Electricity Distribution Infrastructure: public hearings Day 4


31 July 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

Free Market Foundation (FMF) proposed that creating competition in the distribution of electricity was the best possible way to solving the challenge of infrastructure maintenance. The introduction of competition and customer choices were in the Electricity Regulation Act of 2006. Allowing Independent Power Producers (IPPs) would result in reduced prices for electricity and there would be no load-shedding.
Accenture told the Committee that vertical configuration of electricity generation, transmission and distribution had changed everywhere but not in South Africa. This was causing problems of massive backlogs in maintenance. There was no problem with municipal distribution; good governance was key to electricity provision.
Institute of Municipal Finance Officers (IMFO) said distribution systems were a source of revenue for municipalities. The problems the country faced in the provision of electricity were at both ends of the supply system. Local government needed to remain sustainable in order to fulfil its mandate, and it stood to lose out in the restructuring process. It would not help to improve electricity distribution, and leave behind general service delivery. The country would still be left with less satisfied citizenry. Conditions could be put on the licence to manage electricity far more efficiently. Certainly, local government needed service delivery agreements with providers. It was not sustainable that Eskom distributed separately from the municipalities.
National Union of Metalworkers SA (NUMSA) and National Union of Mineworkers (NUM) warned the sector was headed for trouble unless something drastic was done. This state of affairs warranted urgent measures. Union members and their employers depended on the security of supply and this was critical. The unions had been associated with the restructuring process for a long time, and their involvement went back to the days of the National Electrification Forum. NUMSA said there was a need for a Refurbishment Fund, that could be either ring-fenced in the equitable share, or that could be funded through a conditional grant system.
Winding Technologies said it was ready to produce air-cooled transformers that did not use oil. Countries like the United States and Canada had done away with oil transformers and were now using these transformers.

Development Bank of Southern Africa (DBSA) said maintenance of infrastructure in poor communities would need to be funded differently. While funding was seen as the problem, it was not necessarily the biggest problem. The challenge was the inability of weaker municipalities to plan and prepare projects, and manage contractors and maintain the infrastructure in the long term.

Members sought clarity on various issues including tariffs; the role of the Sector Education and Training Authority in the electricity distribution sector, the impact of electricity theft, and how financing could be used as a measure to promote accountability at municipalities.

Meeting report

The Acting Chairperson announced the Committee Chairperson, was in Kenya. Institutions scheduled to make submissions were the Free Market Foundation (FMF); Accenture; Institute of Municipal Finance Officers (IMFO); Development Bank of SA (DBSA); National Union of Metalworkers SA (NUMSA) and National Union of Mineworkers (NUM), and Winding Technologies.

Free Market Foundation (FMF) submission
Mr Eustace Davie, FMF Director: Policy Unit, said all over the world there had been dramatic changes on how electricity was generated and distributed. Vertical configuration of electricity generation, transmission and distribution had changed everywhere but not in South Africa. This was causing problems of massive backlogs in maintenance.

He said capital and skills were required to solve distribution challenges. The assets in the distribution industry could be used to acquire capital and support those already in the system. The problem with this was a conflict of interest at municipalities. If municipalities spent on maintenance, they would have less to spend on delivering services.

Distribution systems were a source of revenue for municipalities which they probably would want to hang onto, unless a solution was found. Blackouts should be avoided at all costs. It was a good idea for politicians to institute policies that would solve the problem. The country needed to hire capital and skills to catch up on distribution goods. If distribution options could be contracted out it would open up the industry to competition. SA needed to be thinking of instituting policies that would encourage competition and bring about the best possible prices.

Mr Doug Kuni, FMF Energy Policy Unit and Managing Director:
SA Independent Power Producers Association (SAIPPA), said the whole chain in supply of electricity had to work simultaneously. If the distribution sector had problems, the customer would not get electricity. The pressure of electricity generation on the economy needed to be noted, especially that it impacted on industrial and property development, gross domestic product (GDP) and investment.

Electricity generation was a challenge since 2007, and currently had a shortage of 5000 megawatts. Distributors were unable to expand their economies without power, and they could easily collapse because they depended on a single supplier that currently was struggling to meet the demand.

He said the introduction of competition and customer choices were in the Electricity Regulation Act of 2006. By allowing Independent Power Producers (IPPs), this would result in reduced prices for electricity and there would be no load shedding. The problems the country faced at the moment were at the both ends of the electricity supply system.

The Electricity Distribution Industry (EDI) concept had challenges before it was disbanded last year. There was another perverse effect that few stakeholders realised. Investment in the distribution system was not made due to the uncertainty over ownership of assets. Uncertainty about ownership resulted in backlogs in refurbishment. Meanwhile, upgrades needed to happen because more customers had been added to the distribution systems. Any solution about distribution, people had to be made aware that it would not have any perverse effects.

Accenture SA submission
Mr Ken Robinson, Senior Executive, Accenture, said the requirements of “wires” and of customers could be joined through a smart meter. One could actually understand the requirements of customers and initiate changes in how “wires” were managed in order to ensure demand was met.

He disagreed with the FMF that competition would be the answer to electricity challenges in SA. It did not make sense to build another wires network. Customers did not need competition in the next few years as it was likely to increase sales rather than enable demand side management. Competition was not the answer.

Mr Robinson said there was not a problem with municipal distribution; it did not make sense to drive political boundaries as boundaries for distributors. In electricity provision, good governance was key. It was also important that a relationship between suppliers and customers was established. Any distributor needed to be able to meet minimum standards of the operating model especially the municipal distributors. In the centre of the operating model should be the quality of supply and the government social agenda of free basic electricity and universal access. Government and Eskom should prepare for distributor mergers.

He said Eskom could manage merging with about 20 municipal distributors in a year. The regulator should apply distribution standards and ensure all distributors understood those standards. The regulator should withdraw the licences of the 20 lowest distributors from the table. There was a need to use the assets of this country to achieve the solution to the problem.

Institute of Municipal Finance Officers (IMFO) submission
Ms Louise Muller, Director: Shareholding Management, IMFO, said most of the submissions received were from those who expected to gain out of the electricity distribution restructuring. Local government needed to remain sustainable in order to fulfil its mandate, and it stood to loose on the restructuring process, depending on the process chosen. It did not help to improve electricity distribution, and leave behind general service delivery, as the country would still be left with a less satisfied citizenry.

She said the provision for local government should be towards efficient governance and improved service delivery. The licencing conditions could be used to manage electricity far more efficiently. Certainly, local government needed service delivery agreements with providers. It was not sustainable that Eskom distributed separately from the municipalities.

Ms Muller cited an example of Khayelitsha, where economic development was being revived. This was an Eskom area; low voltage was provided and this did not allow for economic development. The City of Cape Town had had to take its own funding to invest in assets there and they became Eskom's. If there was a service delivery agreement, this relationship could be managed a lot better.

She said when municipalities encouraged service delivery agreements, they did not only look at surcharges, but also at encouraging economic development. Municipalities had a broad range of activities that needed to be attended to, beyond electricity connections to a particular point.

It was important to maintain a single point of contact with the customer. With different providers, customers tended to be confused about queries. A single service centre, where Eskom and the municipalities dealt with queries collaboratively, would be ideal. The trading in electricity, as aspired to in legislation, needed to be revisited.

Electricity was the life blood of finances in well run municipalities. The equitable share received from local government was insufficient for the services that municipalities had to provide. Municipal finances might be improved by up to 10% if municipalities could decide on imposing surcharges. Municipalities could also cut off electricity as a form of debt collection. But that would not be pleasant. She said lack of response on the part of customers should be understood as an indication that customers were not able to afford it.

Ms Muller said there was a need for cost benefit analysis when making a determination on whether to provide electricity. This was even more so in shack dwellings, where the cost of not providing electricity could be measured against the cost of providing emergency supplies, when there had been fires. The cost of not providing electricity would have to be balanced with the cost of providing electricity.

Municipalities were service authorities that had the power to regulate the provision of services. In many instances municipalities had had problems where they did not have control over the service provider for electricity.

Rationale for restructuring
Ms Muller said they needed to ask if the restructuring was informed by size as was the case internationally. Another question that needed to be asked was whether this move would bring about universal access, as there were many households still without electricity in SA. The movement of poor people to urban centres grew exponentially. And urban municipalities were faced with an increased usage, and were unable to cope with the demand for electricity. Many of the areas were inaccessible shack dwellings. One could not easily go into such areas and electrify, or provide the kind of services, such as toilets, water and refuse, that would have been provided in a suitably located area.

She said there was a need to ask whether the restructuring was about the infrastructure backlogs. There were infrastructure backlogs, and repairs and maintenance were not as they should be. The lack of economic return on some assets would stifle investments. There was little money meant for the maintenance of assets geared to provide free basic services. In that instance, repairs and maintenance of assets would remain a challenge. There was fiscal reform being undertaken in local government, and if anything was going to be done, now was the right time to speak to National Treasury.

Ms Muller said Members needed to ask if the rationale behind restructuring was due to the promotion of the market structure. Electricity utilities at this stage still supported economic and social development. This was distinct from a market based structure that sought to promote economic efficiency and efficient allocation of resources. It was way too early for a market structure; the country needed to have developed a bit further.

She said restructuring should be informed by a clear thought of what the country wanted to do. There was also a need to minimise disruptions to local government and electricity services. It would be wonderful to correct challenges in the electricity services provision, but that needed not be at the expense of other municipal services.

The country should consider all the options beyond generation, transmission and distribution. Perhaps the country should look at standardising electricity distribution by Eskom and municipalities. But Eskom should be a willing partner in any process otherwise it would be very difficult to work.

Ms Muller said it was important to recognise diversity and not adopt a single approach. And ensure all the partners in electricity distribution were willing to work together and, it also being legislated on. There needed be no departure from the constitutional mandate of local government of being a service delivery arm. There also was a need to keep disruptions to the minimum. She said there was a need to consider transferring assets at no cost; and also, there was a need to consider the impact of labour legislation.

Winding Technology submission
Mr H du Preez, Manager, Winding Technology, said restructuring of electricity distribution was a very serious problem in the country. Electricity was an important element in communities. Through the ageing electricity infrastructure and inefficiencies in electricity supply industry, the living standards of people were being compromised. He said with the help of the PHA Engineering firm, Winding Technologies would provide air-cooled transformers for five years. These would be provided to customers such as local government and mining companies. In the past some companies had attempted to provide these transformers without success. And after four years of research into this product, Winding Technologies would be launching it.

Mr Du Preez said countries like the United States and Canada had done away with oil transformers and were now using air-cooled transformers. Winding Technologies was in contact with big air-cooled transformer companies.

The Chairperson interjected and requested that the submission be summarised, with emphasis placed on key points.

Mr Du Preez said the company would be able to implement in a couple of months’ time. Savings would be made and an improved service would be provided to government in manufacturing and distributing electricity. There were huge benefits to the air-cooled transformer and it was lighter. There was very little maintenance required and it did not use oil. The project was in its finalisation stage.

National Union of Metalworkers SA (NUMSA) / National Union of Mineworkers (NUM) submission
Mr Dinga Sikwebu, Education Coordinator, NUMSA, said the proposed restructuring of the electricity distribution industry had posed uncertainty for the past 15 years. The two unions were the biggest affiliates of the Congress of South African Trade Unions (Cosatu), and their membership ought to be seen as electricity customers. These unions organised the majority of employees at Eskom distribution, and both unions were in the energy, mining and smelting sectors.

Members and their employers were dependent on security of supply and this was critical for the members. The unions also organised in companies that manufactured transformers, switch gears and cables. The unions had been associated with the restructuring process for a long time, and their involvement went back to the days of National Electrification Forum.

Mr Sikwebu said the unions were surprised to note convergent views about the challenges facing the sector. Most people, since last week spoke of shortages, backlog, investments, fragmentation, inequitable treatment of consumers, and varied performances of suppliers. The two unions submitted that the sector was headed for trouble, unless something drastic was done. This state of affairs warranted urgent measures.

Differentiated tariffs and services were becoming an important trigger for service delivery protests. There had been little movement from the Department of Energy on the restructuring of the sector, especially since EDI restructuring was approved by Cabinet in December 2011. This was very serious.

The view that the country was in a state of emergency was further informed by the deterioration of customer service to poor communities. It needed to be underscored that members from poor communities were severely affected by this. There also was a decline in the EDI component of the manufacturing sector, and this meant job losses. Not much attention had been paid to this.

Mr Sikwebu said even if funds were availed for the purpose of restructuring, there would be no capacity to build. And as a result, skills would be imported, as was the case currently. There was a need for a twin track strategy where steps would be immediately taken by existing institutions, while a long-term and holistic strategy was being devised. The unions were aware that participants to this process would not be interested in a further long drawn out process. Sadly, as things stand, this could not be avoided.

The emergency plan that the unions wanted to suggest had the following seven pillars:
(i) U
pdate the Approach to Distribution of Assets Management (ADAM) and be transparent with the municipal revenue streams. There was also a need to continue with the ring-fencing exercise as envisaged under EDI Holdings.

(ii) There was a need for a programme for maintenance and refurbishment. To this end granting licences was an important weapon where the regulator could specify a figure for maintenance. Also a National Refurbishment Fund was needed in the grant system.

(iii) There was a need for a human resource development plan to counter the exodus of an ageing staff complement. A particular focus ought to be given to artisans. The Sector Education and Training Authority (SETA) in the sector was performing poorly. There was a need for close monitoring of the SETA, and that it be seized with the task of producing artisans and technicians.

(iv) There had to be a work-stream with the Municipal Infrastructure Support Agency grant.
(v) There had to be a localisation strategy for the electricity distribution component in the manufacturing sector.

(vi) The country needed a strategy to deal with electricity losses.

(vii) The Minister of Finance should be encouraged to determine
norms and standards in electricity surcharges.

These did not require long talks and drawn out processes. Action had to be taken.
Mr Sikwebu said track two of the plan was a long term strategy. The country needed the establishment of a statutory electricity council. This was agreed to during the Reconstruction and Development Programme (RDP), and when the National Electricity Forum (NEF) was concluded. The electricity industry was a well integrated network sector that could not be restructured haphazardly. The problem with restructuring currently was its fragmented approach.

He said the statutory electricity council could play an advisory role to the Minister and would ensure synergy in the sector. This was vital. Also there was a need to begin a preliminary discussion on a vision for the distribution industry.

Development Bank of Southern Africa (DBSA) submission
Mr Chucheka Mhlongo, DBSA Divisional Executive:
SA Operations, said the observation had been that metros had the ability to undertake project designs and implementation. These municipalities had access to private finance, and had ability to generate revenue. In these municipalities there had been fewer problems of funding and the rolling out of projects. Most of the challenges that had been raised, as relating to ageing infrastructure were being experienced by under-resourced municipalities.

Government had asked DBSA to pay a particular focus o
n under-resourced municipalities, commonly referred to as rural, local and district municipalities. In this sector, municipalities relied on governmental transfers as they were unable to source that capital. DBSA believed that while funding was seen as the problem, it was not necessarily the biggest problem. The challenge rested with inability to plan and prepare projects, and the inability to manage contractors.

There was much under-spending in the sector. DBSA aiming to assist municipalities develop the capacity to plan for the longer term. Also DBSA was assisting municipalities to package and implement their projects, and ensure optimised spending of the funds transferred. DBSA had aligned its programmes with government on the national infrastructure rollout in 106 municipalities.

Mr Mhlongo said R2 billion had been put aside by DBSA to deal with the maintenance of the distribution infrastructure at these municipalities. Due to the indigent nature of the customers of these municipalities, DBSA did not expect the municiplaities to be self-sustaining, to the extent of being able to maintain the infrastructure in the long term. Maintenance of infrastructure in poor communities would need to be funded differently.

He said there was an urgent need for refurbishment and maintenance of infrastructure. The cost of doing that was not important. DBSA had partnered with the Department of Energy, Eskom and National Treasury, to be able to go to under resourced municipalities and accelerate the rollout of access.

Mr Mhlongo said there were opportunities for improvement. Supporting municipalities through the development of business cases – in order to raise sufficient capital – needed to be focused upon. There also had to be provision for the replacement of equipment. There needed to be consistency in the backlog information, as that would assist in financial estimates and projections for interventions.

Capacity building was a big issue and needed to be addressed as an emergency. Although it would be easy to put infrastructure, maintaining and repairing it was a bigger challenge. Where customers could afford to, the discipline to pay needed to be encouraged if local government were to be sustainable in the long run.

Mr L Greyling (ID) said the tendency throughout the hearings had been that people tended to argue for their own sake. The Committee needed to rise above all of the views expressed and devised a workable solution that would accommodate everyone. The FMF needed to differentiate the issues. One could not really have competition in distribution, but in the generation of electricity it was possible to open up competition.

Mr S Radebe (ANC) said it would be impossible to allow for competition in distribution, because the country was in a developmental stage, and that levels of development were still skewed. The argument that competition would bring about cheaper rates was wrong and would never happen. He cited an example of petrol prices and said even if the international price went down, competitors just kept looking for reasons to hike. Stakeholders needed to be practical and reasonable about these matters. Stakeholders in the sector should not be influenced by personal gain when proposing solutions; think on behalf of South Africans.

Mr Temba Nolutshungu, FMF Director, replied that competition was crucial in electricity and for the energy crisis the country was faced with. He said NUMSA's reference to the matter of electricity as a state of emergency was an understatement; this was calamitous situation. Without energy, the economy would not grow and there would be other undesirable consequences like unemployment.

Mr Nolutshungu said there was a need to ask hard questions on how things were happening in the sector. There was a problem once the supplier encouraged people to consume less; this defied any business logic. Competition brought excellence, improvement in services, good value for money and good quality. The European Union had opened up the electricity market and there had been remarkable results, and as a result electricity prices had generally gone down.

He said there could not be improved efficiencies unless there was competition. To say competition was not a solution was ludicrous. Competition was of crucial importance if there was going to be an overhaul of the current system.

Mr Greyling said it appeared that Accenture was pushing for Eskom to take care of distribution, but the Committee needed to be aware of the problems associated with such a view. There was the challenge of charges that had to be addressed. Eskom was undercharging because it did not have to pay for things like street lights. A workable plan would be to push for Metros to take over areas that Eskom supplied. On the other side, municipalities were surcharging on electricity and using that money to fund other services. He wanted to know if it was possible to increase tariffs on other services like water and waste collection to actually fund that surcharge, as many families had resorted to using paraffin, as a an escape route to the higher tariffs of electricity provision.

Ms Muller replied that Eskom did not charge the customer for transmission costs, as was the case with municipalities. The surcharge on electricity was interesting; it had become contentious because of the recent price hikes. These were real influential figures in municipalities. There was a concern with the manipulation of these charges. She said there was a possibility of National Treasury capping these amounts.

Mr Robinson replied that municipal areas were not effective boundaries for electricity areas, given the current nature of Eskom grid.

Mr Greyling sought clarity on the IMFO statement that electricity funding was part of the equitable share, and that it could not be made a conditional grant. Why could this not be made a conditional grant? Clearly, situations where funds were shifted should not be allowed in munic

Ms Muller replied the equitable share was local government's portion of the nationally raised revenue. An impression had been created that this allocation at local government level was meant for free basic services. This was traditionally what the equitable share was considered for at local government level. The movement of people in SA influenced how municipalities got money; some got more than they should and others got less. It might also be that there was a need to look at the vertical split of the equitable share.

Mr Greyling said the country need an end-state vision in distribution and that had to come from the Department of Energy. It was important to look at the kind of distribution networks the country needed in order to respond to challenges that the 21st century energy sector was faced with.

Mr Robinson replied that the 21st century network was a very exciting project that was talked about in major metros.

Mr Greyling said the licences could not be used as part of the conditions because the National Energy Regulator of SA (Nersa) did not have the power to revoke. The licence could only be revoked if the municipalities put in a request to have their licences revoked.

Mr Radebe sought clarity on the withdrawal of licences being used as a control measure or condition. This could never be a workable solution especially as the systems would be prone to human error. If one wanted to withdraw a licence, that would take the country to conflict.

Mr Robinson replied that if there was legislation needed to enable the withdrawing of licences, this should be addressed. There should not be any reason why licences could not be withdrawn from municipalities that were failing.

Mr Radebe sought clarity on the kind of partnership that Winding Technologies wanted to enter into around servicing the transformer market. Most companies struggled with international partners who brought equipment and even labour into the country. Who were these partners that the submission made reference to?

Mr Du Preez replied that there would be no international company that would be involved in the project and the BEE status of the company would be 50%.

Ms Mathibela sought clarity on the reference to Khayelitsha by IMFO, especially that electricity distribution was a service provided by Eskom, as opposed to the City of Cape Town. She said her understanding was that Khayelitsha was under the jurisdiction of the City.

Ms Muller replied that she agreed that Khayelitsha was part of the City of Cape Town, which had to be developed. There were similar problems in other areas as well where one had a very depressed area that was supplied by Eskom. The City of Cape Town had found a solution and ended up paying an entity to contract Eskom to put a substation which would reliably supply electricity to centres of economic activity. Development was starting to happen, but that would have to be supplemented at some stage. She said Eskom's vision of Khayelitsha was not the same as that of the City to make the township economically viable.

Ms Mathibela sought clarity from NUMSA about SETAs. She asked if SETAs had practical ways of giving skills.

Mr Ndlela Radebe, NUMSA shop steward, replied that SETAs provided an administrative kind of work, and not necessarily the practical skills. Ideally it should assist companies identify those learner that have capacity. Business and employers should come to the party and ensure that they capacitate people at the work place. SETA could not play that role, but could only advise.

Ms Mathibela asked what needed to be done about theft of electricity, especially as it was also stolen by employers.

Mr Neo Olyn, NUMSA shop steward, replied electricity theft was a problem and cancerous and caused a lot of problems. For the past two years Eskom lost about R1.2 billion as a result of electricity theft. The combined losses due to electricity theft amounted to R4.4 billion in the last year alone. This had the potential to lead to reduced revenue streams and job losses. The amount of 4.4 billion could electrify Khayelitsha and Gugulethu on a sustainable basis. Government should legislate against this phenomenon of electricity theft, and consider making it a crime. But also stakeholders need to put measures in place to counter the effect of this.

Ms B Ferguson (Cope) said she did not believe in taking the responsibility of electricity distribution away from municipalities. There was a need to strengthen their financial and accountability systems. Electricity was just one component.

Mr Robinson replied that a special effort would be needed for water and electricity in SA regardless of other municipal services. The two services were identified in a World Bank report, along with education, as the three things that could help lift SA out of poverty.

Ms Ferguson said it was not acceptable that a different operator worked in Khayelitsha that was not even 24 km away from the City. She hoped that the City would look to address this anomaly, especially as it affected economic development.

Ms Ferguson said she agreed with notion of the end-state vision. She was interested in understanding what Cosatu was doing around bringing the SETAs into line. There was a need to plan ahead for the future needs. It appeared that in 20 years from now, the country would still be behind schedule; what kind of workable solutions were being put on the table.

Ms Ferguson said the statistics on the backlogs, as provided by the DBSA were shocking, especially that a third of the country's needs sat in backlog. This was a crisis, and NUMSA was correct in describing the situation as a state of emergency.

The Chairperson sought clarity on how the Refurbishment Fund as proposed by NUMSA would function; and if the union wanted a special grant for the purpose without the users paying. He asked that NUMSA clarify the assumption that it was looking for a situation where the National Government paid.

Mr Mhlongo replied he was hesitant to express a view on the NUMSA proposal. DBSA had made reference to a ringfenced funding model that could deal with maintenance. Funding of this model would probably have to follow a diferentiated approach. For municipalities who were able to use tariffs to fund, they should use that. The majority of the municipalities that the DBSA supported were poor municipalities, who would not be able to use the Fund. He said he believed there was a need to look at the conditional grant system.

The Chairperson asked if Accenture wanted Eskom to state how many mergers it could conduct. Was this not the consolidation of the monopoly? He was not opposed to the idea but wanted to get more information on how it would work. He asked all the presenters about how best to finance the refurbishment of the distribution assets.

Mr Robinson replied that one could understand the usage of electricity that had occurred. There would always be 20 various sector distributors. It was only a few municipalities that the Auditor General was unable to see their set of accounts. Those municipalities were the ones that needed to be addressed immediately.

Mr Robinson said that tariffs were under the control of Nersa. There could be a very effective tension between DOE, Department of Public Enterprises (DPE), the Regulator, Eskom, and the
Department of Cooperative Governance and Traditional Affairs (Cogta) in understanding the issues, but tariffing was clearly under Nersa. Tariffs were not an issue that could address some of the failings in distribution.

He said large distributors set priorities for refurbishments and maintenance every year. The budget for maintenance was set by the Regulator, as most companies would tend to skip this important aspect. Eskom did admittedly cross-subsidise tariffs across the country and could equally cross-subsidise the need for maintenance.

Mr Robinson said that there was a monopoly. There would always be some comparison of the major distributors. But the distributor issue was not a significant matter for monopoly making.

Mr Sikwebu replied that he was aware of the legislative limitations of the regulator withdrawing licences and the consequences of that. Although there was that limitation, there was much that Nersa could do, linking licences to some conditionality on maintenance. The emergency plan addressed that. Municipalities that have the licence to sell electricity should be monitored. These could have the Refurbishment Fund and yet choose not to do maintenance. Cosatu really would not want to have that situation. It was important to acknowledge that some of the backlogs in refurbishments were as a result of policy uncertainties caused by drawn out processes. The grant system should be explored soon.

The Chairperson asked FMF if it was possible to raise capital on assets that had been run down, as its submission sought to suggest.

Mr Davie replied one could sell the distribution assets for a period of time, on condition of a purchaser doing upgrades. This was a possibility. He said raising capital, without selling, for upgrade would work on a concession basis. The concession would clear out the upgrading and refurbishment and would again earn income for the duration.

Mr Greyling asked DBSA if it could use its power when financing to bring about change in municipalities. If distribution could be done centrally, this could improve the situation instead of having municipalities controlling their own distribution networks.

The Chairperson said DBSA managed to identify some of the serious challenges that the municipalities were faced with. With the Metros it could be easy to address some of these challenges because they could raise funds. How could rural municipalities be able to fund the projects without the backing of DBSA?

Mr Mhlongo replied first one had to define the problems in the municipal sector. There were significant losses, and that got worse with poorly performing municipalities. There was incapacity to plan and undertake feasibility studies; incapacity to manage contractors; and a significant skills gap. DBSA used its funding position to intervene in these areas.

Before providing funding, the determination of level of losses was made, and also the capability of the municipality to implement projects was considered. The in-house expertise to determine if it was possible to deliver projects in the stated timeframes was also taken into consideration. DBSA could never influence a municipality to change its tariff structure, but it could have a see through on whether the tariff structure could assist a municipality to recover costs.

He said DBSA did use its financing to influence change at municipalities but that was not adequate. National Treasury had raised the issue of whether DBSA could use its treasury capacity to mobilise municipal bonds for struggling municipalities. A few years ago, a study was conducted to determine if such a bond could be established, and if it would make a difference. DBSA had concluded that such a bond would not make a significant difference.

Any funder would still want to sift through the credit profile of a municipality. The nature of the problem of the municipalities that required support was such that very few commercial banks would want to assist. Banks cared less about how municipalities performed but rather if returns would be made. Treasury had asked that DBSA continue to look at the issue of using the financing as a measure to improve services.

He said the treasury function of most municipalities, including the Metros, was very bad.

The Chairperson thanked presenters and said their inputs were valuable. The Committee had dealt with a complex issue, and would sit again and consider all the inputs and develop recommendations for the Executive.

The meeting was adjourned.


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