SEKHUKHUNE DISTRICT MUNICIPALITY Public Request for Comment

FOR THE

Smart Meter System Revenue Enhancement Project

June 2017

Version 1

PREPARED FOR: Sekhukhune District Municipality 3 West Street 0470

CONTRACT NUMBER NO. SK8/3/1-43/2015/16

Contact Person: Busisiwe Matjie Tel: +27 13 262 7680 email: [email protected]

SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT Executive Summary

The SDM are faced with significant challenges in the rollout of water and sanitation infrastructure, as part of the service upgrade process. Despite these challenges, the SDM are committed to service delivery, specifically in terms of the provision of efficient and sustainable water and sanitation services to all within their jurisdiction.

The Sekhukhune District Municipality (SDM) appointed SMEC in association with Pamoja Capital to investigate the feasibility of a smart meter system for revenue enhancement. The Project is expected to enable the SDM to become a “development oriented Leader in Service Delivery”. The Project aims to increase the internal municipal revenue by improved customer metering through the installation of smart water meter infrastructure and systems. The Project will aim to increase the municipal revenue through improved metering of the customers supplied through the SDM water infrastructure. The SDM only metered approximately 5% of the total population in 2015/16 financial year and are in need for enhanced customer metering to increase their internal revenue.

The overall objective of the project is to increase service delivery, revenue and collections from water. Holistically, the implementation of the Project intends to ensure better control of water supply and demand, as well as provide the community with a basic service that is efficient and reliable. Furthermore, the Project targets to reduce water losses and increase the community’s trust in the municipality to provide a sustainable service.

The feasibility study investigated a public sector contract or a public private partnership (PPP) contract where the Private Party is responsible for the finance, planning, design, construction, operation and maintenance of the service to agreed standards with the SDM playing a regulatory and compliance monitoring role.

The Smart Meter System Revenue Enhancement Project aligns with many of the strategic objectives outlined within the various key performance areas defined by the SDM.

The Feasibility Study indicated solutions for each metering applications include:

• Domestic customer metering: Standard Transfer Specification (STS)-based prepaid meter • Bulk customer metering: STS-based prepaid meter (for meter diameter up to 50mm) and Automatic Meter Reading (AMR) meter (for meter diameter greater than 50mm) • Bulk zonal metering: AMR meter • Communal metering: Token-based prepaid meter The results of the Feasibility Study indicated that there was significant technical, financial and operational risk transfer through the use of an external delivery mechanism. The financial model further indicated that the external reference model demonstrated value for money over the option of continuing under the status quo. The PPP term was modelled over a 15 year period.

Following the National Treasury Service Delivery and PPP Guidelines, the Feasibility Study was submitted to the National Treasury for views and recommendations and is herein summarised and made available to interested parties, including the general public and government bodies. This document is provided 60 days before the Feasibility Study will be presented to Council. All interested stakeholders are provided 30 days within which to submit feedback on the Feasibility Study. Responses can be made as indicated in Section 8: Comments, Views and Recommendations.

i SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT All responses will be collected and incorporated into the Feasibility Study for Council consideration. Based on feedback from the general public and the views and recommendations from National Treasury, the SDM Council will table a resolution whether to proceed with procurement.

ii SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT TABLE OF CONTENT

1 INTRODUCTION ...... 1-1

OVERVIEW ...... 1-1 PROJECT SCOPE ...... 1-1 APPROACH AND METHODOLOGY TO THE FEASIBILITY STUDY ...... 1-1 2 NEEDS ANALYSIS ...... 2-2

MUNICIPALITY’S STRATEGIC OBJECTIVES ...... 2-2 BUDGET ...... 2-5 INSTITUTIONAL ANALYSIS ...... 2-5 OUTPUT SPECIFICATIONS ...... 2-6 Meter Management (infrastructure) ...... 2-6 Revenue Management ...... 2-6 Customer Management...... 2-6 Report Management ...... 2-6 SCOPE OF THE PROJECT ...... 2-6 Meter Management ...... 2-6 Implementation ...... 2-7 3 TECHNICAL SOLUTION OPTIONS ANALYSIS ...... 3-8

OPTIONS CONSIDERED ...... 3-8 EVALUATION AND ASSESSMENT ...... 3-10 RECOMMENDATIONS ...... 3-11 4 SERVICE DELIVERY OPTIONS ANALYSIS ...... 4-12

OPTIONS CONSIDERED ...... 4-12 EVALUATION AND ASSESSMENT ...... 4-12 RECOMMENDED OPTION ...... 4-13 5 PROJECT DUE DILIGENCE ...... 5-14

LEGAL ASPECTS ...... 5-14 SITE ENABLEMENT ...... 5-14 SMART METER SYSTEM REQUIREMENTS ...... 5-15 SMART METER SYSTEM ROLLOUT PLAN ...... 5-15 SOCIO-ECONOMIC AND BEE ...... 5-16 Customer Socio-Economic Factors ...... 5-16 Job creation opportunities ...... 5-16 PROJECT STRUCTURE ...... 5-16 6 VALUE ASSESSMENT ...... 6-17

APPROACH ...... 6-17 EXTERNAL REFERENCE MODEL ...... 6-17 OUTPUTS OF THE FINANCIAL MODEL ...... 6-19 Value for money ...... 6-19 Risk transfer ...... 6-19 CONCLUSION AND RECOMMENDATION ...... 6-19 7 PROCUREMENT PLAN ...... 7-20

OVERVIEW ...... 7-20 8 COMMENTS, VIEWS AND RECOMMENDATIONS ...... 8-22

iii SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT LIST OF FIGURES FIGURE 2-1: LOCATION OF MUNICIPAL AND PROVINCIAL GROWTH POINTS WITHIN SDM ...... 2-3 FIGURE 2-2: NUMBER OF HOUSEHOLDS WITH ACCESS TO WATER (ADAPTED FROM STATSSA CENSUS 2011 AND COMMUNITY SURVEY 2016) . 2-4 FIGURE 2-3: THE AGE ANALYSIS OF THE DEBTOR’S BOOK OF SDM FOR WATER AND SANITATION RELATED SALES ...... 2-5 FIGURE 2-4 THE METER READING LIFECYCLE ...... 2-7 FIGURE 2-5: EXAMPLE OF THE ETERNAL SERVICE DELIVERY ARRANGEMENTS WITH PREPAID METERS ...... 2-7 FIGURE 3-1: DOMESTIC (RESIDENTIAL) CUSTOMER METERING APPLICATIONS ...... 3-9 FIGURE 3-2: COMMERCIAL CUSTOMER (BULK) METERING APPLICATIONS ...... 3-9 FIGURE 3-3: COMMUNAL (SHARED) METERING APPLICATIONS ...... 3-9 FIGURE 3-4: BULK (ZONAL) METERING APPLICATIONS (NON-BILLING RELATED) ...... 3-9 FIGURE 3-5: EXAMPLE OF THE SPATIAL ANALYSIS AVAILABLE WITHIN A METER MANAGEMENT SYSTEM ...... 3-10 FIGURE 5-1: TYPICAL LOCATION OF THE CUSTOMER WATER METER ...... 5-15 FIGURE 6-1: ALTERNATIVE UNITARY FEE STRUCTURES AVAILABLE FOR THE PROJECT ...... 6-18 FIGURE 6-2: POTENTIAL FLOW OF MONEY ...... 6-19 FIGURE 7-1: PROPOSED PROJECT STRUCTURE ...... 7-20

LIST OF TABLES TABLE 2-1: SDM HOUSEHOLD DISTRIBUTION AND AVERAGE WATER DEMAND (ADAPTED FROM STATSSA COMMUNITY SURVEY 2016) ...... 2-2 TABLE 3-1: RISK OVERVIEW FOR THE ROLLOUT OF VARIOUS METER TECHNOLOGIES ...... 3-11 TABLE 4-1: RECOMMENDED TECHNOLOGIES BASED ON CURRENT SERVICE DELIVERY ARRANGEMENTS ...... 4-12 TABLE 4-2: SUMMARY ASSESSMENT OF SERVICE DELIVERY OPTIONS ...... 4-12

iv SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT

1 INTRODUCTION

Overview The SDM are faced with significant challenges in the rollout of water and sanitation infrastructure, as part of the service upgrade process. Despite these challenges, the SDM are committed to service delivery, specifically in terms of the provision of efficient and sustainable water and sanitation services to all within their jurisdiction.

The Project is expected to enable the SDM to become a “development oriented Leader in Service Delivery”. The Project aims to increase the internal municipal revenue by improved customer metering through the installation of smart water meter infrastructure and systems. The Project will aim to increase the municipal revenue through improved metering of the customers supplied through the SDM water infrastructure. These Smart Meters shall be installed to increase the municipal revenue, decrease the debt, and curb water losses beyond the customer meter.

The Project will improve water service delivery and will have positive indirect impacts on the other service delivery challenges, namely sanitation and high unemployment rates. The Project will also improve accountability and monitoring of water losses, through the proactive implementation of the customer meter lifecycle. The increased revenue collection will further enable the equitable distribution of resources through enhanced customer metering.

Project Scope The Project will include the installation, and operation and maintenance of Smart Water Meters at customer water connections, along with the associated hardware and software systems. The will result in the formation of a single, integrated information management system where billing, revenue collection, water losses and water demand can be managed. This system will provide sound governance, data integration, efficiency, and transparency between the SDM departments’ information management systems. This will stimulate institutional development and accountability and will enable the SDM to “provide creative integrated development solutions in partnership with Local Municipalities, Communities and other stakeholders,” which is part of their mission. As a metering related project, the Project is classified as a municipal support activity, as per the Municipal Service Delivery and PPP Guidelines. As a municipal support activity, the Feasibility Study requires compliance with section 120 of the MFMA. All Public Participation is conducted in accordance with Section 120(6)(b)(i and ii) of the MFMA and section 21(1) to (5) of the MSA.

Approach and methodology to the feasibility study The SDM appointed SMEC South Africa as the Transaction Advisor for the Smart Meter System Revenue Enhancement Project in June 2016, and SMEC and the Project Officer have since worked toward completing the Feasibility Study through the use of site visits, data gathering with relevant stakeholders, structured interviews with SDM staff and quantitative data obtained from the billing system. The approach used in the development of the Feasibility Study has provided the SDM with a thorough understanding of their needs and the available technical and service delivery options available for the implementation of the Project.

1-1 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT 2 NEEDS ANALYSIS

Municipality’s Strategic Objectives The SDM are committed to service delivery, specifically in terms of the provision of efficient and sustainable water and sanitation services to all within their jurisdiction. Despite their commitment, the SDM are faced with water supply, geographic, and socio-economic challenges. Therefore, the SDM have developed clear aims and objectives derived from their mission and vision statements within their Integrated Development Plans. The SDM developed a Water Services Development Plan to strategically plan for the implementation of water infrastructure, which is reflected in the Integrated Development Plan. Based on these plans, the SDM plan to supply at least the minimum level of water and sanitation services to approximately 62% of the SDM population to meet basic water requirements. The vision of the municipality is to become a “Development oriented Leader in Service Delivery”. For the vision of the municipality to be achievable, the SDM will endeavour to address the above service delivery challenges.

The implementation of these plans will require substantial capital investment and will require the SDM to enhance their internal revenue generation.

The SDM have significant geographic challenges as most households within the SDM are characterized as rural based, as indicated in Table 2-1, which requires extensive water infrastructure to get the water supply from the water sources to the rural areas. Approximately 21% of the workforce is employed and 57% of the SDM population is below the poverty line, and are classified as Indigent Households who are unable to afford basic services. These unemployment statistics were predicted to remain constant over the medium term, despite new mining developments within SDM. The SDM are expected to be faced with high percentage of households within the SDM who are unable to afford to pay for water related services, and only a small portion of the population (approximately 43%) can contribute to internal revenue generation.

Table 2-1: SDM household distribution and average water demand (adapted from StatsSA Community Survey 2016)

Number of Access to Piped Customer Type Number of People Households Scheme (%)

Urban 17 378 48 577 67%

Can afford services 10 266 28 698 89%

Cannot afford services (Indigent) 7 112 19 879 73%

Rural 262 754 1 094 971 30%

Can afford services 111 011 462 615 41%

Cannot afford services (Indigent) 151 743 632 356 32%

Farms 10 395 26 214 37%

Total 290 527 1 169 762 33%

2-2 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT The main growth areas within the SDM have been identified as:

• Apiesdoring • Groblersdal •

• • Klipbank

The growth points are indicated in Figure 2-1. The Burgersfort area and the Greater Tubatse Local Municipality in general has seen the most rapid growth within the SDM.

Figure 2-1: Location of municipal and provincial growth points within SDM There are high correlations between the availability of water infrastructure, and infrastructure investment, in these growth areas.

The water infrastructure requirements within SDM are evident in Figure 2-2. The average annual daily demand (AADD) for the SDM population was 56 l/c/d for households with access to water supply within 200m from their dwelling. This supply volume was considered significantly high, based on the:

• socio-economic indicators;

• level of service within the entire municipal area; and

• free-basic water allowance of 25 l/c/d.

2-3 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT

40 000

29%

21% 28% 20 000

11% No. Households of

5% 2% 1% 3%

0 Piped inside Piped inside 200m from 200 - 500 from 500 - 1000m > 1000m from Other No access to dwelling yard dwelling dwelling from dwelling dwelling piped water

Elias Motsoaledi Ephraim Mogale Makhuduthamaga Fetakgomo Greater Tubatse

Figure 2-2: Number of households with access to water (adapted from StatsSA Census 2011 and Community Survey 2016) Figure 2-2 clearly shows that the SDM will be required to invest significantly in water infrastructure to ensure basic service delivery. Approximately 31.5% of the SDM population with access to piped water inside their yard can contribute to revenue generation through the payment of municipal services. The billing system analysis for the 2015/16 financial year indicated that a smaller percentage (approximately 5%) of the households were metered and most areas with access to piped water did not have customers recorded on the billing system. Another key challenge that the SDM faces is that there is a culture of non-payment for water services.

The low-percentage of customer metering has a direct impact (along with physical water losses, i.e. pipe bursts) to the level of non-revenue water within the SDM.

The SDM are faced with significant challenges in the rollout of water and sanitation infrastructure, as part of the service upgrade process. These include:

• Limited water supply capacity within the region;

• Low percentage of metering, which limits the municipal revenue generated from water services;

• Low collection rates from the customers;

• High levels of Non-Revenue Water, which reduces the municipal revenue generated whilst increasing expenditure on the purchase and treatment of water; and

• Limited bulk water distribution network reach within the region, which requires high investment in water infrastructure, whilst having limited revenue capacity to fund the infrastructure requirements, both capital funds for construction and operational funds for the sustained operation and maintenance requirements. These factors impair the SDM’s ability to implement requirement operation and maintenance on existing infrastructure and constrain the ability of the SDM to implement the proposed infrastructure developments.

2-4 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT Budget The bulk of SDM’s revenue is in the form of transfers recognised. In the medium term, this may not remain a sustainable state of affairs. For this reason, it is important that SDM explores means through which it can maximise its own revenue sources. However, an age analysis of the historical debtors’ book from internal revenue collections, indicated in Figure 2-3, lends credence to the possibility that there is an underlying difficulty faced by customers in meeting their obligations to pay for services rendered. In general, the gradual shift from a debtor book with a bias for shorter term debtors to one with a bias for longer term debtors is indicative of a deteriorating ability of customers to meet their payment obligations.

2016

2015

2014

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

+ 181 Days 91 - 120 Days 121 - 180 Days Current (0 – 30 days) 31 - 90 Days

Figure 2-3: The age analysis of the debtor’s book of SDM for water and sanitation related sales The socio-economic and employment status, as well as the historic debt recovery ratios within SDM indicate that there is reason to believe that a significant factor contributing to poor revenue collection in SDM arises from an inability of customers to meet their payment obligations. This is a factor that exists independently of the quality of the customer metering and revenue collection/management system. The solution option selected needs to be cognisant of the reality that, at least for the near term future, a large number of customers in SDM jurisdiction may not be able to pay water service charges required to maintain the water supply infrastructure.

Based on the analyses of relevant capital and operational expenditure budgets, it is clear that no specific budgetary provision has been availed in the Medium-Term Revenue and Expenditure Framework (MTREF) by the SDM for the expected capital or operational expenditure of the Project, which is the rollout of smart water meters to customers.

Institutional Analysis The meter management process involves various stakeholders, with the key responsible department being the Revenue Division within the SDM Budget and Treasury Department. Other key stakeholders within the SDM include the Spatial Planning Section, the Customer Care Section and the Infrastructure and Water Services Department of the SDM. The experience of the SDM is limited to administrative management of the metering lifecycle for the management of approximately 10 000 meters. The SDM has predominantly performed the administrative roles within the metering lifecycle and has limited experience in the implementation thereof.

SDM has limited experience in the rollout of smart meters. SDM recently (in 2016) rolled out 350 smart meters in an area near Burgersfort, within the Greater Tubatse Local Municipality. The experience in the rollout of these meters has not provided the SDM with experience in the management of the meters – specifically related to the operation and maintenance requirements for the electrical components at scale throughout the entire lifecycle of the meters – which have an expected useful life of 10 years.

2-5 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT Output Specifications The Project will have the following overarching output specifications: Meter Management (infrastructure) • All meters, systems and process comply with relevant standards, legislation, policies or bylaws;

• Meters are monitored remotely using an integrated GIS interface based on latest data;

• Accurate meter and customer information is updated on all municipal databases;

• Faulty meters are replaced within 30 days;

• Free basic water allocations are provided to indigent households, payment over this threshold is enforced; Revenue Management • Revenue collection rates for all water and sanitation service charges exceed 95%;

• Meter reading intervals do not exceed 40 days;

• Customer meter consumption and billed consumption are within a 10% tolerance;

Customer Management • Customers can conveniently pay for their water service charges;

• All customers are metered within the area, independent of customer type; Report Management The following reports are produced per managed area on a monthly, quarterly and annual basis:

• Water balance;

• Revenue management (billed revenue, collections, debt);

Scope of the Project Meter Management The Project will include the entire meter lifecycle, as indicated in Figure 2-4.

2-6 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT

Meter Installation Meter reading Meter auditing Billing processes

Indigent Meter Credit Control Receipting management replacement

Figure 2-4 The meter reading lifecycle It is expected that a delivery arrangement will be as per Figure 2-5, where the SDM will perform a regulatory (governing) role, making use of a meter management system to monitor the successful rollout of the Project.

Figure 2-5: Example of the eternal service delivery arrangements with prepaid meters Implementation The project scope is expected to be implemented within three different stages:

• Handover stage: This stage is the transition stage from legacy meters managed by the SDM to the smart meters managed by the PPP Operator.

• Development stage: This stage will be implemented by the PPP Operator and will predominantly be focused around the installation of meters, i.e. construction works; and

• Operational stage: This stage will be implemented by the PPP Operator and will predominantly be focused around meter management, i.e. meter reading, auditing, billing, vending, reconciliations, etc.

2-7 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT 3 TECHNICAL SOLUTION OPTIONS ANALYSIS

Options considered The technical options available for customer metering were investigated and the following technologies were included within the analysis:

• Post-paid metering solutions

o Conventional meters; and

o Automatic meter reading (AMR) meters.

• Prepaid metering solutions

o Token-based prepaid meters; and

o STS-based prepaid meters.

The technologies are available in the market and have been used extensively across the world and in South Africa. Their application is specific to the type of customers. The meter technologies are indicated in Figure 3-1 to Figure 3-4, and an example of a meter management system is indicated in Figure 3-5. The meters were considered within the relevant regulations and standards. The standards associated with water metering include:

• SANS 1529-1: Metrological characteristics of mechanical water meters of nominal bore not exceeding 100 mm;

• SANS 1529-3: Physical dimensions;

• SANS 1529-4: Mechanical meters of nominal bore exceeding 100 mm but not exceeding 800 mm;

• SANS 1529-9: Requirements for electronic indicators used with mechanical water meters, electronic water meters and electronic prepayment water measuring systems.

Prepaid meters which provide electronic tokens, using the Standard Transfer Specifications (STS) protocol must also be approved by the STS Association in compliance with IEC 62055-41 and IEC 62055-51, where

• IEC 62055-41: STS – Application layer protocol for one-way token carrier systems; and

• IEC 62055-51: STS – Physical layer protocol for one-way numeric and magnetic card token carriers.

Finally, it is required that the meters are manufactured with ISO 9001 compliant processes.

The meters would be synced into an integrated Meter Management System, integrating into the Fixed Asset Register and the Billing System (including the municipal and prepaid billing system). The software provides a spatial view of the metered customers and links to the cadastral boundaries of the properties within the municipal jurisdiction, as indicated in Figure 3-5.

3-8 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT

Figure 3-1: domestic (residential) customer metering applications

Figure 3-2: Commercial customer (bulk) metering applications

Figure 3-3: Communal (shared) metering applications

Figure 3-4: Bulk (zonal) metering applications (non-billing related)

3-9 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT

Figure 3-5: Example of the spatial analysis available within a meter management system

Evaluation and assessment The technologies were assessed at each stage within the meter lifecycle based on their technical capabilities and limitations, compliance requirements, financial considerations, and major risks of the technologies. The technologies were detailed separately and were evaluated accordingly, based on the PPP Municipal Guidelines, including an evaluation of the:

• Technical capabilities; • Evaluation to the Output Specifications;

• Risks; • Qualitative factors;

• Human resources; • Financial implications;

• Site issues; • Funding and affordability;

• Delivery arrangements; • Transitional management considerations;

• BEE and other socio-economic factors; • Considerations for external service delivery.

All technical options had risks and opportunities. These risks were considered within a risk register and mitigating measures must be put in place to mitigate these risks as far as possible. A summary of the benefits and disadvantages of each technology is summarised in Table 3-1.

3-10 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT Table 3-1: Risk overview for the rollout of various meter technologies

Token-based Prepaid STS-based Prepaid Conventional Meters AMR Meters Meters Meters

Advantages Payment is received upfront Payment is received Meter readers are not upfront Accurate meter Low capital start-up used for billing purposes readings costs Meter readers are not Statements don’t have used for billing purposes Meter reading can be Low maintenance to be printed or posted obtained ad hoc, or at requirements by Municipality Statements don’t have to be printed or posted selected times Reduction in bad debt by Municipality Customer is responsible Reduction in bad debt for water service payment

Disadvantages High capital start-up costs for the Automatic Limited guarantee of High capital start-up High capital start-up Metering Infrastructure revenue collection by costs costs SDM Limited guarantee of Increased monitoring Increased monitoring revenue collection by Payment is invoiced and evaluation and evaluation SDM as payment is after services are used requirements requirements invoiced after use

Customer water leak Additional maintenance Additional maintenance Customer water leak may flow for extended requirements requirements may flow for extended periods before it is Additional fees for the Additional fees for the periods before it is repaired payment of vendors (1% payment of vendors (1% repaired SDM is responsible for - 6% of each - 6% of each Additional maintenance customer payment transaction) transaction) SDM is responsible for customer payment

Recommendations The multi-criteria analysis indicated that the prepaid solutions provided the most benefit for the SDM in terms of the needs analysis and output specifications for smart meter solutions. Specifically, the STS-based prepaid system provided the most benefit for domestic customer metering applications. However, the technological limitations of the STS-based prepaid system means that this option is not viable for all metering applications within the SDM. The selected solution for each metering applications is indicated below:

• Domestic customer metering: STS-based prepaid meter

• Bulk customer metering: STS-based prepaid meter (for meter diameter up to 50mm)

AMR meter (for meter diameter greater than 50mm)

• Bulk zonal metering: AMR meter

• Communal metering: Token-based prepaid meter

3-11 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT 4 SERVICE DELIVERY OPTIONS ANALYSIS

Options considered The current institutional arrangements for the meter management lifecycle are indicated in Table 4-1 for each meter technology. The SDM are currently performing the administrative roles within the meter management lifecycle and are making use of external services providers for discrete work packages.

Table 4-1: Recommended technologies based on current service delivery arrangements

Prepaid STS Prepaid Token-based AMR AMR Meter Process (Domestic Customers) (Communal Customer) (Bulk Customers) (Bulk Zonal Meter)

Meter Installation External External External External

Meter Reading External External External External

Meter Auditing External External External External

Billing Processes External External Internal N/A

Credit Control N/A N/A External N/A

Receipting Internal Internal Internal N/A

Indigent Management External External N/A N/A

Meter Replacement External External External External

The Service Delivery Options considered two approaches, the first was internalising all services within the SDM and the second was making use of an external service provider to implement and manage the entire meter management lifecycle.

Evaluation and assessment The assessment of the service delivery option is summarized in Table 4-2 based on a detailed assessment of each component of the meter management lifecycle. The assessment evaluated the advantages and disadvantages of implementing the metering lifecycle through either internal or external delivery mechanisms. Based on the assessment, the most viable service delivery option was using the external service delivery option.

Table 4-2: Summary assessment of Service Delivery Options

Option Advantages Disadvantages Risk transfer

Internal Service Delivery • Internal management of services • Large capital expenditure No risk transferred • Direct and indirect job creation requirements; opportunities; • Limited funding available will • Technical Risk: SDM • Enhanced management of water mean a slow rollout of the meter • Financial Risk: SDM losses; installations; • Operational Risk: SDM • Internal capacity building. • Slow increase in revenue from slow meter rollout; • Limited experience in implementing the meter lifecycle through internal processes; • Municipal procurement processes require long lead time for supply of goods and services; and

4-12 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT • High financial risk of employing permanent staff whilst potentially not receiving revenue. External Service Delivery • External service providers’ • High transitional management All risk transferred performance managed based on requirements in transferring contractual obligations; data from the SDM to the • Technical: External • Rapid rollout of meter external service provider. This is • Financial: External installations; to ensure that current meters • Operational: External • Direct and indirect job creation are still read and that all opportunities; information is accurately • Enhanced management of water transferred onto the metering losses; systems. • All procurement and contracts managed through external service provider; • Payment for metering distributed through contract lifecycle.

Recommended option The SDM have shown a willingness to internalise operational services. However, within the current metering service offering, a large portion of the metering lifecycle is conducted through external service providers (meter installations, reading and audit, invoicing, and credit control). Thus, there is limited technical skill to rapidly internalise these services. It is suggested that a phased rollout strategy could be used for the development of such capacity. However, there is an urgent need to increase the SDM’s internal revenue generation whilst reducing their water losses. This is driven by the limited existing water supply capacity and the burden of water infrastructure development required within the SDM (as detailed in the Water Services Development Plan and Master Plan). This will require large capital and operational allocations for such infrastructure development. Hence, the main limitation to implementing an extensive meter rollout programme will be capital and the required cash flow to rapidly rollout the meter installation and sustain the meters’ continued operation.

The service delivery options analysis recommended the external service delivery mechanism based on the benefits to an external service delivery option. The major benefit being that the smart meter process can be rapidly rolled out to areas within the SDM.

The analysis identified that there was capacity within the private sector to manage projects of this scale, based on the current technology and infrastructure available, both locally within South Africa, and internationally. There is also capacity within the private sector to fund such projects through an annuity based income. The exact funding model for the Project rollout will be evaluated through the Value Assessment stage. Making use of an external service provider to build and operate the metering lifecycle provides a mechanism for the SDM to rapidly increase internal revenue generation whilst reducing their water losses.

Despite the recommendation for an external service delivery arrangement, the SDM will be responsible for performing its constitutionally mandated metering activities. The SDM will remain accountable for efficient delivery of the metering lifecycle, despite contracting the tasks.

4-13 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT 5 PROJECT DUE DILIGENCE

Legal aspects The SDM have the constitutional mandate to provide basic services to all, which must be implemented and monitored through a strategic plan which relates to the water policies and bylaws of the SDM. Importantly, it is noted that the Mazibuko case (Mazibuko and Others v City of Johannesburg and Others - CCT 39/09 [2009] ZACC 28) provided clarity that the citizen’s right to basic services is not without limitation, and that the customer has responsibilities to inter alia pay for their water services, where it exceeds the free basic water allocation.

The legal due diligence indicates that the SDM have the authority to make use of an external service provider for implementing the metering lifecycle. The SDM can make use of the service tariffs, grants, or other revenue sources to pay for all such services.

There is motivation to investigate the appropriateness of the tariffs within SDM for sustainable cost recovery based on a high-level assessment of the reported figures within the Annual Financial Statement 2015/16. At this stage, no conclusive recommendation can be made, as the assessment does not consider operation or maintenance costs related to the delivery of water, nor factors such as water losses or customer non-payment.

Should the prepaid solution be used for as the technical solution, then the SDM will have to re-evaluate their tariff structure for variable consumption rates to ensure that the revenue collected from the prepaid meters does not result in a loss of revenue to the SDM.

The SDM are required to make provision within their policies and water bylaw so as to provide procedures through which a reasonable period is clearly defined with application to prepaid, AMR, and conventional meter payment for services. It is recommended that the Credit Control Policy provide such clarity on the permanent and temporary discontinuation of water services, which are inherent functions of the prepaid water metering systems. The SDM are required to have metering guidelines in place to ensure that the customer meters are equitably installed for all customers. These guidelines can either be adopted as part of the water bylaws or as a separate guideline or policy.

Site enablement The site enablement issues which are specifically related to the project include the following areas, namely the:

• construction site camp; • sites where the prepaid vendors are located; and

• sites where meters are installed; • operations site camp.

The PPP Operator shall require a site during the construction and operational stages. Such sites must be available to the PPP Operator for storage of new meters (where meters are to be installed) and old meters (where faulty/defunct meters are to be removed), and all the ancillary materials, equipment and tools. The site must have access to infrastructure, such as access roads, water, electricity, and internet connectivity. The PPP Operator shall be responsible for the leasing of such land.

Where the smart meters make use of prepaid meter technologies, customers must be able to purchase credit from a physical vendor. These prepaid vendors must be strategically based within the areas where prepaid meters are installed. The vendors shall, where required, consist of one or more local or franchise stores, service stations, or other points of sale, where access to electricity and internet connectivity is available.

5-14 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT Domestic water meters are to be installed where there is water reticulation to the customers, whether a yard or house connection. Communal water meters are to be installed where stand pipes are provided to communities who do not have access to an on-property water connection. The meters are to be installed based on the municipal water meter installation policy or guideline. The location of the meters is preferably within the road reserve, or within the customer property. A typical installation schematic diagram is indicated in Figure 5-1. The location of the meter cannot inter alia obstruct the flow of traffic.

Figure 5-1: Typical location of the customer water meter

Smart Meter System requirements The technology associated with the smart meters (whether prepaid or AMR meters) must input all information into the meter management system with the output data in required mSCOA formats. The tariff structure on the prepaid meters should be as per the current tariff structures, including block tariffs and free basic water provision for indigent households. It is recommended that prepaid water meters are annually provided with a once-off emergency water volume – which is paid back the next time that the customers purchase and load credit.

Furthermore, the SDM will require a meter management system to manage the metering information provided by the PPP Operator and the metering information obtained from the areas outside of the PPP Operator’s jurisdiction. It is recommended that the SDM negotiates the use of the PPP Operator’s system for internal use and that all existing systems be integrated with the selected meter management system proposed by the private party.

Smart Meter System Rollout Plan The project rollout is expected to consist of three stages, namely:

• Handover Stage;

• Development Stage; and

• Operations Stage

It is noted that the PPP Operator shall have to identify a project rollout plan based on the available data provided to the bidders during the RFP documentation.

5-15 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT Socio-economic and BEE Socio-economic recommendations suggested that community leaders and ward councillors need to be consulted before and during construction to ensure community buy-in during the construction works related to the meter installation and replacement. This will not only be for community buy-in, but also in sourcing local labour, and the identification and confirmation of appropriate vendors which can be used to sell credit, if required for the system’s operations. Customer communications will be provided by the PPP Operator and will include communications related to the operations of the metering system.

Customer Socio-Economic Factors The SDM predominantly services indigent households within its jurisdiction. The effect of the high percentage of indigent households within the SDM will mean that there will be a substantial reliance on the free basic water allocation. The Project will focus on the Growth Areas, as indicated in Figure 2-1, and the Project will focus on the economically active customers who have access to municipal water connections in their property. This will enable the SDM to enhance their revenue collection capacity and fulfil their mandate to deliver services to all. Job creation opportunities The Project consists of both construction works, i.e. works related to the installation, replacement, or repair of the water meters and the associated infrastructure, and the operations works, i.e. works related to the meter reading, auditing, billing, collections, and reconciliations. It is expected that opportunities would be created through the construction works and opportunities would be created through the operations works. It is important to define annual work opportunities as the number of jobs created in a single year, which have an employment, or opportunity, term of one year. Therefore, the project may expect a total of 600 annual work opportunities throughout the project term this translates into, for example, approximately 20 full-time permanent jobs for the construction works, and 200 temporary work opportunities with a temporary employment term of one year. The operations works would create approximately 80 permanent jobs during the project term, and approximately 1 500 temporary work opportunities with a temporary employment term of one year.

The effects of this project are estimated to be a net positive impact within the community. The job opportunities created through the project are expected to have a direct impact on the local economic environment. Although not accounted for, there are also ancillary jobs in related industries (i.e. material supplies, increased turnover in local shops during construction, etc.) which were not taken into account.

Project Structure Project structure recommendations are that the SDM will require an internal project structure to interface directly with the private party in order to ensure compliance against the objectives of the project and the related key performance indicators. The information obtained from the private party will need to be processed and analysed into the required SDM systems and integrated into the metering being implemented by the SDM.

5-16 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT 6 VALUE ASSESSMENT

Approach Two possible approaches exist for the development of the Value Assessment. These options were:

1. Full value assessment: Under this approach, the value assessment prepares a risk-adjusted Public Sector Comparator (PSC) model and compares the results of this against the results of a risk adjusted external reference model in order to determine affordability, value for money and risk transfer.

2. Simplified value assessment: Under this approach, the value assessment is not required to prepare a Public Sector Comparator (PSC) because a preliminary assessment arrives at the conclusion that the public sector procurement option does not present a feasible option. Affordability, value for money and risk transfer are therefore assessed based on quantitative parameters and qualitative considerations.

The simplified value assessment was used for the project based on the following criteria:

1. The nature of the project under consideration;

2. The capacity of the government institution to undertake the project. More specifically, capacity relates to legal, technical, financial capacity among other factors incidental to the project;

3. How the project will be funded;

4. Whether the municipality has the technical capacity and experience to execute the project with minimal risk.

External Reference Model The risk-adjusted external reference model was developed through a financial model setting out financial projections. The financial model took into account a set of assumptions based on the Technical Options. The financial model primarily covered:

1. Periodic unitary fee paid to the service provider by SDM

2. Capital expenditure estimates i.e. the costs of installing the smart meter system, other supplementary non-current assets such as storage facilities and vehicles, and associated project development costs

3. Operating (lifecycle) costs for the smart meter system

4. Bulk water purchases: This cost is allocated to SDM

5. Financing of capital and operating costs

A risk matrix detailing the various technical, financial and legal risks of the project was prepared for the risk adjustment of the model. These costs were subsequently costed on the basis of estimates of:

1. Probability of occurrence

2. Impact of occurrence

3. Base cost factors (nominal totals for capital expenditure and/or operating expenditure over the projection period and the estimated unitary fee arising from the relevant number of households covered)

6-17 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT 4. Allocation of risks according to which party between SDM and the private party is best placed to manage it

An indicative value for money assessment was based on estimation of the net revenue (sale of water revenue less variable unitary fee (commission) paid to the service provider over the 15 year period). The final value for money assessment shall be the product of the evaluation of financial and technical proposals that would be provided by a preferred bidder in a PPP procurement process.

The term of the proposed PPP was based on the following assumptions and factors:

1. The initial rollout of meters is expected to be concentrated over the development period i.e. the first 4 years. Thereafter, installations shall relate to organic growth in number of households.

2. All meters have a 10 year expected useful life. On transfer of the meter system back to SDM, SDM should receive a functional system with most meters still having a reasonable time to the end of their useful life

3. The private party should make an adequate return over the term

4. A summary evaluation of the above criteria and the basis for a 15 year term

The various payment structures available for the project were based on Figure 6-1. All four payment structure options were considered and the appropriate payment structure for the Project will be decided during the procurement stage, based on the bidder responses and the views and recommendations from National Treasury. The SDM’s preferred option is Option 1 in Figure 6-1.

INCREASING RISK TO SDM

OPTION 1 OPTION 2 OPTION 3 OPTION 4

Variable Variable unitary Partially fixed unitary fee: Fully fixed unitary unitary fee fee based on a fee payable based % monthly fee per 1. Fixed portion to cover debt periodically based commission meter installed service costs incurred by on a fee per meter private party of value of and operational installed 2. Variable portion based on a tokens sold monthly fee per meter installed and operational

Figure 6-1: Alternative unitary fee structures available for the Project

6-18 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT Figure 6-2 presents a high-level representation of the possible flow of money under the selected option:

DEBT CAPITAL EQUITY CAPITAL PROVIDERS PROVIDERS

SEKHUKUNE DISTRICT MUNICIAPLITY PRIVATE PARTY CONSUMERS

RING-FENCED COLLECTION ACCOUNT

Figure 6-2: Potential flow of money

Outputs of the Financial Model Value for money In the context of this project, a key aspect of value for money is the extent to which revenue to SDM is enhanced through the rollout of the meters. The indicative value for money shows a net positive position after adjusting for estimated risks to be retained by SDM over the development and operations periods. The value assessment concluded that the external reference model offers greater value for money than a continuation of the status quo. Risk transfer The PPP model offers opportunities for significant risk transfer from SDM to the private party. On the whole, the risks retained by SDM are less than those that it would have to bear if the status quo was to continue for the foreseeable future. The value assessment concludes that the PPP model is a more favourable option than the continuation of status quo with regard to risk transfer.

Conclusion and Recommendation The results of the value assessment conducted conclude that the external reference model demonstrates value for money over the option of continuing under the status quo. It is therefore recommended that SDM adopts a PPP model as the preferred procurement option for the project.

6-19 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT 7 PROCUREMENT PLAN

Overview The Feasibility Study will be presented to Council for a resolution whether to proceed to procurement. This section outlines the procurement stage which will be implemented should SDM Council resolve to proceed with procurement. The procurement plan is considered to consist of the following phases:

• preparation for the bidding process; • evaluation of the bids received; and

• bid process; • negotiation with the Preferred Bidder.

The procurement plan details each of these components including the factors influencing procurement, governance and decision making, bid evaluation processes (technical and financial evaluation), quality assurance, and stakeholder involvement. This plan is established around two legislative requirements. Firstly, processes and procedures to ensuring equity, transparency, competitiveness and cost-effectiveness of the procurement process in terms of the constitution and the SDM’s Supply Chain Management policy. Secondly, the ability of the SDM to procure, implement and enforce monitor and report on the project.

The SDM have appointed the Transaction Advisors for both the Feasibility and Procurement stages of the PPP project, and therefore have budgeted sufficient funds and procured advisors to achieve TVR III. The project team and roles and responsibilities are detailed within the Procurement Plan and the project stakeholders and the extent of their involvement in the PPP option are indicated in Figure 7-1.

Figure 7-1: Proposed Project Structure

The procurement methodology used within this Project is the full concession PPP. The proposed project structure indicates that the external operator (PPP Operator) will manage all financing, risk, and technical matters and will deliver a turnkey meter management solution to the SDM. The envisioned payment mechanism is that the SDM will pay the service provider monthly based on a revenue share model, which is based on the contractually agreed performance indicators.

The procurement plan will follow the National Treasury Municipal Service Delivery and PPP Guidelines. The following tasks are expected to take place during the procurement stage of the Project.

7-20 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT • Obtain Treasury Views and Recommendations (TVR IIA) for relevant procurement documentation

• Request for Qualification (RFQ)

o Prepare and issue documentation, and receive and evaluate responses

• Request for Proposal (RFP)

o Prepare and issue documentation, and receive and evaluate responses

• Prepare Value Assessment report

• Obtain Treasury Views and Recommendations (TVR IIB)

• Negotiate with preferred bidder and finalise contract management plan

• Obtain comments from interested stakeholders (general public and government institutions)

• Obtain Treasury Views and Recommendations (TVR III)

• Council passes resolution authorising execution of the PPP contract

• SDM accounting officer signs PPP agreement

The appointment of the PPP Operator will only be considered after Treasury Views and Recommendations and input is obtained from interested stakeholders. The Project must also indicate Value for Money.

The procurement plan was expected to be implemented within the next two financial years. Challenges related to delays in approvals or internal supply chain management processes or any other deviations will be managed by the SDM Project Officer to ensure that the processes are followed and that the procurement plan is successfully implemented.

7-21 SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT

8 COMMENTS, VIEWS AND RECOMMENDATIONS In terms of the National Treasury Municipal Services and PPP Guidelines, the Feasibility Study was submitted to the National Treasury for views and recommendations and a summary is herein made available to interested parties, including the general public and government bodies. This document is provided 60 days before the Feasibility Study will be presented to Council. All interested stakeholders are provided 30 days within which to submit feedback on the Feasibility Study. You are invited to submit all comments, clarifications or feedback to Busisiwe Matjie from the Sekhukhune District Municipality at:

Name: Busisiwe Matjie (Acting CFO) Postal Address: Sekhukhune District Municipality Private Bag X8611 Groblersdal 0470 Tel: 013 262 7680 Fax:086 270 7551 Email: [email protected] Address: Cnr Chris Wiid & van Reebek Street, Groblersdal

Please include the following with your feedback:

Full Name and Surname: Address: Contact Number(s): Email: Affiliation (company or institution):

All feedback must be provided within 30 calendar days from the issue of this notice. All responses will be collected and incorporated into the Feasibility Study as an annexure for Council consideration. The completed feasibility report will then be distributed to all pertinent municipal departments 20 days prior to the Council meeting and to the council members with department comments 10 days prior to the Council meeting. Based on feedback from the general public and the views and recommendations from National Treasury, the SDM Council will table a resolution whether to proceed with procurement.

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