Global consultancy firm EY (formerly Ernst & Young) played a key role in the controversial contract for the roll-out of pre-paid electricity meters in the City of Tshwane that is consuming cash at a rate the city can no longer afford.
Moneyweb earlier reported that the city in February paid an average of R4.6 million per day to PEU Capital Partners, the company contracted to undertake the roll-out, and has indicated that it is looking for ways to get out of the contract as it is unaffordable and does not deliver the expected benefits to the City.
In a joint statement with PEU it later said the city “remains committed to the prepaid smart meter project”.
In terms of the contract, PEU will roll out 800 000 smart pre-paid meters. The contract stretches over eight years. PEU will cover the capital outlay, estimated at R6 billion, but will be paid a 19.5% commission on the electricity subsequently purchased by consumers through these meters.
PEU told Moneyweb 12 500 meters would be installed by the end of March. This is far short of the target of more than 400 000 after the first two years (of which only seven months are left).
PEU and the City blame the delays on a legal challenge to the contract by AfriSake. This claim was denied by AfriSake attorney Willie Spies.
From a report on the EY website titled “Smart Metering -Transforming Africa’s Energy Future” and signed by EY’s African Power & Utilities Sector Leader Norman B Ndaba, it seems that it played a key role in developing and implementing the project and saw it as a foundation for similar roll-outs all over the continent.
The consultancy would not respond to questions from Moneyweb, saying PEU or the City of Tshwane should respond. City spokesperson Selby Bokaba said EY was appointed by the company and not by the City and therefore PEU should respond. PEU in turn said “these questions are very specific to the company’s processes and systems and it would be EY that would be have to answer them.”
According to the EY report, PEU, after being appointed to create an “off-balance sheet, self-funding” smart metering system for the City, appointed EY to create a business case, design the new smart metering operating business and run the project management office (PMO).
EY stated that the business case was developed under extreme time pressure and completed within four weeks. It explains that the City did not need to raise the R6 billion needed to fund the programme. Instead the project is self funding and means that customer tariffs won’t change.
EY said a new operating business (TUMS) had to be set up. “A new structure and operating model had to be designed and created from scratch”.
“At the time of writing, we believe this is the largest deployment of smart meters in Africa. EY’s commitment as PMO will last for ten years in total, and we will also be responsible for ongoing commercial and risk management.”
Among the questions EY would not respond to, was whether it quantified the savings from which the roll-out would be funded and if so, what the amount was, whether it was achieved and if not, why not.
In all the documents before the City Council at the time the contract was approved, no such calculations by EY or anyone else were quoted.
EY also did not answer whether it identified the critical success factors for the project and whether achieving the savings was among them.
Moneyweb also asked EY whether it considered the affordability for the City of the 19.5% commission on electricity revenue to be paid to PEU.
Municipal expert Werner Zybrands consistently questioned the sustainability of the contract, even before its implementation, on the grounds that the commission was unaffordable.
His position is supported by electricity regulator Nersa’s analysis of the cost structure of municipal electricity distributors. According to Nersa, 73% of electricity revenue is spent on bulk purchases (Eskom), 10% on salaries and wages, 5% on repairs and maintenance, 4% on capital expenses and 7% on other costs (possible profit).
Unless the City of Tshwane’s cost structure is fundamentally different it would not be able to pay the 19.5% commission from electricity revenue, which would render the contract unsustainable – a factor one would expect EY to consider.
At the time of writing it could not yet be confirmed whether the future of the contract will be on the agenda of a special council meeting to be held on Thursday.