in this document of the expense would be reduced by R630 086. does not form part of the financial statements and is presented as additional information. I have not audited these schedules 28. Expenditure further includes an amount of R413 499 resulting and accordingly I do not express an opinion thereon. from VAT. Where a VAT vendor acquires goods or services for purposes of use or supply in the course of making taxable REPORT ON OTHER LEGAL AND REGULATORY supplies, that vendor is entitled, subject to the provisions of REQUIREMENTS sections 16(2), 16(3), 17(1), 17(2) and 20 of the VAT act no. 89 of 1991 to deduct from the amount of output tax the VAT 34. As required by the PAA and in terms of General Notice 1570 of paid in respect of a taxable supply made to him. Had the VAT 2009 issued in Government Gazette 32758 of 27 November been correctly subtracted from the taxable supplies, 2009, I include below my findings on the report on expenditure would be reduced, net profit would be increased predetermined objectives, compliance with the following key and the liability in the statement of financial position for VAT laws and their regulations and financial management (internal would be reduced by R413 499. control): • PFMA Irregular, fruitless and wasteful expenditure • Treasury Regulations • Water Services Act (Act No. 30 of 2004) 29. Section 51(1) (a) (iii) of the PFMA requires the entity to implement and maintain an appropriate procurement and Findings provisioning system which is fair, equitable, transparent, Predetermined objectives competitive and cost-effective. Payments of R1 335 103 were Non-compliance with regulatory requirements made in contravention of the supply chain management requirements. R1 312 103 was not included in irregular 35. The entity has not reported performance against predetermined expenditure, disclosed in note 13 to the financial statements, objectives, as required by section 40(3) (a) of the PFMA. resulting in irregular expenditure being understated. Compliance with laws and regulations PFMA, Water Services Act and Treasury Regulations. Related parties 36. Contrary to the requirements of section 51 (1) (f) of the PFMA 30. IAS 24, Related Party Disclosures, requires disclosure of and Treasury Regulations 8.2.3, the entity did not pay all related party transactions and outstanding balances in the supplier invoices within 30 days from receipt of invoices. financial statements. The related party transactions of Boffin and Fundi, and also Mahlangu’s Bed and Breakfast, including 37. Contrary to the requirements of section 55 (1) (c) (i) of the the outstanding balance of Boffin and Fundi was not included in PFMA the financial statements were not submitted within two disclosure note 19 to the financial statements, resulting in the months after the end of the financial year. transactions with related parties amount being understated by R11 709 469 and R37 369 respectively, and related party receivable balances being understated by R2 096 940.

46 38. Contrary to the requirements of section 54 (2) (b) of the PFMA the entity did not obtain written approval before participating in a significant partnership, trust, unincorporated joint venture or similar agreement.

39. Contrary to the requirements of section 51 (2) (b) of the Water Services Act not all members of the board disclosed their interest in contracts or dealings of the water board.

INTERNAL CONTROL

40. I considered internal control relevant to my audit of the financial statements and the report on predetermined objectives and compliance with the PFMA, but not for the purposes of expressing an opinion on the effectiveness of internal control. The matters reported below are limited to the deficiencies identified during the audit. • Leadership Actions taken to address risks relating to the achievement of complete and accurate financial and performance reporting were not effective, in ensuring the desired level of control over financial reporting and compliance with laws and regulations. Control weaknesses identified by internal and external auditors were not appropriately followed-up to address and correct the root causes. • Financial and performance management The annual financial statements and annual performance report were not submitted for auditing as per the legislated deadlines. Supporting documentation was not submitted on the agreed timeframes as stipulated and agreed to in the engagement letter. • Governance Internal controls to prevent/detect and correct material misstatements in financial reporting and reporting on predetermined objectives did not function effectively in the financial period under review.

OTHER REPORTS

Investigations in progress

41. An investigation is currently being conducted on the duplicated expenditure and procurement transactions identified by both the internal and external auditors. The investigation was still ongoing at the reporting date.

Rustenburg 21 January 2011

47 9. REPORT OF THE AUDIT AND RISK COMMITTEE FOR THE YEAR ENDED 30 JUNE 2010

We are pleased to present our report for the financial year ended 30 June 2010.

1. Audit and Risk Committee Members and Attendance

The Audit and Risk Committee consists of the members listed hereunder and meets at least four times per annum, as per its approved terms of reference. During the current year, seven meetings were held.

Name of members Date of appointment Number of meetings attended Mr. R Mokua (Chairperson) 6 August 2009 7 of 7 Mr. L Gwangwa 6 August 2009 3 of 7 Mr. E Mabena 1 September 2009 5 of 7 Ms. S Makinta 1 September 2006 4 of 7 Mr. R Theunissen 1 September 2006 3 of 7 Ms. T Zondi 6 August 2009 5 of 7

2. Audit and Risk Committee Responsibility The Audit and Risk Committee has evaluated the annual financial statements for the year ended 30 June 2010 and based on The Audit and Risk Committee is satisfied that it has, to the best the information provided is satisfied that the Annual Financial of its ability, complied with its responsibilities as outlined in Section Statements comply, in all material respects, with the requirements 51(1)(a) of the PFMA (Public Finance Management Act) and of the Water Services Act, Act 108 of 1997, Public Finance Treasury Regulation 27.1.10. Management Act, Act 1 of 1999, as amended and International Financial Reporting Standards. The Audit and Risk Committee The Audit and Risk Committee reports that in accordance with concurs with the Auditor General’s audit opinion that the adoption treasury regulation 27.1.6 it has adopted appropriate written terms of the going concern premise in the preparation of the financial of reference as its Audit and Risk Committee Charter. statements is appropriate.

3. The Effectiveness of Internal Control Systems Mr. Rapula Mokua

The PFMA 38(1)(a)(i) and 51(I)(a)(i) states that the accounting authority must ensure that the entity has maintained an effective, efficient and transparent system of financial and risk management and internal control. Chairperson of the Audit and Risk Committee

The Audit and Risk Committee continues to have concerns with the number of control issues raised by Internal Audit and the Auditor General during the period under review and has noted the response by management.

The Audit and Risk Committee concurs with the External Auditors that there are currently no adequate control processes and procedures designed and implemented to ensure the accuracy and completeness of performance information and no audit opinion was expressed thereon.

48 49 Financial Statements

50 51 10. Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Board’s Responsibilities and Approval

The Board of Directors (The Board) is required by the Water Services Water. While operating risk cannot be fully eliminated, Magalies Act, No 108 of 1997, as well as the Public Finance Management Act Water endeavours to minimise risk by ensuring that appropriate of 1999, to maintain adequate accounting records and is responsible infrastructure, controls, systems and ethical behaviour are applied for the content and integrity of the annual financial statements and and managed within predetermined procedures and constraints. related financial information included in this report. It is the Board’s responsibility to ensure that the annual financial statements fairly The Board is of the opinion, based on the information and explanations present the state of affairs of Magalies Water as at the end of the given by management, that the system of internal control provides financial year and the results of its operations and cash flows for reasonable assurance that the financial records may be relied on the period then ended, in conformity with International Financial for the preparation of the annual financial statements. However, any Reporting Standards and Generally Accepted Accounting Practice. system of internal financial control can provide only reasonable, and The external auditors are engaged to express an independent not absolute, assurance against material mis-statement or loss. opinion on the annual financial statements. The annual financial statements set out on pages 53 to 71, which The annual financial statements are prepared in accordance with have been prepared on the going concern basis, were approved by International Financial Reporting Standards and are based upon the Board of Directors on 12 October 2010 and are signed on its appropriate accounting policies consistently applied and supported behalf by: by reasonable and prudent judgments and estimates.

The Board acknowledges that it is ultimately responsible for the system of internal financial control established by Magalies Water and places considerable importance on maintaining a strong control environment. To enable the Board to meet these responsibilities, the Board sets standards for internal control aimed at reducing the risk of error or loss in a cost effective manner. The standards include the proper delegation of responsibilities within a clearly defined framework, effective accounting procedures and adequate segregation of duties to ensure an acceptable level of risk. Chairperson Chief Executive These controls are monitored throughout Magalies Water and all employees are required to maintain the highest ethical standards 12 October 2010 in ensuring Magalies Water’s business is conducted in a manner that in all reasonable circumstances is above reproach. The focus of risk management in Magalies Water is on identifying, assessing, managing and monitoring all known forms of risk across Magalies

52 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Statement of Financial Position

Note(s) 2010 2009 R ‘000 R ‘000

Assets

Non-Current Assets Property, plant and equipment 2 590,430 590,090 Investments 3 38,551 33,202 Long term debtors 5 1,151 1,295 630,132 624,587

Current Assets Inventories 6 6,126 6,202 Investments 3 302,319 311,199 Trade and other receivables 7 105,742 91,580 Long term debtors- short term 5 198 252 Cash and bank 8 301 15,047 414,686 424,280 Total Assets 1,044,818 1,048,867

Equity and Liabilities Equity Reserves 40,468 40,468 Retained Income 956,847 942,255 997,315 982,723

Liabilities Current Liabilities Trade and other payables 11 47,503 62,944 Provisions 10 - 3,200 47,503 66,144 Total Equity and Liabilities 1,044,818 1,048,867

53 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Statement of Comprehensive Income

Note(s) 2010 2009 R ‘000 R ‘000

Revenue 12 187,251 166,985 Cost of sales (126,832) (100,607) Gross surplus 60,419 66,378 Other income 113,835 117,464 Operating expenses (198,045) (190,080) Operating (deficit) surplus 13 (23,791) (62,38) Finance Income 14 27,935 37,694 Finance costs 15 (23) (150) Surplus for the year 4,121 31,306

54 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Statement of Changes in Net Assets

Revaluation Retained Total Reserve Income Equity R ‘000 R ‘000 R ‘000

Balance at 01 July 2008 40,468 910,949 951,417 Changes in equity Surplus for the year - 31,306 31,306 Total changes - 31,306 31,306

Balance at 01 July 2009 40,468 942,255 982,723 Changes in equity Prior year adjustment for assets expensed - 10,471 10,471 Net income (expenses) recognised directly in equity - 10,471 10,471 Surplus for the year - 4,121 4,121 Total recognised income and expenses for the year - 14,592 14,592 Total changes - 14,592 14,592 Balance at 30 June 2010 40,468 956,847 997,315 Note(s) 9

55 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Cash Flow Statement

Note(s) 2010 2009 R ‘000 R ‘000

Cash flows from operating activities Cash used in operations 17 (20,594) (11,977) Interest income 27,935 3,7694 Finance costs (23) (150) Net cash flows from operating activities 7,318 25,567

Cash flows from investing activities

Purchase of property, plant and equipment 2 (27,125) (19,991) Sale of property, plant and equipment 1,332 3908 Increase in investments 3,531 (15959) Decrease of Long term debtors 198 121 Net cash flows from investing activities (22,064) (31921)

Total cash movement for the year (14,746) (6,354) Cash at the beginning of the year 15,047 21,401 Total cash at end of the year 8 301 15,047

56 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Accounting Policies

1. Presentation of Annual Financial Statements

The annual financial statements have been prepared in accordance to International Financial Reporting Standards, Water Services Act, No 108 of 1997 and Public Finance Management Act of 1999. The annual financial statements have been prepared on the historical cost basis, and incorporate the principal accounting policies set out below.

These accounting policies are consistent with the previous period.

1.1 Property, plant and equipment

Costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. If a replacement cost is recognised in the carrying amount of an item of property, plant and equipment, the carrying amount of the replaced part is derecognised.

Property, plant and equipment is carried at cost less accumulated depreciation and any impairment losses.

Depreciation is provided using the straight-line method to write down the cost, less estimated residual value over the useful life of the property, plant and equipment, which is as follows:

Item Average useful life Buildings Buildings 40 years Plant and machinery Plant and machinery 18 years Laboratory equipment 5 years Furniture and fixtures Furniture & Fittings 6 years Motor vehicles Light vehicles 4 years Heavy duty & industrial vehicles 4 years Office equipment Office equipment 3 years IT equipment Computer equipment 3 years Resevoir & pipelines Water works and pipelines 45 years

The residual value, depreciation method and the useful life of each asset are reviewed at each financial period-end. The depreciation charge for each period is recognised in the statement of financial performance. The gain or loss arising from the derecognition of an item of property, plant and equipment is included in the statement of financial performance when the item is derecognised. The gain or loss arising from the derecognition of an item of property, plant and equipment is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item.

Fixed assets under construction

Fixed assets under construction are carried at cost less any impairment loss where the recoverable amount of the asset is estimated to be lower than the carrying value. Costs include professional fees, materials etc. Depreciation of these assets, on the same basis as other assets, commences when the assets are ready for their intended use.

Land is carried at cost and is revalued every three years.

57 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Accounting Policies (continued)

1.2 Investments

Investments maturing within 12 months from the balance sheet date are classified as current assets.

Investments maturing over a period of longer than 12 months from the balance sheet date, are classified as non-current assets. All investments are stated at fair value with any resultant gain or loss recognised in the statement of financial performance. Investment income is recognised as it accrues in the statement of financial performance, using the effective interest rate method.

Investment income and expense comprises interest income on funds invested and changes in the fair value of financial assets at fair value through the statement of financial performance.

Finance expenses comprise interest expenses on borrowings, unwinding of the discount on provisions and other interest- free liabilities, changes in the fair value of the financial assets at fair value through the statement of financial performance, impairment losses are recognised on the financial assets.

1.3 Financial instruments

Initial recognition

Magalies Water classifies financial instruments, or their component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement.

Financial assets and financial liabilities are recognised on Magalies Water’s statement of financial position when Magalies Water becomes party to the contractual provisions of the instrument.

Trade and other receivables

Short duration receivables with no stated interest rate are measured at original invoice amount less provision for doubtful debts.

Trade and other payables

Trade payables are initially measured at fair value.

Cash and bank

Cash and cash equivalents comprise of cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. These are initially and subsequently recorded at fair value.

1.4 Inventories

Inventories are measured at the lower of cost or net realisable value. Net realisable value represents the estimated selling price in the ordinary course of business less any costs of completion and costs to be incurred in marketing, selling and distribution.

Cost is determined on the following basis:

Raw materials are valued at first in, first out basis.

Maintenance stores and chemicals are valued at weighted average cost.

Water Inventory is valued at cost.

58 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Accounting Policies (continued)

1.5 Impairment of assets

Magalies Water assesses at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, Magalies Water estimates the recoverable amount of the asset.

1.6 Long-term debtors

Debtors that have fixed or determinable payments which are not payable in the next twelve months and not quoted in an active market are classified as long-term debtors. Long-term debtors are measured at amortised costs using the effective interest rate method, less any impairment. Interest income is recognised by applying the effective rate, except for short- term debtors when the recognition of interest would be immaterial.

1.7 Employee benefits

Other post-retirement obligations

The Board is obliged to contribute a share of monthly contributions to the medical aid fund on behalf of retired members, provided that they retain their membership of the medical aid fund. The Board has arranged an insurance policy which will fund this liability. The Board provides post- retirement health care benefits to their retirees. The entitlement to this benefit is based on the employee remaining in service up to retirement age and completion of a minimum service period.

Defined contribution plans

Contributions to defined contribution plans are in respect of services in a particular period and are recognised as an expense in that period. The Board contributes towards the Magalies Water Retirement Fund. This fund is registered and controlled in terms of the Pension Fund Act.

1.8 Provisions and contingencies

Provisions are recognised when: • Magalies Water has a present obligation as a result of a past event; • it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and • a reliable estimate can be made of the obligation.

The amount of a provision is the present value of the expenditure expected to be required to settle the obligation.

1.9 Government grants

Government grants are recognised when there is reasonable assurance that: Magalies Water will comply with the conditions attached to them; and the grants will be received.

Government grants are recognised as income over the periods necessary to match them with the related costs that they are intended to compensate.

A government grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to Magalies Water with no future related costs, is recognised as income of the period in which it becomes receivable.

59 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Accounting Policies (continued)

1.10 Revenue

Revenue from the sale of water and services rendered are recognised when all the following conditions have been satisfied: • Magalies Water has transferred to the buyer the significant risks and rewards of ownership of the goods; • Magalies Water retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to Magalies Water; and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Revenue is measured at the fair value of the consideration received or receivable and represents the amounts receivable for goods and services provided in the normal course of business, net of trade discounts and volume rebates, and value added tax.

Interest income is accrued on a time proportion basis, taking into account the principal outstanding and the effective interest rate over the period of maturity. Interest income is recognised in the statement of financial position.

1.11 Borrowing costs

Borrowing costs are recognised as an expense in the period in which they are incurred.

1.12 Other income

Interest income

Interest income is accrued on a time proportion basis, taking into account the principal outstanding and the effective interest rate over the period of maturity. Interest income is recognised in the statement of financial position.

Management fees

Management fees are charged for work done on behalf of municipalities and other entities and are recognised as revenue on the accrual basis in accordance with the substance of the relevant agreements.

1.13 Cost of sales

When water is sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

1.14 Unauthorised, irregular, fruitless and wasteful expenditure

Irregular expenditure means expenditure incurred in contravention of, or not in accordance with, a requirement of any applicable legislation, including:

- The PFMA, or

- Supply chain management framework

Fruitless and wasteful expenditure means expenditure that was made in vain and would have been avoided had reasonable care been exercised.

All irregular and fruitless and wasteful expenditure is charged against income in the period in which they are incurred.

60 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Notes to the Annual Financial Statements

2. Property, plant and equipment 2010 2009 Cost / Accumulated Carrying value Cost / Accumulated Carrying Valuation depreciation Valuation depreciation value Land 8,296 - 8,296 8,296 - 8,296 Plant and machinery 156,084 (48,220) 107,864 151,512 (42,798) 108,714 Fixed assets under 7,857 - 7,857 18,156 - 18,156 construction Motor vehicles 16,748 (11,452) 5,296 16,934 (7,424) 9,510 Furniture and fixtures 6,510 (5,048) 1,462 4,908 (4,311) 597 Computer Equipment 6,884 (2,369) 4,515 3375 (1,844) 1,531 Pipelines & Reservoir 649,165 (210,304) 438,861 622,566 (195,170) 427,396 Buildings 21,981 (5,702) 16,279 21,244 (5,354) 15,890 Total 873,525 (283,095) 590,430 846,991 (256,901) 590,090

Reconciliation of property, plant and equipment - 2010

Opening Additions Disposals Transfers Depreciation Total Balance Land 8,296 - - - - 8,296 Plant and machinery 108,714 4,740 (41) - (5,549) 107,864 Fixed assets under 18,156 14,981 - (25,280) - 7,857 construction Motor vehicles 9,510 - - - (4,214) 5,296 Furniture and fixtures 597 1,602 - - (737) 1,462 Computer Equipment 1,531 3,748 (14) - (750) 4,515 Pipelines & Reservoir 427,396 1,317 - 25,280 (15,132) 438,861 Buildings 15,890 737 - - (348) 16,279 590,090 27,125 (55) - (26,730) 590,430

Reconciliation of property, plant and equipment - 2009

Opening Additions Disposals Depreciation Total Balance Land 8,296 - - - 8,296 Plant and machinery 113,960 3,800 - (9,046) 108,714 Furniture and fixtures 2,887 738 (63) (2,965) 597 Motor vehicles 9,528 7,776 (3,535) (4,259) 9,510 Computer equipment 1,223 1,737 (245) (1,184) 1,531 Pipelines & Reservoir 441,056 - - (13,660) 427,396 Fixed assets under 12,846 5,310 - - 18,156 construction Buildings 15,601 630 - (341) 15,890 605,397 19,991 (3,843) (31,455) 590,090

The Fixed assets under construction consist of fixed assets not yet completed and it is probable that future economic benefits associated with these items will flow to Magalies Water when they are completed. No impairment of assets was deemed necessary for the year under review. The revaluation of land will be done in the next financial year as it was last revalued in 2008.

61 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Notes to the Annual Financial Statements

2010 2009 R ‘000 R ‘000 3. Investments

Zero Coupon Investments INCA Zero Coupon Investment, 14.94% growth on investment, maturing 3,277 2,837 31/03/2015 SCMB Zero Coupon Investment, 43.167% simple interest on the initial capital 11,110 10,317 balance of R1 835 976 per annum, maturing 30/06/2011 Based on the agreement, interest is only invested when the income is capitalised. SCMB Zero Coupon Investment, 50.787% simple interest on the initial capital 11,042 10,208 balance of R1 640 677 per annum, maturing 31/03/2015 Based on the agreement, interest is only invested when the income is capitalised. 25,429 23,362

Other long-term Investments Sanlam 2,139 - This investment was intended for the settlement of interest on the final instalment of a long-term loan. The Loan, however, was repaid in full in 2007/08 financial year end. The amount was re-invested and classified as a long-term investment.

Momentum 10,983 9,840 The Board is obliged to contribute, on behalf of members, the Board’s share of their monthly contributions to the medical aid fund, provided the members retain their membership of the medical aid fund. The Board has arranged an insurance policy which will fund this liability. The Board provides post- retirement health care benefits to their retirees. The entitlement to post- retirement health care benefits is based on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment, using an accounting methodology similar to that of defined benefit pension plans. Magalies Water is under no obligation to cover any unfunded benefits. 13,122 9,840

Short-term Investments 302,319 309,277 Unlisted short-term investments - 1,922 Sanlam This investment was intended for the settlement of interest on the final instalment of a long-term loan. The loan, however, was repaid in full in the 2007/08 financial year end. The investment has been reclassified as a current asset in the 2008/09 financial year as it matures in June 2010. 302,319 311,199 Total Investments 340,870 344,401

Represented by:

Non-current assets Zero Coupon Investments 25,429 23,362 Other long-term Investments 13,122 9,840 Current assets 38,551 33,202 Short-term Investments 302,319 311,199 Total Investments 340,870 344,401

62 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Notes to the Annual Financial Statements

2010 2009 R ‘000 R ‘000 4. Retirement benefits

Defined contribution plan

Contributions to a defined contribution plan are in respect of service in a particular period and are recognised as an expense in that period. The Board contributes towards the Magalies Water Retirement Fund. This fund is registered and controlled in terms of the Pension Funds Act 24 of 1956. The total contribution of R9,345,192 (2009: R7,535,309) comprises of 7.50% employee contributions amounting to R4,000,259 (2009: R3,229,418) and 10% employer contributions amounting to R5,344,933 (2009: R4,306 891).

5. Long-term debtors

East Gauteng Services Council 1,349 1,547 Less : East Gauteng Services Council - Short-term portion (198) (252) East Gauteng Services Council- Long-term portion 1,151 1,295

The debt is repayable in six monthly instalments of R196 713 including interest at 13.5% per annum with a final instalment of R196 713 on 30/09/2014.

6. Inventories

Chemicals and materials 5,849 6,202 Water Inventories 277 - 6,126 6,202

7. Trade and other receivables

Trade receivables 101,829 83,121 Deposits 910 897 Provision for bad debts (10,161) (4,826) Sundry debtors 13,164 12,388 105,742 91,580

8. Cash and bank

Cash and cash equivalents consist of:

Cash on hand 19 18 Bank balances 282 15,029 301 15,047

9. Revaluation reserve

Arising from assets exceeding liabilities with the acquisition of North West Water Supply Authority on 1 April 1996 40,468 40,468

63 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Notes to the Annual Financial Statements

2010 2009 R ‘000 R ‘000 10. Provisions

Reconciliation of provisions - 2010

Opening Reversed Total Balance during the year Provision for project expenditure 2,600 (2,600) - Provision for Settlement 600 (600) - 3,200 (3,200) -

Provision for project expenditure of R2,6m is in respect of expense to be incurred in building a school hall as part of the Corporate Social Investment and it represents management’s best estimate of Magalies Water’s liability under this period.

11. Trade and other payables

Trade payables 3,813 6,956 Amounts received in advance 17 - VAT 2,227 2,361 Retention and consumer deposits 3129 3,120 Accrued leave pay 7,633 8,196 Accruals 27,804 39,906 Other Payables 161 - 13th Cheque 2,719 2405 47,503 62,944

12. Revenue

Water Sales 187,251 166,985

64 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Notes to the Annual Financial Statements

2010 2009 R ‘000 R ‘000 13. Operating (deficit) surplus

Operating surplus for the year is stated after accounting for the following:

Other income Management fees received 109,318 115,162 Other 4,517 2,302 113,835 117,464

Operating lease charges Equipment Contractual amounts 565 80

Surplus on sale of property, plant and equipment 1,277 65 Depreciation on property, plant and equipment 26,730 31,455 Employee costs 90,192 79,951 Fruitless and wasteful expenditure (See note 15) 23 978

14. Finance Income

Interest Income Interest received - RDP 152 250 Interest received from Banks 1,336 1,801 Interest received- East Gauteng Services Council 195 54 Investment income 26,252 35,589 27,935 37,694 15. Finance costs

Long-term loans and other creditors 23 150

Interest paid on long outstanding creditors

16. Taxation

Magalies Water is exempt from income tax in terms of the provisions of section 10(I)(cA)(i) of the Income Tax Act.

65 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Notes to the Annual Financial Statements

2010 2009 R ‘000 R ‘000 17. Cash used in operations

Surplus before taxation 4,121 31,306 Adjustments for: Depreciation and amortisation 26,730 31,455 Profit on sale of assets (1,277) (65) Interest received (27,935) (37,694) Finance Costs 23 150 Movements in provisions (3,200) 3,200 Other non-cash items 10,471 - Changes in working capital: Inventories 76 (939) Trade and other receivables (14,162) (31,227) Trade and other payables (15,441) (8,163) (20,594) (11,977)

18. Contingent Liabilities

Guarantees were given via a financial institution to Rustenburg Water Services Trust and the City of Tshwane Metro Municipality for the operations and maintenance contracts to the amount of R3 465 000.

Magalies Water has entered into a collaboration agreement with various mining companies and municipalities to construct the Pilanesberg Water Scheme at a total cost of R1.174 billion. The scheme will be funded jointly together with the mines and Magalies Water will fund R563 million of the total amount. The collaboration agreement suggests a Special Purpose Vehicle (SPV) to manage the contract with Magalies Water as the controlling entity. To date, Magalies Water has not obtained approval from the Minister of Water and Environmental Affairs to participate in the SPV. The other parties to the collaboration agreement have spent R170 million to date on the project. If Magalies Water does not proceed with the project, potential claims can amount up to 48% of the money already spent by the other parties. If Magalies Water decides to continue with the project, the Collaboration Agreement states that Magalies Water will take over the funding should any of the parties withdraw from the project. Although no such withdrawals are anticipated at this stage, this creates a potential liability for Magalies Water of the full R1.174 billion.

19. Related parties

Related party balances

Amounts included in Trade receivables regarding related parties City of Tshwane Metro Municipality 22,649 25,353 Rustenburg Water Services Trust 25,499 19,124 The following transactions were carried out with related parties:

Management fees received from related parties Rustenburg Water Services Trust 31,392 38,313 City of Tshwane Metro Municipality 37,819 30,331 Purchases of goods and services on behalf of related parties Rustenburg Water Services Trust 25,956 25,872 City of Tshwane Metro Municipality 29,209 51,367 Guarantees issued on behalf of related parties City of Tshwane Metro Municipality 2,850 2,580 Rustenburg Water Services Trust 885 885 Compensation to board and other key management Short-term employee benefits 10,229 10,173

66 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Notes to the Annual Financial Statements

2010 2009 R ‘000 R ‘000 20. Board & Senior Management emoluments

SENIOR MANAGERS

Ms. S.J. Sekgobela - CE Resigned June 2009 970 2,074

Mrs. Z. Nkukwana 1,087 736 Mr. C. Morolo – Resigned December 2009 685 1,069 Mr. K. Vilakazi 1,262 905 Mr. M. Dayanand 1,014 968 Mr. L.M. Motlhodi - Acting Chief Executive 1,248 1,085 Mr. S.E. Ngcobo 950 928 Mr. R.M. Le Roux 1,271 1,045 8,487 8,810

BOARD MEMBERS

Ms. M.M. Legana (Chairperson) 14 168 Adv F.M. Mayimele-Hashatse (Vice-Chairperson) 6 128 Mr. S.S. Faku 7 120 Adv K.C.O. Garlipp 32 301 Ms. J. Krzyzanowska 7 100 Ms. M. Magasa 6 110 Clr W .B. Mahlangu 126 83 Mr. N. Pretorius 4 170 Mr. F.I. Sherrif 7 122 Mayor. M.J. Wolmarans 7 61 *Prof. M. I. Jahed (Chairperson) 125 - *Ms. T. Zondi ( Vice-Chairperson) 196 - *Mr. L.C. Gwangwa 230 - *Ms. M. Hlahla 147 - *Ms. Z.B. Madikizela 110 - *Mr. C. Mannya 96 - *Mr. R. Mokua 171 - *Ms. P.N. Nkwinika 242 - *Mr. D.R. Sibanda 209 - **Mr. R Theunissen 18 22 **Ms. S Makinta 29 7 **Mr. E Mabena 29 6 1,818 1,398

*On 18 June 2009, a new board of directors was appointed with effect from 1 July 2009.

**External Audit Committee Members

21. Prior period errors

Assets under construction were understated in the previous year by R10 471 202 as certain construction costs were expensed. Retained earnings were therefore understated by R10 471 202. This error was corrected in the statement of changes in net assets.

67 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Notes to the Annual Financial Statements

2010 2009 R ‘000 R ‘000

22. Going concern

The annual financial statements have been prepared on the basis of accounting policies applicable to a going concern. This basis presumes that funds will be available to finance future operations and that the realisation of assets and settlement of liabilities, contingent obligations and commitments will occur in the ordinary course of business.

23. Reclassification of operating costs as cost of sales

Raw water 46,901 39,381 Chemicals 25,159 23,620 Electricity 51,620 34,083 Water Research Levy 2,006 2,623 Water Resource Management 1,424 900 127,110 100,607

In terms of the guidelines issued by DW A, potable water cost of sales is only raw water, with all other operating costs associated with production process included in operating and administration expenses. In order to improve disclosure, Magalies Water deemed it appropriate to depart from DW A guidelines and reclassify operating costs associated with the production process to cost of sales which is in line with International Financial Reporting Standards. All other costs are regarded as operating costs.

68 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Detailed Income Statement

Note(s) 2010 2009 R ‘000 R ‘000

Revenue Sale of goods 187,251 166,985

Cost of sales Raw water purchases (46,901) (39,379) Cost of production (80,208) (61,226) Closing stock 277 - (126,832) (100,605) Gross surplus 60,419 66,380 Other income Interest received 14 27,935 3,7694 Administration and management fees 109,318 115,159 received Gains on disposal of assets 1,277 65 Other income 3,042 1,953 Sundry income 198 287 141,770 155,158 Expenses (Refer to page 70) (198,045) (190,081) Operating surplus 13 4,144 31,457 Finance costs 15 (23) (150) Surplus for the year 4,121 31,307

69 Magalies Water - Annual Financial Statements for the year ended 30 June 2010 Schedule of operating expenses

Note(s) 2010 2009 R ‘000 R ‘000

Operating expenses Accident and excess costs - (3) Accounting fees (944) (1,064) Administration overheads (249) (665) Advertising (3,898) (4,069) Bad debts (7,543) (2,715) Bank charges (157) (167) Computer expenses (795) (1,104) Consulting fees (2,636) (4,643) Consumables (1,931) (2,577) Corporate Social Responsibility (532) (389) Cost recovery (8,300) (6,501) Depreciation, amortisation and impairments (26,730) (31,455) Donations - (100) Electricity (162) (166) Employee costs (90,192) (79,951) Entertainment (1,179) (1,423) Fines and penalties (77) (635) Garden services - (1,293) Hire (50) (3,532) Insurance (842) (1,687) Lease rentals on operating lease (565) (80) Legal expenses (871) (644) Licensing and certification costs (1,188) (306) Motor vehicle expenses (1,355) (1,540) Other operating expenses - (1,159) Petrol and oil (1,923) (1,995) Postage (107) (116) Printing and stationery (1,120) (926) Recruitment costs (486) (976) Repairs and maintenance (26,054) (19,751) Security (6,235) (4,892) Short-term intervention programme (1,935) - Subscriptions - (1) Telephone and fax (3,510) (3,439) Training (3,741) (3,066) Travel-local (2,738) (7,051) (198,045) (190,081)

70 Annexure to the Financial Statements

World Cup Expenditure The following expenditure was incurred with respect to the 2010 World Cup tickets, memorabilia and clothing.

Quantity 2009/10 2008/09 Board Members R'000 R'000

Tickets acquired 20 281 0 Soccer jerseys and scarves 20 18 0

Total 299 0

Executive Management

Tickets acquired 30 290 0 Soccer jerseys and scarves 10 9 0

Total 299 0

Management and other employees

Tickets acquired 12 26 0 New edition jerseys 18 18 44 0

Staff

World Cup T-Shirts 500 376 0 Vuvuzelas 500 26 402 0

Purchase of other World Cup apparel

World Cup decorations and memorabilia 40 0 Car mirror socks 8 1 41 0

Total 1,085

71