By: Melusi Maposa

It is time to involve private capital and skills in municipal electricity.

Every year, the National Energy Regulator of South Africa (Nersa) reports noncompliance with licensing conditions by municipal electricity distributors, whose rate of asset replacement is inadequate. If the lights went out in the past 12 months, then it was a distribution failure, not load-shedding. In its 2015 report, Nersa noted that one municipality managed only 2% compliance with the Nersa scorecard. Compliance is often a measure of the quality of electricity distribution, and no industrialist would start a business in a 2%-compliant town.

According to Nersa, funding and skills are the key issues. Yet the Financial and Fiscal Commission (FFC), in its report to Parliament, states that adequate or nearly adequate capital funds for new access and refurbishment are available across all provinces (with the exception of Gauteng), if the Municipal Infrastructure Grant and Integrated National Electrification Programme electrification funds are combined. The FFC further states that, in three provinces, electricity plant renewal and growth are actually overfunded (this statement does not include funding for the maintenance backlog).

But the FFC also highlights the lack of maintenance. For at least seven years, municipalities have spent only 60% of the benchmark for maintenance across all municipal infrastructure, of which R10-billion a year for electricity infrastructure is the largest component. This could mean seven years of underspending amounting to R40-billion in current money terms. Again, funding is not the only issue, with the FFC stating that a lack of institutional capacity is a major cause of the maintenance backlog. Even if funding is available, municipal dis- tributors are unable to spend it.

Municipal electricity needs skills to allocate funds and prudently invest in electricity. Even if funding is available, where will the skills come from? Our belief is that the skills should come from the private sector, but we recognise that there is pressure to keep elec- tricity in the public sector.

If we can separate electricity from other infrastructure, then other public-sector organisations can be a source of electricity skills, although possibly not sources of funding. A municipality could contract State-owned power utility Eskom or another municipality for institutional capacity to run its electricity network. The steps would include:
• The municipality chooses a public-sector distribution network service provider; Eskom is a possible choice, with government support, but other municipal distributors may be able to extend their operations.
• The network service provider renders services to the municipality for a fee, in line with a service level agreement, and the services could include capital growth and renewal. If Eskom is the chosen distribution network service provider, then, as a public entity, it would reconcile its Public Finance Manage- ment Act budget process with the municipal budget process under the Municipal Finance Management Act.
The municipality retains its customer relationship functions, including billing and the operation of its call centre, besides others.
• The network service provider absorbs the municipal electricity staff – subject to staff transfer issues being addressed, especially if the transfer is from a municipality to a public entity such as Eskom.
• The parties follow the basic services’ procedure in the municipal Acts, unless these are amended by government.
• The municipal budget includes the service provider’s fee; if funding is an issue, then the National Treasury’s assistance may be requested.

If customer billing and prepaid vending are issues or if wholesale electricity purchases are in arrears, then Eskom’s service could include the customer relationship function. Prepayment is not the only answer for electricity – industrialists need a more flexible approach for them to be attracted to a municipality. In this case, the steps would include:
In addition to Eskom Wires providing the network operations services (including normal capital growth and renewal), Eskom Customer Services manages consumer billing and prepaid services directly to consumers at Eskom tariffs (or could even provide a full municipal billing service), and pays for network operation costs from the proceeds. Eskom’s budget would be adjusted to take the National Treasury’s assistance into account, if required.
• The National Treasury regulates a munici- pal surcharge (if any), depending on the overall financial sustainability of the municipality.
• Eskom absorbs municipal wires and some customer service staff, with the same staff transfer issues as noted for a wires service provider approach.
• The ‘basic services’ procedure required by the municipal Acts would be followed.

In all these cases, we assume that there is no requirement to fund substantial backlogs in asset renewals and maintenance.
For the substantial capital backlogs, the industry should look to private-sector capital.

The Department of Energy’s (DoE’s) renewables programme has demonstrated that private capital is available for electricity, provided that there is assurance on capital recovery.

To involve private capital in municipal distribution, there has to be the equivalent of the bankable power purchase agreements arranged for renewable energy. The DoE should run a procurement process to involve private-sector service providers with tenderers providing specific responses to key issues, such as sources of skills; requirements for capital; billing, prepayments and cash management; tendered electricity prices; arrangements for staff transfers; and National Treasury assistance.

The whole process should be initiated by Nersa. The regulator should cancel the electricity distribution licences of the 20 worst- performing municipal distributors for noncompliance with regulations and give those municipalities a chance for electricity-driven prosperity based on private-sector funding and skills. If necessary, Parliament must support Nersa by amending the Constitution. For years, Nersa has reported noncompliance – it is time for a solution. Capital and skills from the private sector can help avoid a crisis caused by a situation where there is abundant generation but feeble distribution infrastructure in many municipalities.

Maposa is MD: resources at professional services firm Accenture - melusi.t.maposa@accenture.com