A crumbling Mpumalanga municipality faces financial ruin after being forced to maintain a dubious contract
The threat of a multimillion-rand lawsuit appears to have been the only reason a cash-strapped Mpumalanga municipality wimped out on its decision to stop a R410 million substation, constructed by a Chinese company.
Last year, Thaba Chweu Local Municipality councillors in Lydenburg had resolved to review and stop the contract with China Sinogy Electric Engineering Company (Cseec) SA, following concerns that the costs of the project would be unaffordable for the financially struggling institution.
At the time, the municipality was indebted to Eskom to the tune of R400 million, over and above other service delivery backlogs.
The 40 megavolt amp (MVA) Duma electricity substation is now nearing completion, despite council having aspersed the contract signed with Cseec in 2014 when it resolved to cancel it in June.
When the council resolved to stop the project, its minutes read: “The cost of the project had increased from R295 million to R388 million, and lately to R410 million as a result of amendments in the scope of work and the agreement, and also due to the exchange rate, which poses a risk to the municipality of illegally trading in forex.”
The minutes further said that the transaction did not comply with section 120 of the Municipal Finance Management Act; that there was no contract management plan; and that the Bill of Quantities, submitted on May 16 last year, “depict hallmarks of flagrant misrepresentation of the project as a public-private partnership (PPP), while the municipality is portrayed to have agreed, through its officials, to all the irregularities”.
Since this was a PPP project, Cseec had raised all the money to construct the substation and would recoup it later from the Thaba Chweu municipality.
It was, however, unclear how Cseec would get its money back because the municipality had its own problems and was struggling to collect revenue from residents and businesses.
Residents, led by the EFF, had also raised concerns that electricity tariffs would increase, after a company contracted by Cseec, Hexing Electrical SA, installed 15 000 new smart meters.
The municipality appointed Cseec to construct the 40 MVA Duma substation, and Cseec signed a contract with Hexing for the supply of the smart meters.
Last week, Thaba Chweu municipal spokesperson, Themba Sibiya, was reluctant to respond in detail to City Press’ questions about the council’s about-turn.
“Following the council resolution to halt the project, council applied its mind. After careful consideration of all factors and risks, [it] resolved that the construction phase of the project be reinstated,” Sibiya said.
“Subsequently, council further appointed experts to advise on all the risks associated with the contract.”
Sibiya said the experts would guide council on how to proceed with the contract.
However, he could not explain how the experts’ report was going to help the municipality since the project had progressed and was near completion.
However, according to documents City Press has obtained, the Thaba Chweu council backed down because Cseec threatened legal action – to claim about R4.6 million every week while the project was suspended.
A letter, dated June 12 2018, was written by Cseec SA’s managing director, Wu Wensheng, to the former municipal manager, Patrick Kgoale.
It reads: “We refer to our letter, dated June 7 2018, warning the municipality that the halt of the works shall contractually constitute a compensation event … Please find hereunder the breakdown of the daily costs incurred directly because of the halt. The Private Party (Cseec) shall claim these costs weekly until the halt is stopped.”
A breakdown of the costs indicate that Cseec was losing R650 802.24 a day as interest on its loan, loss of profit, salaries, equipment storage and maintenance.
On September 25, the council resolved during a special sitting to allow for the resumption of construction work.
“Council approves the reinstatement of construction works … to curb further losses and litigations. Council acknowledges the implications of decisions taken by council with regard to the Duma project and assigns a political task team to deal with mitigation of the reputational risk and potential litigation regarding the project,” read the minutes.
EFF councillor Exodus Maloka said the council meeting was convened when his party’s councillors were absent.
“We were not part of this meeting. Otherwise, we would not have agreed to this as we had always opposed the project,” Maloka said.
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