Phumelela, Investec, SuperGroup director Peter Malungani’s PEU dragged into court over R27bn municipal contract

Peter Malungani - dragged into a court action over a massive contract with Tshwane
Peter Malungani – dragged into a court action over a massive municipal contract

Through my involvement with the Sport of Kings, I served for a time on the board of the listed horse-racing business Phumelela. Ahead of the appointment, as with any other director of a company with a gambling licence, I was required to complete a veritable book of personal and financial information – a process called Probity. The chairman then, as now, is Peter Malungani who is also a director of Investec SA and chairs SuperGroup.  We had a fairly lengthy, getting-to-know-you chat in his PEU Group offices ahead of my first board meeting. Malungani is efficient, friendly and composed. And because of the positions he holds, like Caesar’s Wife is required to conduct himself above reproach. So he must be less than impressed at having PEU – and by association himself – dragged into a court action over a massive (R27bn) contract which it landed with the Tshwane Municipality. Chris Yelland of EE Publishers, the country’s leading journalist on energy matters, has been closely following the matter. Today he published a damning report which is republished below the transcript. We asked Yelland to come through to CNBC Africa’s studios to tell us what’s going on. Hopefully Malungani will soon provide the other side. – AH   

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ALEC HOGG:  Business rights watchdog AfriSake has branded the metering contract for the City of Tshwane as blatantly corrupt.  The contract between the City and PEU Capital Partners, worth in excess of R27 billion is for the outsourcing of electricity metering and revenue collection activity over the next ten years.  Joining us to discuss this is Chris Yelland, MD of EE Publishers and still with us is Adrian Saville.  We’ll be talking to Adrian about other issues, but maybe he’d like to chip in on this conversation.  Chris it’s a fantastic story that you’re covering at the moment.  Where did you pick it up?

CHRIS YELLAND:   Well, one gets these stories from sources, but actually it all started I guess, with ANN7, who have been running the story for a few months.  It has really ‘hotted up’ lately as AfriSake served court papers on Tshwane Metro.  They are seeking an interdict to prevent a massive project from proceeding.  They have a lot of what they believe are good grounds for doing so, both on a procedural basis as well as in the substance of the contract.  I managed to pick up the story from these court papers.

ALEC HOGG:   R27bn is a lot of money.  Is that the revenue that will be generated over ten years for PEU or overall?

CHRIS YELLAND:  That is PEU’s service fee over the next ten years.  It is a staggering amount.  If you bear in mind the arms deal, I think it was in the region of R30bn.  This is R27bn over ten years – a similar kind of period.

ALEC HOGG:   What will PEU do to get that?

CHRIS YELLAND:  Well, they will roll out prepayment metering systems, not just for the domestic/residential sector…in the past it’s been almost exclusively limited to the poorer residential sector.  However, prepayment metering, according to this plan, will be rolled out to not just the poorer, but also the middle class, upper class, commercial, industrial, and bulk metering customers.  In fact, every single electricity customer of the City of Tshwane will effectively go onto prepayment metering, according to this plan.  PEU will roll out the metering equipment, meter boxes, data communication, network, service centre, and vending infrastructure for vending of prepaid electricity to all these customers.

GUGULETHU MFUPHI:  Is it possible to value that kind of service that they’ll be rolling out?  Naturally, it might not be worth R27bn but could we perhaps give it a value.

Chris Yelland - EE Publishers
Chris Yelland – EE Publishers

CHRIS YELLAND:  Well, this is what my article (see below) looks at, and one looks at the current cost of revenue collection and metering within the City of Tshwane and this is where things start getting interesting.  According to documents that Tshwane itself have delivered to the National Energy Regulator, they claim that the total cost of running Tshwane Electricity – excluding the price of energy, which they purchase from Eskom – the total cost, all-inclusive of all the balance of running Tshwane Electricity amounts to about 16 percent of sales.  Now if you imagine that metering and revenue collection is a subset of that, one would estimate that metering and revenue collection would be somewhat less than 16 percent.

ALEC HOGG:   What is it, as a percentage, of the R27bn?

CHRIS YELLAND:  The City of Tshwane is saying that the current metering and revenue collection costs are 27 to 35 percent of revenue, whereas the cost of the PEU service is 19 percent.  The actual cost, I believe, is somewhat less than 16 percent.

ALEC HOGG:   So what you’re saying is that they’ve given some information to the Regulator, which is at odds with what they’re now saying.

CHRIS YELLAND:  Exactly, and the figures they’re using to motivate the project seem to me to be greatly at odds with figures that are given to NERSA and figures their own financial department planned to give to the council.  That information, however, was stopped at the last minute, presumably because the information didn’t tally with the information that the mayor and the city manager are giving to the public.

ADRIAN SAVILLE:   Chris, the service that they’re going to provide doesn’t include additions, extras, or new elements that aren’t in the old numbers?

CHRIS YELLAND:  Well, it includes an addition to the contract.  For example, they’re going to roll out devices that sit in the home, which will enable the municipality to switch off swimming pool motors, geysers, etcetera remotely, but that’s separate to this contract. Another addition to this contract is still to be added.

ALEC HOGG:   So it’s a little bit like the e-tolling system where the collection costs are extremely high.  The problem in all of this, however – if I read your article correctly – there was no transparent procurement process that was followed?

CHRIS YELLAND:  Well, this is a big part of AfriSake’s case.  They would argue that this was an unsolicited bid, which was not unique, and therefore it should have gone out to Tender but it didn’t go out to Tender.  They point to conflicts of interest because the company PEU was employed as a consultant to advise the City of Tshwane.  Subsequently, they were appointed the contractor.  AfriSake says this is grossly irregular, in breach of the Finance Management Act and the Municipal Systems Act.  There’s a whole host of procedural issues that go along with the awarding of this contract, to which AfriSake makes a very strong case…  Of course, the City of Tshwane and PEU deny that it was not procedural.

Chris Yelland’s article is republished below with his permission:

Tshwane Metro metering contract branded “blatantly corrupt”

by Chris Yelland CEng, investigative editor, EE Publishers

On 5 December 2013, Afrikaans business rights watchdog organisation, AfriSake, initiated court proceedings to prevent a contract between the City of Tshwane (Pretoria) and private service provider PEU Capital Partners (Pty) Ltd (PEU) from proceeding.

The contract, with service fees to PEU estimated to be in excess of R27-billion over the contract period, was established in May 2013, when the City of Tshwane approved a 10-year arrangement to outsource its entire electricity metering and revenue collection activity to a private company, PEU.

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 that PEU was granted an unsolicited bid, and that the resulting transaction is illegal in that 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 AfriSake’s allegations.

In terms of the outsourcing contract, for a service fee from Tshwane of between 19,5% and 25% of electricity sales revenue, PEU will be responsible for all metering and electricity revenue collection on behalf of Tshwane for a period of ten years, with the option to extend the arrangement for a further three years by mutual agreement.

To do this, 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 meteringand revenue collection under the previous system was 27% to 35% of electricity sales revenue.

However, a report dated 11 October 2013 on the cost of metering andrevenue 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 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 (“D-Forms”) submitted to the National Energy Regulator of South Africa (NERSA) on 31 October 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.

As just part of the total balance of costs of running Tshwane Electricity, the cost of metering and revenue collection must be fraction of 18% of sales revenue, and 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 x to 2x 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“.

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