Tshwane Mayor Kgosientso Ramokgopa on Wednesday defended the intentions and actions of the City and PEU Capital Partners in relation to the collapsed prepaid smart metering project that cost rate payers around R1 billion since October 2013.
Ramokgopa announced that the two parties reached agreement on the terms for the cancellations of the project on a no-fault basis. No penalties are payable.
The termination takes effect on June 30, which means that Tshwane’s daily multimillion rand payments to PEU will continue until then. Thereafter the City will continue to pay PEU at a rate reduced by about 50% for a transitional period to continue managing the 13 000 meters and related system it has installed.
According to a statement by the City, the announcement on May 12 that the contract was “terminated with immediate effect” merely halted the further project roll-out.
Ramokgopa said the agreement will ensure there is no disruption of services to the City’s customers and will enable the City to collect more than R1.8 billion during the six-month transitional period.
Moneyweb has calculated that PEU will therefore earn about R171 million during that period.
On July 1 the City will start a new procurement process to find a substitute service provider. PEU will not be prohibited from competing for the tender, because “we have not found them guilty of anything,” Ramokgopa said.
The infrastructure PEU has installed and related intellectual property will be valuated by an independent valuer and the substitute service provider will be expected to take it over and pay PEU the amount of the valuation. The City plans to appoint this service provider by December.
As was the case with the PEU project, the service provider will retain ownership of the infrastructure and will be paid a commission on the electricity revenue.
PEU was paid 19.5% of electricity revenue. This was determined on the City’s determination that the collecting and billing expenses consumed 27-30% of revenue and by eliminating these costs, the City would be able to pay PEU the 19.5% from the savings and retain about a third of the savings.
This argument was questioned by experts who maintained that the estimated percentage spent on metering and billing was much lower. According to the National Energy Regulator (Nersa) a benchmark of 73% of municipal electricity revenue is spent on bulk purchases from Eskom, 10% on salaries and wages and 6% on repairs and maintenance, which leaves only 7% for other expenses or profit.
Unless the City of Tshwane’s cost structure differs radically from this, the cost of collection should therefore be much lower than 30% of total electricity revenue. It has been suggested that this is why the project cost the City hundreds of millions, while it actually expected it to improve its financial situation.
Ramokgopa confirmed that this calculation of the cost of billing and collections will also be the basis for the new contract.
City manager Jason Ngobeni said it is key to complete the roll-out of all 800 000 smart meters within a short period of about two years, in order to remove the embedded collection cost from the system without delay.
The City further plans to extend the roll-out to water meters in what Ngobeni considered “probably the largest deployment of smart meters in Africa”.
Ramokgopa put the blame for the collapse of the project on business group AfriSake, a member of the Solidarity movement, that approached the High Court to review and set aside the contract. This was on the grounds that the procurement process that was allegedly flawed. The case is still pending.
He said funders were not prepared to back the project with the pending lawsuit. This delayed the roll-out and rendered the project unsustainable to the extent that termination was the only option.
AfriSake on Tuesday put the City on terms to disclose several relevant documents, including the termination agreement. The organisation threatened to approach the court for assistance if the City fails to provide the information by close of business on Friday.
Ramokgopa maintained that the City did nothing wrong. He admitted that the City did not put the smart metering project out to tender, but argued that was not necessary. He said the City asked for innovative solutions. PEU came with such a solution for the City’s growing debtors book. PEU did not propose smart metering, but a complete solution including funding and automated meter reading, data management, data processing and analysis.
He said the City will engage National Treasury on the gap in the legislative framework to deal with unique, innovative solutions. “A significant amount of the problems we face, need innovative solutions. The problem is that if you go out on tender, you have to specify (what you need). That means you have to know the answer. We don’t know the answer (yet).”
Ramokgopa said legislation is silent on the treatment of innovative solutions. “Silent means it is not prohibitive. If those solutions come, we will take it and people will take us to court.”
He said young people are scared to propose innovative solutions, because of the PEU debacle.
AfriSake CEO Cornelius Jansen van Rensburg said the organisation is waiting for a copy of the termination agreement to calculate the full cost of it. He said the valuation of PEU’s infrastructure may pose a stumbling block to new bidders.