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Tshwane metering contract branded ‘blatantly corrupt’

Contract worth R27bn over ten years.

Business rights watchdog organisation AfriSake has initiated court proceedings to prevent a contract between the City of Tshwane (Pretoria) and private service provider PEU Capital Partners (PEU) from proceeding.

The contract came into affect in May 2013 when the City of Tshwane approved a ten-year arrangement to outsource its entire electricity metering and revenue collection activity to PEU. The contract is estimated to be worth more than R27 billion over the contract period.

AfriSake claims that “PEU has no experience in the installation or management of electricity infrastructure in towns or cities”, and that the outsourcing contract “is probably an example of one of the most blatantly corrupt municipal transactions to date”.

It further says the contract is illegal as it violates the Municipal Finance Management Act, the Municipal Systems Act, the Consumer Protection Act, the Promotion of Administrative Justice Act, and the city’s own supply chain management policy.

Tshwane and PEU officials deny the allegations.

In terms of the contract, PEU will be responsible for all metering and electricity revenue collection on behalf of Tshwane for a period of ten years, for a service fee of between 19.5% and 25% of electricity sales revenue. There is also an option to extend the contract for a further three years.

In terms of the contract PEU will roll out new prepayment metering infrastructure to all of Tshwane’s domestic, commercial and industrial electricity customers, including those customers presently on prepaid and credit meters. This infrastructure would include: prepaid smart meters, meter boxes, consumer interface units and appliance control units; prepaid electricity vending infrastructure and points-of-sale; a meter data communication platform and back-end system; and a contact centre.

In addition to various other claimed benefits, the primary intention of the outsourcing contract is ostensibly to reduce debtor days, improve revenue collection and reduce non-technical losses (i.e. electricity theft and non-payment). However, the initial conditions of these performance metrics prior to commencement by PEU are undefined and unstated in the contract, and there is no direct linkage of PEU’s service fee to any such performance improvements.

In fact, even if there are no benefits arising or improvements in electricity revenue collection and levels of theft and non-payment resulting from the new arrangement with PEU, and the current (undefined) situation simply continues unabated, some 19.5% to 25% of Tshwane’s electricity sales revenue per year will be diverted away from municipal coffers to PEU.

In public statements to justify the outsourcing contract and PEU’s high service fee of 19.5% to 25% of Tshwane’s electricity sales revenue, the Tshwane city manager and mayor have stated that the cost of metering and revenue collection under the previous system was 27% to 35% of electricity sales revenue.

However, a report dated October 11 2013 on the cost of metering and revenue collection for the past three years, prepared by Tshwane’s group financial services department for presentation to the council’s standing committee on public accounts, indicates the cost of metering and revenue collection is only 12% of electricity sales revenue.

This report was subsequently withdrawn by the Tshwane chief financial officer when it became apparent that the cost figures therein contradicted those being given by the city manager and mayor to justify the PEU contract.

Furthermore, formal documents submitted to the National Energy Regulator of South Africa (Nersa) on October 31 2013 by the city manager, chief financial officer and senior statistician for the 2012/13 financial year, state that Tshwane electricity sales revenue was R8.57-billion, the cost of electricity purchased from Eskom was R5.55-billion (i.e. 65% of sales), and the total balance of costs of running Tshwane Electricity (including metering and revenue collection) was R1.53-billion (i.e. 18% of sales), giving a surplus (profit) on the sale of electricity of R1.48-billion (i.e. 17% of sales) for the year.

The cost of metering and revenue collection must only be a fraction of the “total balance of costs” of running Tshwane Electricity. This “total balance of costs” represents 18% of total sales.

It is clearly impossible, indeed absurd, that the cost of revenue collection and metering could be 27% to 35% of sales revenue, or 1.5 to 2 times the total balance of costs of running Tshwane Electricity (excluding only the cost of electricity purchases from Eskom), as is claimed by the Tshwane city manager and mayor.

Thus if one accepts the formal figures prepared for the council’s standing committee on public accounts and Nersa rather than the unsubstantiated claims by the Tshwane city manager and mayor in efforts to justify the outsourcing contract and PEU’s high service fee, it is apparent that far from providing significant savings, the contract will incur massive costs, without any linkage to improvements in revenue collection metrics.

In fact, the PEU service fee of 19.6% to 25% of sales revenue has the potential to wipe out the current 18% surplus on electricity sales (i.e. R1.48-billion surplus in 2012/13) that Tshwane Electricity generates to cross-subsidise other municipal services. If this were the case, to compensate, there would undoubtedly have to be a corresponding upward movement in other municipal service rates to be borne by Tshwane ratepayers.

Nersa has indicated to EE Publishers that PEU will be selling electricity to Tshwane customers in 2013/14 at the electricity tariff rates approved by Nersa for Tshwane, and the contract between the municipality and PEU is governed by the MFMA and not within Nersa’s jurisdiction. Nersa further indicated that it would be looking closely at Tshwane’s 2013/14 declared costs and 2014/15 tariff application to ensure that only efficiently incurred costs are passed through to the customer in the approved tariff rates for 2014/15.

The Tshwane Electricity figures prepared for Nersa and the council’s standing committee on public accounts, and the figures put out by the city manager and mayor to justify the outsourcing contract and the PEU service fee, appear to be in stark contradiction, and the comments by Tshwane and PUE to this article raise more questions than answers.

However, Tshwane’s executive director: strategic communication, Selby Bokaba, has since indicated: “We will not entertain further questions on this matter as Afrisake has taken us to court with the intention to interdict the implementation of the contract. Thus, the matter is sub judice”.

*Chris Yelland Ceng is an investigative editor at EE Publishers

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