Tshwane’s smart meter woes could lead to downgrade
THE legal tussle over the City of Tshwane’s smart meter contract has added financial pressure on the metro that may result in a credit rating downgrade by Moody’s.
The metro is one of two in the country in which political contestation in the 2016 polls is intense — with opposition parties closing in on the ANC majority.
While Tshwane has seen fierce battles between the ANC and the DA since the first local election in 2000, newcomer the EFF is also eyeing the country’s largest metro by land mass. The city has also recently become embroiled in ANC faction fighting that led to a “compromise candidate”, Thoko Didiza, being announced as mayoral candidate. This led to violent protests that resulted in five deaths and more than 200 arrests.
Moody’s, which is expected to release its rating decision soon, announced a review of Tshwane’s rating in March, with a view to a possible downgrade. Its investment grade rating stayed the same but its outlook was changed to negative.
A credit opinion released by the agency after announcing the review, flagged the city’s high debt levels, cash-flow pressure and costs associated with the smart meter contract as credit risks.
“The implementation of the city’s large capital expenditure programme will continue to put pressure on the city’s credit profile in the medium term,” it said.
The capital city received an unqualified audit from AuditorG-eneral Kimi Makwetu. However, in a report to the council in January, he noted that the municipality had incurred service fee expenditure of R808,333,532 on the smart prepaid meter contract for the year ending June 30 2015. This was up from R177,557,908 in the previous year.
In its credit opinion, Moody’s noted that the city was in the final stages of appointing a new service provider to assume the assets and liabilities from the previous smart meter company.
“However, if the appointment of the new service provider is delayed further, the city may have to fund the shortfall of up to R300m which may pose a huge financial pressure for the city,” Moody’s credit opinion read.
The smart meter saga is before the High Court in Pretoria.
Contractor PEU Capital Partners was appointed in 2013 to install smart electricity meters at households and businesses and manage them on behalf of the city, in an attempt to curb losses on electricity payments. The contract was concluded, ignoring the advice from the Treasury that the project was unsustainable.
The city cancelled the deal two years later after realising it was not financially viable.
Civil rights group Afri-Forum obtained an urgent interdict preventing the city from making a near R1bn payment to PEU in what appeared to be a cancellation fee.
The public protector is also investigating the contract, criticised by opposition parties for being opaque and concluded without following the correct procurement procedures.
Moody’s, in its credit opinion, also highlighted some positive factors about the administration of the metro including “strong revenue growth, consistent operating transfers and the city’s large and diversified local economy”.
However, on the expenditure side bulk purchases and staff costs “create a rigid operating cost structure which do not allow much scope for expenditure flexibility”.
“Large capital spending has added to the expenditure pressures that Tshwane faces from the incorporation of two adjacent local municipalities which had little or no meaningful economic activities and required a lot of investment to improve its basic infrastructure.”
The report read it had resulted in an increase of the city’s debt stock by 67% from R6.1bn in 2012 to R10.3bn in 2015. “Tshwane’s debt exposure is higher than the median of other related metros in the country,” it said.