Update on pilot Approach to Distribution Asset Management (ADAM): input by Department of Energy, SALGA, Municipal Infrastructure Support Agency & Financial and Fiscal Commission

Meeting report

Chairperson’s opening remarks
The Chairperson welcomed representatives from the Department of Energy (DoE), Municipal Infrastructure Support Agency (MISA), the South African Local Government Association (Salga) and the Fiscal and Financial Commission (FFC).

Briefing by Department of Energy (DoE)
Mr Goodman Nxumalo, Energy Programmes and Projects, DoE, gave an overview of the Electricity Distribution Industry (EDI) restructuring and said over the last 20 years, different attempts had been initiated to improve/restructure the EDI in order to address its various shortcomings. In May 2001, the Cabinet approved the restructuring of the industry and established Electricity Distribution Industry Holdings (EDIH) to manage the process. However, the restructuring process had had to be reviewed.

In November 2012 Cabinet had approved the ADAM programme and started with the first phase. The presentation to the Committee would, however, only be focusing on the mini-ADAM pilot phase. The full implementation of the ADAM programme was a long-term policy process. The current state of EDI had an unacceptably wide range of tariff differences and there were also significantly different service standards and practices. Challenges faced pertained to the lack of appropriate investment in electricity distribution network assets, the loss of technical and non-technical skills, and revenue management. There was also a decrease in the quality and reliability of electricity distribution to the end customer, and inadequate skills development within the industry.

Having done field visits to all 12 priority cities, the following observations were made:

•  Asset management strategies/plans and appropriate systems did not exist across the industry;
•  Municipalities and Eskom were not providing for sufficient investment in existing and planned distribution networks leading to a backlog in infrastructure upkeep;
• The average age of the networks was in excess of 40 years;
• Demand growth exceeded the loading capacity of the networks, which would among others pose a significant risk to the effective introduction of energy efficiency strategies.

While the industry suffered from a lack of reliable data and appropriate measurement, all indications were that network reliability was decreasing, which was evident in the increase in the number of outages due to poor performing networks, and incidents related to electric cable and associated equipment theft.  With regard to asset management, the Nersa Report on the state of EDI infrastructure showed that even though there were pockets of good performance as far as maintenance, reliability, control and networks went, a significant number of assets needed improvement. Through a study conducted by EDIH during 2008, it had been revealed that the estimated maintenance, refurbishment and strengthening backlog in the distribution network amounted to R27,4 billion (2008 values).  A holistic approach to asset management was required.

Mr Nxumalo explained that the progress made on the mini-ADAM programme to date was that National Treasury had re-allocated R320 million of the funds not utilized by EDI Holdings, to DoE to initiate the “Mini-ADAM” project. The R320 million 2013/14 allocation for the “Mini ADAM” had been allocated to seven municipalities and two metros as critical emergency interventions, as part of the  implementation of the overall ADAM strategy.  In order to ensure that the “Mini ADAM” projects were conducted in a holistic manner, a broad-based steering committee had been established.

Briefing by Municipal Infrastructure Support Agent (MISA)
Mr Ricardo Hansby, Acting Chief Executive Officer, MISA, said that ADAM was a programme initiated by the DoE with the aim of getting municipalities to address increasingly high levels of backlogs on maintenance and refurbishment of their electricity distribution assets. Since its establishment, MISA had been supporting low capacity municipalities to address key problems on their infrastructure for key services, including electricity distribution. The nature and extent of support was intended to assist municipalities realise ADAM objectives.

The initial work undertaken in implementing ADAM focused on addressing the capital and skills shortage that existed in the electricity distribution industry, which was driven by the Electricity Distribution Industry (EDI) Holdings. The establishment of the Regional Electricity Distributors (REDs) had been aimed as an institutional mechanism to address these challenges. Currently MISA was a member of the National Steering Committee on the MINI ADAM Programme. The role of the steering committee had been crafted to provide a national oversight programme and project management to the MINI ADAM Programme. The steering committee was responsible for approving budgetary strategy, defining and realising benefits, monitoring risks related to the programme, ensuring quality and adherence to timeframes by the local municipalities that received the allocation.

MISA currently had 65 technical professionals deployed to support a total of 107 municipalities throughout the country. A total of 91 municipalities had been assisted to develop and adopt Integrated Support Plans; these were part of the 108 municipalities prioritised by CoGTA for Local Government Turnaround Strategy (LGTAS) support. With regard to municipal capacity building, currently a total of 234 electrical apprentices had been placed in 25 municipalities in six provinces (Eastern Cape, KwaZulu Natal, Limpopo, Mpumalanga, Northern Cape and North West), for experiential learning.

Through the capacity building programme, MISA will be training an additional 29 candidates, who were undergoing experiential learning in municipalities across all nine provinces towards qualifying as artisans in the electricity sector.

Briefing by South African Local Government Agency (Salga)
Mr Chris Neethling, of SALGA, said when municipalities were established and assumed responsibility for various municipal infrastructure services and functions, they inherited old infrastructure, some of which was way overdue for replacement. In some cases, it was already more than 30 years old. This required huge investments for refurbishment.

A study done by Electricity Distribution Industry Holdings (EDIH) in 2008 had estimated the maintenance, refurbishment and strengthening backlog in the EDI (Eskom and Municipalities) to be at  about R32 billion, and growing at the alarming rate of R2.5 billion per annum. The deteriorating state of the electricity distribution infrastructure was one of Salga’s serious concerns, as it negatively affected service delivery at the local level. Salga welcomed and supported the launch of the Approach to Distribution Asset Management (ADAM) project, which had been launched in line with Strategic Integrated Projects (SIPs) 6 and 10 of the Presidential Infrastructure Coordinating Commission’s (PICCs) National Infrastructure Plan.  However, there was a shortage of skills in the engineering sector. Small municipalities faced a severe challenge in terms of attracting and retaining skilled resources.

In an effort to assist smaller municipalities with the skills gap, Salga had initiated a business “adopt-a-municipality” programme.  Metros were also encouraged to partner with secondary cities to support smaller municipalities.  With ADAM being funded from the fiscus, this would allow municipalities to start using existing tariffs to cover the costs related to the provision of the service, resulting in the speedy delivery of universal access to electricity.

Briefing by Financial and Financial Commission (FFC)
Professor Daniel Plaatjies, Commissioner, FFC, said its research indicated thatmunicipalities were under-budgeting by R5 billion and under-spending by R 8.9 billion on repairs and maintenance. The extent of the renewals backlog was severe in the case of electricity – between R8 billion and R41 billion was required to address the backlog.  

Asset management in general was also in a poor state. There was therefore a need to determine whether poor performance was a result of:

• Inefficiencies on the part of municipalities; not abiding by sound asset management principles due to lack of consequences;
• Real challenges which may be beyond control of a municipality, such as not being able to attract/retain adequate skills required to drive sound asset management practice; or
• A combination of the above.

The DoE’s 2012 Annual Report had stated that no funding was available for the implementation of ADAM. The 2013 Division of Revenue Act had allocated R320 million to Department of Energy to fund a pilot of ADAM (mini ADAM). This supported nine municipalities.  According to the FFC, the ADAM strategy needed to be contextualised within the current realities facing the electricity sector. The lack of skills within the sector needed to be taken into consideration and relevant solutions had to be implemented. Some recommendations from the FFC were that the regulatory and accountability frameworks needed to be improved, the role of the Department of Cooperative Governance and Traditional Affairs (Cogta) and the DoE needed to be emphasised and an integrated package of infrastructure related capacity development needed to be developed.

Discussion
The Chairperson asked about the progress made by the DoE in engaging the steering committee about the implementation of the full ADAM programme. Infrastructure backlog was a concern and needed to be addressed.  What were the different costs for the rehabilitation of infrastructure versus the installation of new infrastructure? What was the quality of the engagements with stakeholders, and what was the feedback to date?  How was asset management located within electricity distribution and the electricity sector as a whole? The electricity sector as a whole needed to be restructured. What was the extent of public and private investment, respectively?

He argued that the Standing Committee on Finance and the Standing Committee on Appropriations needed to be engaged about the DoE’s R5 billion under-spending.  The “business adopt a municipality” programme was a brilliant initiative, as no business would adopt a fraudulent, corrupt and dysfunctional municipality. More effort therefore needed to be put in to addressing such concerns.  The SIP's strategy was not clear. The ADAM programme should be integrated into some of the SIPs; not the mini ADAM, but the full programme. Some of the infrastructure at municipalities was over 40 years old, but it was not registered under asset management; what corrective measures were there to address this?
Ms N Mathibela (ANC) said municipalities were not to blame for the poor registering of infrastructure asset management, because there had been no registers in 2006. On SALGA’s monitoring of municipalities, she said there was a problem with some municipalities which were using their own contractors for electrification, and not contractors from Eskom. Also, some metros did not want to collaborate with smaller municipalities. Since training took place primarily in the Limpopo province, what plans were in place to include all the other provinces for skills training?

Ms B Ferguson (COPE) said the government was committed to economic growth in the country. The mini ADAM programme was a clear indication of this, as the growing backlog in municipalities was a serious concern. What were the timeframes for ring-fencing the tariff and assisting these pilot municipalities? How would accountability be monitored? How would compliance be ensured? How committed was Eskom to infrastructure maintenance and the three-year strategy?

A concern had been raised to SALGA about the skills shortage within the energy sector. The shortage of relevant skills posed serious problems within municipalities. What were some of the success stories with regard to the partnerships between small municipalities and metros? How were communities being engaged to tackle the vandalising of infrastructure; were communities being educated on taking care of infrastructure? How were electrification backlogs being tracked? What were some of the successes in the 108 municipalities, and how would skills transfer be encouraged?

 A suggestion had been put to MISA about looking into sourcing retired engineers to mentor young entrants into the sector. What were the timeframes for artisans becoming fully accomplished after the training, and why were the numbers of trainees so low? A concern had been raised about the strategy and whether it was a holistic one. Were the stakeholders at the steering committee meetings and being updated often; what progress had been made to date?  About R1.3 trillion was under their control, and this was a huge amount to be in the hands of people who were not skilled. Was there integration between the various institutions; were they communicating? How was ethical behaviour between the various institutions being monitored?

Mr L Greyling (ID) agreed with the Members that the growing infrastructure backlog was a concern which needed to be addressed as a matter of serious urgency. He argued that a holistic strategy was missing. The National Treasury and Cogta needed to be part of such meetings. He cautioned Members that electricity users were moving away from the main grid, and this posed serious challenges. The ADAM programme was a “band aid solution”, and a more holistic approach was needed. About R390 billion in grid assets were losing value through depreciation. The pricing of energy needed to be differentiated from the network charge.  Electricity could not be used to subsidise other services. On corruption within municipalities, he said far too much money was being spent on administration, and there was a serious lack of consequences.

Service delivery protests were another concern. The National Energy Regulator of South Africa (Nersa) needed to be given authority to revoke municipal licences where corruption and mis-management of finances were prevalent.   Unemployment was around 40% in the country. There was therefore a major mis-match between unemployment and the skills available. Why were the skills needed not communicated to the people? Some municipalities were not viable, rural municipalities did not have a revenue base, and these struggling municipalities needed to be grouped together. The distribution grid needed to be passed over to Eskom.  Some municipalities were complaining that Eskom was not extending service delivery agreements. Why had there been no mention of Eskom throughout the presentations?

The Chairperson asked what the length of the pilot project was. How were investments from the private sector being encouraged? What plans were there to include all the 108 municipalities in the ADAM programme? What were the reasons for some of the delays in transfers?

Professor Plaatjies said the FFC was not a subsidiary of the National Treasury. It was a Section 220 institution and therefore reported to Parliament independently. A detailed submission had been forwarded to Parliament and various recommendations had been outlined. A copy of the FFC submission would be made available to the Portfolio Committee. However, the shared problem of a constitutional state clearly outlined who was responsible for what between national, provincial and local government. There was a need for coordination, especially on issues such as affordability and the pricing structure. He acknowledged that there were problems in certain district municipalities, as the grant did not directly pay Eskom bills and poor municipalities did not have a tax base. This was a real struggle.

The Chairperson said a representative from Nersa was present, and would be responding to some of the questions raised. Because of time constraints, he suggested that the bulk of the questions be responded to in writing, through the Chairperson’s Office.

Mr Moefi Moroeng, Specialist: Electricity Trading, Nersa replied to the question on the steering committee on ADAM, and said there were a lot of issues which have been picked up, such as tariffs and compliance. These were currently being addressed. The audits of the eight pilot municipalities had been concluded and made public.   However, Nersa did not have enough authority to take action and more backing was needed. Nersa needed to play a bigger role with regard to tariffs, compliance and capacity building. He agreed that municipalities in rural areas were experiencing higher tariffs, and Eskom therefore needed to provide assistance to them. Nersa would hold public hearings about the tariff. On the infrastructure backlog, he said municipalities needed to be more responsible in handling allocations. Nersa would be looking at ring-fencing the allocations.

Mr Hansby said the majority of the work of MISA was located in rural areas, where technical support was provided. On the “business adopt a municipality” programme, he said Eskom had committed to adopting five municipalities. It would therefore make sense to align the initiative with the ADAM programme, and the suggestion would surely be taken into account. On the participation of the private sector, he said municipalities needed to be encouraged to work with the private sector, especially with regard to SIPs.

Mr Victor Mathada, Executive Manager: Chief Executive Officer’s office, MISA, replied to the questions on municipal capacity deficiencies, and said the area of skills capacity was a difficult one. MISA had a programme where graduates were placed in various Further Education and Training (FET) colleges for about three years, where they received a qualification afterwards.  The task at hand was about getting these municipalities to retain the graduates after the three year training period. He said 250 young people would be placed for skills development in various municipalities. The suggestions for the mentorship programme would be taken into consideration.

Mr Shephard Gadzikwa, Programme Manager: Energy, MISA said nine additional electrical engineers would be allocated to provinces – one per province.

The Chairperson thanked the presenters and the Members for their engagements with the presentations.  Special focus needed to be paid to electricity and not just on energy.  Investment in the sector needed to be encouraged. Cross-subsidization needed to be addressed vigorously and an overall funding model for municipalities was necessary. Creative and skilful utilization of MISA was necessary, as the institution was at the cutting edge for skills development. The DoE needed to intensify the implementation of the pilot project; stakeholders such as Eskom and the FFC should be engaged continuously. Issues and recommendations raised by the Committee should be taken into account through the Chairperson’s Office. The suggestion to incorporate the ADAM programme into the SIPs should be taken into serious consideration. The steering committee needed to intensify the ‘adopt a municipality’ programme as a campaign which included all legislators. Inter-parliamentary engagement with Cooperative Governance and Traditional Affairs, Finance and Appropriations were necessary.  Momentum should be built beyond the ADAM programme.

The meeting was adjourned.