Municipalities are abusing their role

2010-12-02 00:00

I REFER to Nalini Naidoo’s article on the decision by the government to close down EDI Holdings and withdraw a bill that would have enabled the establishment of Regional Electricity Distributors (Reds). At the SACCI Convention, I successfully proposed that government should be urged to hasten the establishment of Reds. There were several reasons I made the proposal, and why it was adopted.

The electricity distribution sector yields R33,5 billion per annum. Constitutionally, distribution is a function of 187 municipalities, but few are capable of doing it. Eskom fills the gaps, applying its own tariffs, even though this is an exclusive delegation to municipalities. Insofar as municipalities have to maintain a distribution network and the appropriate staff, it is reasonable that they should recover these costs from consumers. However, over the years they have realised that the sale of electricity is very profitable. Consequently, electricity consumers have been required to subsidise other municipal accounts. Municipalities, including ours, have abused their role as distributor, first by engaging in cross-subsidisation and, secondly, by using Eskom increases to exploit their own customers. In principle, cross-subsidisation is a questionable practice; pragmatically, it is justifiable on the grounds that there are far more electricity consumers than there are ratepayers. Municipal electricity tariffs are fraught with complexity and variation from one distributor to another. There are after all 187 tariff-setting municipalities. Business, and industry in particular, requires harmonisation so that competitiveness does not come down to over a myriad electricity charges within the country.

EDI Holdings was established in 2003 to consolidate distribution by the establishment of six authorities. The economies of scale so achieved would, it was believed, simplify the distribution, harmonise tariffs and better utilise scarce resources. It was not long before those municipalities that rely on the profits from the sale of electricity began to object to the loss of their cash cows. They found an ally in the Constitution. That the government had not foreseen this obstacle itself before outlaying so much to establish and sustain EDI is mystifying, but just this year steps were being taken to make the legislative amendments to enable Reds to be established. The larger municipalities, in particular, would not yield without a fight, however, a fight which over seven years has already tested political will and found it wanting.

The defiant municipalities have allies — commentators who have come out against Reds. Most have argued that they would constitute a third party that must be remunerated from the process of distribution. The argument is open to dispute, for the very essence of economies of scale is that products can be supplied at far more cost-effective rates, and this should more than compensate for the cost of the institutions. Perhaps there is limited understanding of just how inefficient the distribution is. Not only are municipal electricity departments inadequately staffed, but infrastructure has been allowed to deteriorate as income from electricity sales has been too freely diverted elsewhere. EDI claims that the backlog amounts to R28 billion and increases by 2,5 billion each year. This is a compelling argument in favour of dedicated, well-resourced distribution agencies which do not allow other considerations to interfere with their priorities. Detractors will point to the failure of the pilot Red established in Cape Town. But this was really the Cape Town Municipality’s electricity department in fancy dress. The city was the sole shareholder and ended up paying a management fee to a company which signed a service agreement with the municipality for the latter to continue with distribution.

The most compelling argument against Reds is government’s abysmal record of institutional establishment and management. EDI costs millions (about R260 million in 2008/9) and has a staff of 93. Its achievements do not warrant expenditure of this magnitude. If Reds are to be additional fiefdoms, incompetent empires in their own right, then of course we don’t want them. But good ideas should not be discarded because of poor implementation. Let’s get the implementation right. Let’s ensure that Reds are highly efficient, cost-effective structures that employ competent and qualified professionals dedicated to the achievement of the objectives, the first of which is “to provide low-cost electricity to all consumers, with equitable tariffs for each customer segment”.

• Andrew Layman is the CEO of the Pietermaritzburg Chamber of Business.

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