Indications are that R50 million per month will continue to flow from the City of Tshwane to PEU Capital Partners for a further two years.
Neither the City of Tshwane nor PEU Capital Management responded to direct questions from Moneyweb about the cost of terminating its failed smart prepaid electricity metering contract.
From information Moneyweb obtained about payments made up to May 11 and further information obtained by DA shadow member of the mayoral committee Lex Middelberg, it seems payments will continue until June 1 2017 at a lower rate, but it will still amount to about R50 million per month.
The contract, that would have seen the rollout of 800 000 smart prepaid meters to all Tshwane power users, was terminated with immediate effect on May 12. In its announcement to that effect the City of Tshwane said it has paid R830 million to PEU since the start of the meter-rollout in October 2013.
Nineteen months after the meter replacement started, only 12 920 meters have been installed, far short of the target of 435 000 after two years.
In terms of the contract, PEU would have managed the metering and vending for eight years. It would supply the system at no cost to Tshwane and retain ownership, but earn 19.5% of all the revenue earned through the meters for the duration of the contract as a service fee. This percentage has been criticised as unaffordable for Tshwane.
Tshwane said the project became “financially and economically unsustainable”.
Moneyweb in March revealed that average daily payments to PEU in February amounted to R4.6 million.
Moneyweb got confirmation that payment stabilised at around R72 million per month since February. R31.4 million was paid to PEU in May, up to May 11, a day before the contract was terminated. (Tshwane made immediate daily payments to PEU on most weekdays, unlike other creditors who are paid monthly and not always within 30 days,)
Since deciding that it wanted to cancel the contract in February Tshwane has paid PEU a further almost R250 million.
According to a presentation leaked to Middelberg which Moneyweb has seen, PEU gave four termination options. The city apparently opted for the option that entails:
- Continued payments at 19.5% of revenue for a further two months;
- Thereafter a service fee of 13.8% generated electricity revenue to be paid until July 1 2017;
- No further rollout of meters;
- PEU through its subsidiary Total Utility Management Services (TUMS) will continue to operate and service the existing 12 920 meters.
Applying the lower percentage to the R72 million payments per month since February that was calculated at 19.5%, Moneyweb has calculated that payments to PEU will amount to more than R50 million per month for the next two years until July 1 2017.
The termination terms are “even worse” than the original contract, Middelberg says.
Tshwane never budgeted for payments to PEU, as it believed the project to be “self-funded.” This assumption was based on the current cost of collecting electricity revenue that was set at 30c for every R1 collected.
The argument was that if PEU was paid 19.5c for every R1 collected, the city would still benefit to the tune of 10.5c. PEU stated that the city could benefit by R2.5 billion per year on that basis.
From the PEU presentation it now transpires that the collection cost is in fact 6c/R1 for large users and 2c/R1 for small users.
Neither the city nor PEU responded to questions about who did the first calculation (30c/rand), whether it was verified and who did the second (2-6c/rand).
Moneyweb also asked consultancy EY – which stated on its website that it developed the business case for the contract – whether it verified the collection cost (30c/R1), It responded as follows:
“We have not been engaged to render any services to the City of Tshwane in respect of this project. Our duties in relation to the City of Tshwane’s Security of Revenue project have been performed specifically for our client, Total Utilities Management Services (TUMS). We are confident about our delivery of services against our agreed scope of work. Client confidentiality obligations prohibit us from providing any further comment on the inaccurate assumptions in the various published articles at this time.“
It is unclear how the city is going to get itself out of this mess that may have serious financial and political ramifications.
According to Middelberg neither City Manager Jason Ngobeni nor Mayor Kgosientso Ramokgopa have the authority to amend or terminate the contract. It has to be done by Council.
PEU further stated that Tshwane’s preferred termination option is dependent on AfriSake abandoning its legal challenge to the contract. AfriSake attorney Willie Spies said it will, on the contrary, supplement its filings to include the termination agreement in its review application. He said: “the termination agreement is just as corrupt as the initial contract”.
AfriSake approached the court on the basis that the proper procurement processes were not followed in the award of the contract to PEU.
Even if the termination is implemented, Tshwane does not have the money to continue paying PEU R50 million per month, which will amount to a further almost R1.3 billion until July 1 2017.
If the termination fails, the city sits in the position where a large portion of its electricity revenue – according to Middelberg about half – is in the hands of PEU. PEU owns the meters and has access to the data on it.
To retain control, Tshwane will have to have the PEU meters removed and replaced. This may be financially and operationally very difficult for the city.
It is not clear when the AfriSake case will be heard, but Middelberg says if it succeeds, which he believes it will, the contract will be declared null and void from the outset. “Legally the contract would never have existed”, he says. The parties will have to give restitution to each other and the status quo will have to be restored.
PEU would therefore have to remove its meters and replace it with the ‘dumb meters’ it removed. It will also have to repay the money it received in terms of the contract.
Why then, one wonders, is the city continuing to oppose the AfriSake application?