Third-party concessions a solution for municipal electricity distribution

Municipal electricity supply may improve if struggling municipalities transfer their electricity operations to third parties on a concession basis, provided the terms are clear regarding the quality of service required, access to electricity, and affordability of tariffs.

This is the recommendation the Organisation for Economic Cooperation and Development (OECD) expressed in its economic survey for South Africa, published earlier this month.

The OECD’s recommendation comes against the backdrop of Eskom’s efforts to implement Distribution Agency Agreements (DAAs) in municipalities that are in arrears on their Eskom bills and defaulting on payment arrangements.

ALSO READ: R26 billion rescue from World Bank: Can the loan save Eskom and Transnet?

Eskom’s ‘existential threat’

Municipalities collectively owe Eskom around R100 billion, and this amount is growing at a rapid pace. Dr Kgosientsho Ramokgopa, Minister of Energy and Electricity, has called it an “existential threat” to Eskom.

In terms of the DAA, a municipality will appoint Eskom as its agent to take over the management of the municipal distribution function, including metering, billing, grid maintenance, and revenue collection – while the municipality retains the distribution license.

Presumably, the municipality will pay Eskom an agency fee.

According to the OECD, a concession agreement with an independent company could ensure the necessary investments that municipalities are currently unable to finance, while generating stable revenue through concession fees.

ALSO READ: Structural reform is silver bullet needed for SA economy to grow – OECD

Portugal benefitting from model

“Portugal successfully adopted this model, transferring operations to private operators while municipalities retained ownership of the distribution grid. In 2020, there were 13 distribution system operators in Portugal,” says the OECD.

However, it warns that opening distribution to private players may increase the financial problems of municipalities that use electricity revenue to subsidise other services.

It points out that National Treasury is busy with a comprehensive review of the local government fiscal framework, including revenue models, electricity pricing, and grants.

“In the short to medium term, efforts should focus on improving tax collection and the operational capacities of struggling municipalities. Greater reliance on property taxes under the current fiscal framework could reduce dependence on electricity revenues,” the OECD states.

ALSO READ: 30% electricity tariff increase is a reality, says Erasa

Nersa to revoke licences

It further specifies that the current municipal debt relief programme run by National Treasury, through which municipalities can have their Eskom debt written off if they comply with strict conditions, also provides for non-compliant municipalities to request that the energy regulator Nersa revoke their electricity licence.

The OECD does not expand on this, and the provision has not yet been enforced, although most participating municipalities are non-compliant.

The revocation of a distribution licence would open the door for other operators, including private companies and Eskom, to apply for it.

This could completely change the distribution landscape.

ALSO READ: Decisive intervention needed for municipal performance — BLSA

There are a few examples of private companies providing electricity services on behalf of municipalities, with Rural Maintenance best known for managing electricity distribution in the Mafube Municipality in the Free State in terms of a 25-year contract.

Fourteen years in, it has invested more than R130 million in infrastructure in the towns of Frankfort, Villiers, Tweeling and Cornelia to upgrade the infrastructure. This has resulted in better service delivery – and non-payment is at a minimum.

The municipality still holds the distribution licence, has retained ownership of the network, and has received more than R23 million from Rural Maintenance in ‘royalties’ over the period.

This is in comparison with the R10 million gross loss on the electricity function in 2011, before the agreement was implemented.

ALSO READ: ‘Please hold’: Here’s which municipal call centres keep the public hanging the most

Midvaal soon to outsource

Midvaal, the best-performing municipality in Gauteng, has also embarked on a process to outsource its electricity function. An investor conference late last year attracted many interested local and international parties.

The contract will be in the format of a 20-year public-private partnership. Midvaal is working with the Development Bank of Southern Africa on the project.

The procurement process is advanced, but no award has been made yet.

ALSO READ: SA now producing less electricity per month than it did in 2019, but charging much more

Nama Khoi partially outsourcing

The Nama Khoi Municipality, based in Springbok in the Northern Cape, has appointed Rural Maintenance as its “development partner” to enhance water and electricity revenue, rather than full-scale outsourcing.

According to the Speaker, Dr Gustav Bock, the 15-year contract was implemented on 1 February this year – and early results are very promising.

Rural Maintenance has already invested in improved infrastructure and has taken steps to enhance billing to businesses. This has enabled the municipality to decrease the tariff for low-income households from R2.60 to R1.97 per kilowatt hour.

ALSO READ: Splitting Eskom will protect its most strategic asset

Political interference a hindrance

The biggest challenge in transferring electricity distribution to third parties may be political. According to Chris Bosch, CEO of Rural Maintenance, the leadership in the Mafube Municipality is not cooperating and even National Treasury wants its contract reviewed and set aside.

This recommendation is contained in a mandatory Financial Recovery Plan that National Treasury drafted for the municipality, which is currently before the high court as Rural Maintenance has taken it on review.

The South African Association of Independent Power Producers (Saippa) late last year also called for the appointment of private companies to assist struggling municipalities with their electricity functions.

Tommy Garner, executive committee member of Saippa, earlier said that if opportunities present themselves, a market of service providers in the distribution management field will develop quickly, as was the case with independent power producers at generation level.

“The economic signal must be there. Municipalities must be pragmatic and allow private companies to bring their expertise, rather than cling to legacy roles.”

This article was republished from Moneyweb. Read the original here.