Anatomy of a failure

Energy is a central pillar of South Africa’s post-apartheid politics. There is both a qualitative and quantitative measure for backing up this statement. In 1994, shortly after securing a large majority in South Africa’s first democratic elections, the newly elected African National Congress (ANC) government committed itself, in its Reconstruction and Development Programme (RDP), to an infrastructural agenda aimed at providing “access to modern and effective services like electricity, water, telecommunications, transport, health, education and training for all our people”. Embedded in this statement, quoted from one of the RDP’s six basic principles, was diagnostic. Basic services were unevenly distributed. This qualitative pronouncement, one easy enough to intuit in the winter smog that hung like a pall over racially-defined black settlements at the edge of the white city, was backed up by a quantitative measure: the new government committed itself to, amongst other things, electrifying
2.5 million new homes.

Non-fiction writing about cities with a development thrust is at heart coldblooded. Despite its habit of collaging political and economic theory onto urban policy and journalistic field research, of combining historical and architectural studies with sociology, basically whatever works to drive the narrative, this form of writing is ultimately beholden to numbers. Statistical data matters. Without it a story risks drifting off into pure impression. Stats are this narrative form’s ballast. So let’s go there. In the seven years after South Africa’s democratic transition in 1994, 1.75 million additional households were connected to the electrical grid. Much of this activity, writes political historian Tom Lodge, occurred in rural areas where usage jumped from 12% to 42%. By 2008, more than 70% of South Africans had access to electricity; that figures now stands at 85%. These statistics are however deceptive.

“Though more houses were connected to the electricity grid, many people could only afford to use the power for very limited purposes,” wrote Lodge in 2003. I reported on this paradox of liberation in 2001 after a visit to Evaton West, an archetypal RDP settlement erected on what was once farmland between Johannesburg and Vereeniging. Founded in 1995 and populated with 10 105 nearly identical one-bedroom starter homes, the government-built dwellings were all connected to the grid but, crucially, excluded electrical meters (a rudimentary interface unit offering prepayment facilities, albeit without data management functions for the local municipality). Residents had to carry the costs of the installation and connection. This simple fact cultivated an instrumental view of life amongst Evaton’s residents, many of who could not afford the connection fee. Responding to my question which was more important, love or money, Juliet Manyisa, a 38-year-old unemployed mother of two living with her husband Joseph Matima, 64, a former security guard who was also unemployed, stated: “Money.” A pair of handcuffs hung on the wall, a keepsake from Matima’s former job. “You cannot make love without money,” elaborated Manyisa. “You cannot install an electricity box without R150. If I don’t have a candle at night I have to go sleep. Money is more important.”

The intersection of poverty and restricted access to electricity is a pressing social problem across sub-Saharan Africa. “Africa’s poor typically pay higher unit costs for energy than the rich,” offer the authors of the ‘2015 Africa Progress Report’, which looks at Africa’s energy crisis. “This  is partly because the rich are subsidised, but also because the poor use inefficient energy sources including batteries, candles, and charcoal.” Poorer households end up spending more on energy—up to 13% of their income. In South Africa, electrification remains an on-going priority for the national government, which has committed itself in its National Development Plan to a target of 90% access by 2030. The diffusion of electrical services to a broader base of users, like the provision of potable water, is a key marker of the success of liberation governance.

But, energy is not singularly the preserve of the empathetic state. In the language of the marketplace, electricity represents a growth sector. It is a highly profitable global industry. Political aspiration and the common good necessarily rub up against other, synchronous desires from actors in the private sector. The need to balance a city’s books while providing essential services, an orthodox ambition of city administration, is met by bold technological innovations in city management. Products pitched at technocrats in state and city government, the later typically framed by the “smart city” rubric, abound. In and of themselves, these smart products, costly as they are to implement, are nonetheless legitimate. But headline writers are not paid to announce business as usual.

In May 2015, two years after Johannesburg businessman Peter Malungani’s PEU Capital Partners inked a deal with the City of Tshwane to supply, install and maintain Africa’s first 100% prepaid electricity metering system linked to a smart grid, city officials in South Africa’s administrative capital made a sudden about-turn and terminated the service contract. They cited the “negative financial and economic impact” of the smart metering project, which formed the bedrock of a strategic play by the city to secure its revenue by migrating electricity users to an upfront payment method. News reports corroborated the city’s gloomy diagnosis: Tshwane was haemorrhaging money. PEU, it was revealed, had struck a deal with the city whereby this private company netted 19.5 cent for every rand of electricity purchased upfront by Tshwane residents using the new smart metering system.

Over a six-month period starting in July 2014, PEU received R355 million, excluding sales tax—R105 million more than had been budgeted by the city. In total PEU earned R830 million before its contract with the city was terminated. PEU had stumbled on a key deliverable. It had promised to install 429 474 meters within two years; by the time its contract was rescinded it had only replaced 12 920 meters with new Siemens-branded smart energy meters. Blame is both a tactic and a by-product of politics. Tshwane’s ANC-led government fingered AfriSake, a white business rights watchdog, as being instrumental in the project’s failure.

Likened to “a spanner in the works”, the city claimed that AfriSake’s 2013 court application to interdict and review the security of revenue project “impeded the speedy roll-out of the meters, undermined the benefits for the city and rendered the project financially and economically unsustainable”. There was however much that went unstated in the city’s terse press statement announcing the contract’s termination. Opposition politicians had early on protested against the project, which was adopted without a publicly debated feasibility study.

The most revealing criticisms however emanated from the national government. Early on, a variety of government ministries took a keen interest in the private-public partnership deal being struck between Tshwane’s youthful executive mayor Kgosientso Ramokgopa, a 40-year-old career politician with a civil engineering degree, and Malungani’s PEU, which represented a diverse range of partners, notably technology company Siemens and consultancy firm EY. Various letters from government officials were sent requesting details of a feasibility study demonstrating the appropriateness of proceeding with the project. These requests were essentially ignored, and in June 2013 the city finalised it service contract with PEU.

The national treasury was outraged. In a detailed letter sent to the mayor in September 2013, former minister of finance and head of the national treasury Pravin Gordhan reiterated the various flaws of the deal. It breached various administrative protocols. For instance, PEU was involved in drafting the guidelines for the tender, violating accepted procurement principles. The treasury also said the contract offered no value for money, PEU’s 19.5% stake in the city’s electricity sales described as “exorbitant”. But the treasury’s assessment was an ex post facto retort: the contract had already been signed.

Hints that the city planned to push ahead with the smart metering project came early. In March 2012, Ramokgopa, who succeeded his aunt Gwen Ramokgopa as executive mayor in 2010, was emphatic about the benefits of a smart metering project. “Accurate billing of services is a critical aspect of sound and good governance aimed at ensuring sustainable use of the city’s resources,” stated Ramokgopa, whose nickname “Sputla” derives from his earlier football prowess. “Yet this has been one of the fundamental challenges in local government throughout the country, including Tshwane.” The remedy to the problem, continued the mayor, was a rollout of prepaid electricity meters to secure city revenues. “Once in full swing, the project will help the city overcome problems of inaccurate billing and loss of revenue to the city, and secure the financial position of the city. This is a game-changing project and will most likely redefine local government’s financial management.”

History, the science of dispassionately looking backwards, is a harsh judge of ambition. But history also qualifies what can, at face value, appear to be mayoral hubris. Up until 1990, access to electricity was a privilege linked to race. Less than a third of South Africans, most of them white, enjoyed the benefits of electrification. “Doubling access to electricity from one-third to two-thirds of the population in a matter of years is probably without international precedent,” wrote Anton Eberhard, an expert in infrastructure reform and regulation at the University of Cape Town, in 2003. The entire electrification programme was initially funded, until 2000, by the country’s state energy utility Eskom, which produces 95% of South Africa’s electricity and owns a network of over 28 000km of transmission lines. (Roughly half of sub-Saharan Africa’s power-generation capacity is in South Africa.) The South African experience, wrote Eberhard, demonstrated that it is possible to make “substantial progress in widening access to electricity services for the poor, even as electricity industries are restructured”.

But many of these gains in democratising access to electricity were piggybacked on existing pre-1990 infrastructure, in the main, a network of aging coal-fired power stations representative of a dated state-led drive to exploit South Africa’s huge deposits of inexpensive, low-grade coal. In 2008, the country experienced the first in a series of planned rolling blackouts as Eskom’s aging infrastructure struggled to meet peak demand. Euphemistically described as “load shedding”, these blackouts are now an intermittent feature of daily life in the country. The problem had however been predicted for some time. A government report published in 1998 stated that the country would face serious electricity shortages by 2007 unless capacity was expanded. In 2003, Anton Eberhard wrote that South Africa was “living on borrowed time”. Electricity prices were too low, he cautioned, and no forethought was being given to raising prices to invest in new capacity. “Rolling blackouts will visit South Africa,” he predicted.

“The warnings were well-known, but the government was too aloof and arrogant to act,” journalist and academic William Mervin Gumede told the New York Times in 2008 when these earlier predictions became fact. In a media briefing the national government simply admitted that it had got “its timing wrong”. Viewed more broadly, South Africa’s on-going energy crisis is not unique. “Governance of power utilities is at the heart of Africa’s energy crisis,” states the 2015 Africa Progress Panel Report. “Governments often view utilities primarily as sites of political patronage and vehicles for corruption; providing affordable energy can be a distant secondary concern.” This broad diagnosis is true of Eskom. President Jacob Zuma is reported to have lobbied for his friend and ally, Ben Ngubane, to be named chairman. The utility is a key site of political wrangling. “Though Zuma had last year—at the urging of his energy minister—promised to establish an independent system market operator, the ANC, which has ideological reasons for not wanting to dilute Eskom, has blocked it at policy level,” reported the Financial Mail in February.

Technocrats and politicians are nonetheless aware of the long-term implications of mismanagement. “The electricity crisis of 2008 and other recent developments have exposed institutional weaknesses related to state-owned companies responsible for network infrastructure,” reads the National Development Plan, a government-backed strategic plan for South Africa. The concession contained in the NDP is telling: it acknowledges a crack in a central pillar of South Africa’s post-apartheid politics. The extent of this weakness is revealed in the factors that motivated the City of Tshwane to set forth on its expensive experiment in technological rescue.

South Africa’s 1994 constitution lists electricity reticulation as a responsibility of local government. The prescription entrenches a longstanding tradition whereby local municipalities act as resellers on behalf of state power utility Eskom. The profit generated by reselling electricity helps local governments, especially those in the country’s six large metropolitan cities, to subsidise property rates and finance other municipal services. Electricity is a particularly important source of revenue for Tshwane, which generates a third of its total annual revenues from electricity sales. In the last two fiscal years, the city generated between R9 and R10 billion in revenues from electricity supply.

Founded in 1855 and previously known as Pretoria, this sprawling, occasionally verdant metropolitan city is situated in rolling hills 50km north of Johannesburg. Its obesity—Tshwane occupies roughly a third of the land area of Gauteng, the country’s most economically vibrant province—owes to the 2 000 consolidation of 13 former city and town councils into a new, super-sized metropolitan structure led by an executive mayor. The city’s reputation as a khaki redoubt belies its economic importance. The city accounts for roughly a tenth of the country’s GDP. It is the seat of government administration and is home to a large military base. Its diversified economy includes manufacturing operations in the automobile sector (BMW, Nissan/Renault, Tata and Ford all have plants here). And it is home to three universities and various embassies and missions.

Despite the importance of large power users to its treasury, Tshwane faces significant challenges. Out-dated technologies and processes account for significant technical losses of electricity every year. It was reported in 2014 that Tshwane only audits a third of all large power users annually. Criminality is another problem, as it is elsewhere in South Africa. The country loses an estimated R4.4 billion a year from electricity theft. In Tshwane electricity theft, meter tampering and faulty meters cost the city R416 million in the 2013/14 financial year alone. A ballooning debtors book is also hindering the city’s ability to deliver efficient services. Last year the city disconnected 8 000 users in a bid to recover R6.5 billion in outstanding municipal debts. It is reported that the average Tshwane customer is 500 days in arrears on service accounts. The city recently made a provision for doubtful debt of R1.1 billion.

The situation in Tshwane is indicative. In 2014, local governments were owed R94  Billion for services such as water, sanitation, electricity and waste management. The knock-on effects of non-payment are cumulative. Eskom was last year owed R4.75 billion by struggling municipalities, prompting threats by the power utility to switch off supply to the worst offending cities.

The challenges faced by South Africa’s state energy utility and its various municipal distributors, like Tshwane, are by no means unique. Latin America now has more middle-class citizens than people living in poverty. One of the downsides of this rapid economic growth since 2000 is the region’s tight supply-demand balance for electricity. An influential 2011 World Bank analysis of future growth trends found that Latin America’s electricity consumption is expected to nearly double by 2030. The report included a warning that the region will not be able to meet future electricity demands by relying on current plans for power sector expansion. It is estimated that between 2007 and 2011, cumulative electricity losses for the region totalled 17%, a figure far higher than those currently experienced by high-income countries of the Organisation for Economic Co-operation and Development (OECD) and levels last seen in the United States in 1929.

Non-technical losses through electricity theft and fraud are so widespread in Latin America that statisticians are able to estimate the size of a country’s informal economy by looking at the amount of wattage illegally siphoned off the grid. A 2015 IMF study of the energy sector in Latin America further highlighted that there is a direct relationship between the inability to secure revenue from electricity sales and higher generation costs, with negative consequence for investment.

Brazil, which generates about 84% of its electricity from hydropower, is especially hard hit. The country’s National Electrical Energy Agency estimates the country’s non-technical losses to be around 15%, or US$4 billion per annum. While anti-fraud detection techniques have evolved, so has the sophistication and extent of tampering. In a bid to stem the tide of non-technical losses, Brazilian authorities in 2012 passed federal regulations mandating the use of smart meters in new meter installations—existing meters need not, however, be upgraded. It is estimated that Brazil will spend US$27.7 billion on its smart grid investments by 2022. The expenditure is key to ensuring its competitiveness in a globalised marketplace.

The necessity for large capital expenditure on electrical infrastructure confronts African states too. “Despite 15 years of sustained economic growth, power shortages, restricted access to electricity and dependence on biomass for fuel are undermining efforts to reduce poverty,” states the 2015 Africa Progress Report. “The energy gap between Africa and the rest of the world is widening.”

The backward-looking conservatism of current energy planning, offers the report, means it will take Africa until 2080 to achieve universal access to electricity. Competitiveness is also being stifled. According to the World Bank’s Enterprise Surveys (2006-10), more than 50% of African businesses surveyed cited inadequate power supply as a major business constraint. “One of Africa’s many pressing challenges is the lack of access to energy,” stated Norman B. Ndaba, a power and utilities consultant at EY, in a 2013 report on smart metering. “This issue is holding back the whole region’s economic and societal development.” Ndaba, whose company partnered with PEU on the Tshwane smart metering project, believes that smart meters represent a “missing link” that could help the energy sector to achieve its goals.

Tshwane took the strategic decision to embrace the smart city concept in 2012. To this end it paved the way for a prepaid electricity vending system by passing a bylaw mandating that city customers switch to prepaid regime when new smart meters were installed. The meters were installed in October 2013, three months after PEU signed its service agreement with the city. The initial rollout was small, totalling some 300 meters within three months. Large power users were the first to be converted, followed more recently by upmarket residential estates on the city’s eastern outskirts.

The meters are not much to look at: a light-grey plastic carapace with a digital display, two bar codes and Siemens branding. Each smart meter is equipped with a communications module and 100MB of monthly data. Consumption information is relayed to a data centre every 15 minutes via GSM networks—until the contract’s termination, an office with cubicles and data displays at PEU’s offices in Rosebank, Johannesburg. Users access the vending system via a web portal, where they can monitor electricity usage and update their credit. The meters are standardised and plugged into a multivendor environment. The vending platform is 100% pre-paid and integrated into all payment channels. With meter tampering a concern in South Africa, each meter is installed with tamper alarm that automatically logs interference at the data centre. Siemens is currently also testing the same meters in solar-powered micro-grids in rural communities in Uganda and Tanzania.

Siemens largely authored the smart grid solution implemented in Tshwane. Its involvement with prepaid modes of payment goes back to the 1990s and South Africa’s pioneering initiatives in high-capacity prepaid cellular systems. Siemens intelligent networks provided the platform for this activity. Martin Sanne, a Siemens executive in charge of smart grid strategy in Africa, knows some of the engineers involved in this earlier project by name. Johannesburg-based Sanne supervised aspects of the technical rollout of smart meters in Tshwane. Real-time data management, he told me, is a key draw of the system.

“Neither smart metering nor prepaid are new concepts, but what is new with this project is the way the meter data management system has been combined with a prepaid platform,” explained Sanne. He was enthusiastically testing a BMW i3 electric car when I met him. “Metering sounds trivial but it actually a science, because the generation and electricity is a science. Electricity is not a straightforward entity: it has a real and imaginary or reactive component. When you supply large power users you have to take that into account.”

Reliable input and output data, which this new smart grid technology supplies, is however in short supply in South Africa. It is not singularly the country’s aging power infrastructure that is hampering growth, explained Sanne, but also long-entrenched technical inefficiencies and escalating non-technical loses. Smart metering, Sanne and his company’s competitors in the energy sector increasingly argue, has the capacity to address many of these problems. South African technocrats have taken note.

In 2008, the Department of Minerals and Energy passed a regulation mandating customers using more than 1000 kWh per month to install a smart-meter system. Large power users were also required to pay for electricity according to a time-of-use tariff. Seen in light of this trend, Tshwane’s decision to implement a smart meter project was, at face value, uncontroversial.

Peter Malungani also pitched his company’s rollout of smart meters in Tshwane as such when I met him. “The smart metering project is a very simple funding structure that is overlaid by technology,” he told me during a sit-down interview at PEU’s offices, a few months before his contract with Tshwane was rescinded. The smart meter project, Malungani explained, was about achieving two key things. “For the customer, it is about giving them power and transparency in how they manage their account. For the client utility, in this instance Tshwane, it enables them to collect money upfront for services that they render.” He was simply reiterating a well-known sales pitch that offers smart city solutions as a kind of silver bullet for technocrats. Malungani is not your conventional salesman. A former black-empowerment partner and director of financial services group Investec, Malungani started his first business in 1983 with savings of R246. PEU, the private company he now chairs, specialises in capitalising and managing cost-intensive state projects through public-private partnership deals. “There are many ways to solve infrastructure problems for developing countries,” he said. Private-public partnerships offered a viable off balance-sheet financing mechanism for cash-strapped municipalities. Financial streamlining aside, he explained, smart technologies introduce a quantum of technical improvements. “It creates an efficient system for measuring electricity usage that it transparent for everyone and has predictability for all parties,” said Malungani.

Aspects of his analysis are hard to refute. “If you think about it,” he told me, “government and municipalities have acted as banks for the longest of times, giving credit on the hope it will come back.” That didn’t always happen. He described the smart metering project piloted in Tshwane as unique. “What is unique about it is that it has brought private sector funding into an infrastructure project that is a service delivery project. The key issue is that it is not the sovereign that you look to for funding, it is your confidence in the ultimate consumer to be able to pay.”

Malungani’s understanding of the predicaments of public governance and intricacies of sovereignty stem, in part, from his close links with power. Former president Kgalema Motlanthe and his partner once occupied a plush Johannesburg home owned by Malungani. He was also a director at Masana Technologies, a black-owned information and communications technology company owned by PEU. Masana spectacularly mismanaged the upgrade of Johannesburg’s service billing system, prompting the city to fire Masana in 2009 with R156 million of the work still unfinished, according to the Mail & Guardian. This history necessarily qualifies Malungani’s confident assertion that, “We bring an improvement of revenue and cash flows to the utility, and ultimately the elimination of debtors.”

Malungani has been a lightning rod for criticisms around the failed smart metering project in Tshwane. But the original idea for the project came from Anton Millar, a former banker at Investec who now heads up TSC Capital, a boutique finance house. This fact is largely unreported by the media, which has framed their coverage of Tshwane’s mismanaged smart city upgrade using popular narratives of bureaucratic incompetence and corrupt practices. I met Millar, a shareholder in the PEU-owned management company (Tshwane Utility Management Services) established to handle the metering contract. Forthright and smart, he too skirted the tricky realpolitik of public infrastructure investment in expensive smart city products, in favour of techno-economic solution.

“People might ask why didn’t Tshwane do this project themselves,” said Millar, who first met Malungani as a client with Investec and knocked on his door again four years ago with an idea to migrate ailing municipalities to smart meters. “If we look at the city, it has had a number of financial challenges, including providing more services to more of its citizens and to upgrade infrastructure. That costs money. To carry out a project like this, the total budget for our term was close US$1 billion. The city does not have the financial resources.” The private sector, however, does—and also has the financial leverage to take on expensive financial solutions on the city’s behalf. “We raise and spend money on their behalf and provide a managed service back to the city.”

Neither Millar nor Malungani came to the smart metering project with any technical knowhow. Malungani is a politically connected dealmaker with big picture nous. Millar has expertise in financing large capital projects, including new aircraft for the country’s national and regional carriers. He also assisted minority shareholders in acquiring a majority stake in Lanseria, a commercial airport north of Johannesburg where he parks his single-engine Cirrus SR22.

“We are ultimately entrepreneurs,” Millar told me. “We are financial people, not technical people. We have always seen ourselves providing a financial solution effectively backed by a technical solution.” What Millar was saying, at least as I understood him, is that political aspiration and the common good are not merely synchronous with the desires of the private sector, but complementary. There is no friction. Everyone can prosper. “One of the key things of our system is that customer does not pay a cent,” stated Millar, highlighting a key pitch of the smart metering project: the off-book financing method. The reward for this was a stake in the city’s electricity. The national treasury took a dim view of this. In a 2013 letter to Tshwane city manager Jason Ngobeni, the national treasury reiterated that revenue collection “is a municipal service”. It could not be outsourced.

Technology and finance are essential to modern technocratic governance, but they are not a panacea. They form part of a matrix of possibilities modulated by the rights and responsibilities that weigh on beleaguered governments, profit-seeking businessman and bill-dodging electricity users. As it stands, Tshwane offers an evolving case study in which necessity, aspiration and failure are key themes. More pointedly, there is still the nagging problem of those l2 920 meters that replaced the old analogue ones, each of which was sealed in a bag and dutifully logged by a technician. One recent news report suggested that Tshwane will have to pay PEU market value for the smart meters. PEU, it was reported in October, have placed a market value on the complete rollout of meters at
R7 billion. Which doesn’t square with the modest infrastructure they had put in place, or a statement by Siemens that the each meter cost a total of R7 000 installed—or R90 million. From costing nothing, Tshwane’s experiment in revenue protection has escalated into a sizable something, and still those cracks in the pillar of democratic aspiration remain untended


2 Responses to Anatomy of a failure

  1. James Kenny March 26, 2016 at 10:35 pm #

    Too long Sean; lacks impact. This issue and the related issue of what’s going on the solar front in Kenya, Tanzania etc. needs reporting. The ‘suits’ are ‘selling the sun’ in East Africa and fleecing the poor with their ‘easy instalment’ lures and ‘smart meters’………………..

  2. student April 11, 2017 at 7:55 pm #

    very insightful, thankyou.

Leave a Reply