sekhukhune district municipality · the sdm are faced with significant challenges in the rollout of...

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

Groblersdal

0470

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

Contact Person: Busisiwe Matjie

Tel: +27 13 262 7680

email: [email protected]

mailto:[email protected]

SMART METER SYSTEM REVENUE ENHANCEMENT PROJECT

SEKHUKHUNE DISTRICT MUNICIPALITY PUBLIC REQUEST FOR COMMENT

i

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 South Africa 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.



ii

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.



iii

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



iv

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

https://smecnet-my.sharepoint.com/personal/pc2704899_smec_com/Documents/JD0014%20-%20SDM%20PPP%20Smart%20Meter/TVR%201/10_Request%20for%20Comment%20v2.docx#_Toc486244658



1-1

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.



2-2

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)

Customer Type Number of

Households Number of People

Access to Piped

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%



2-3

The main growth areas within the SDM have been identified as:

• Apiesdoring

• Burgersfort

• Groblersdal

• Klipbank

• Marble Hall

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.



2-4

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.

5%

28%

21%

11%

2% 1% 3%

29%

0

20 000

40 000

Piped insidedwelling

Piped insideyard

200m fromdwelling

200 - 500 fromdwelling

500 - 1000mfrom dwelling

> 1000m fromdwelling

Other No access topiped water

No

. of

Ho

use

ho

lds

Elias Motsoaledi Ephraim Mogale Makhuduthamaga Fetakgomo Greater Tubatse



2-5

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.

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.

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

2014

2015

2016

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



2-6

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.



2-7

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.

Meter Installation Meter reading Meter auditing Billing processes

Credit Control ReceiptingIndigent

managementMeter

replacement



3-8

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.



3-9

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)



3-10

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;

• Risks;

• Human resources;

• Site issues;

• Delivery arrangements;

• BEE and other socio-economic factors;

• Evaluation to the Output Specifications;

• Qualitative factors;

• Financial implications;

• Funding and affordability;

• Transitional management considerations;

• 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.



3-11

Table 3-1: Risk overview for the rollout of various meter technologies

Conventional Meters

Token-based Prepaid

Meters

STS-based Prepaid

Meters AMR Meters

Advantages

Low capital start-up

costs

Low maintenance

requirements

Payment is received

upfront

Meter readers are not

used for billing purposes

Statements don’t have

to be printed or posted

by Municipality

Reduction in bad debt

Customer is responsible

for water service

payment

Payment is received

upfront

Meter readers are not

used for billing purposes

Statements don’t have

to be printed or posted

by Municipality

Reduction in bad debt

Accurate meter

readings

Meter reading can be

obtained ad hoc, or at

selected times

Disadvantages

Limited guarantee of

revenue collection by

SDM

Payment is invoiced

after services are used

Customer water leak

may flow for extended

periods before it is

repaired

SDM is responsible for

customer payment

High capital start-up

costs

Increased monitoring

and evaluation

requirements

Additional maintenance

requirements

Additional fees for the

payment of vendors (1%

- 6% of each

transaction)


costs

Increased monitoring

and evaluation

requirements


requirements

Additional fees for the

payment of vendors (1%

- 6% of each

transaction)


costs for the Automatic

Metering Infrastructure

Limited guarantee of

revenue collection by

SDM as payment is

invoiced after use

Customer water leak

may flow for extended

periods before it is

repaired


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



4-12

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

Meter Process Prepaid STS

(Domestic Customers)

Prepaid Token-based

(Communal Customer)

AMR

(Bulk Customers)

AMR

(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

• Direct and indirect job creation opportunities;

• Enhanced management of water losses;

• Internal capacity building.

• Large capital expenditure requirements;

• Limited funding available will mean a slow rollout of the meter installations;

• 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

No risk transferred

• Technical Risk: SDM

• Financial Risk: SDM

• Operational Risk: SDM



4-13

• High financial risk of employing permanent staff whilst potentially not receiving revenue.

External Service Delivery • External service providers’ performance managed based on contractual obligations;

• Rapid rollout of meter installations;

• Direct and indirect job creation opportunities;

• Enhanced management of water losses;

• All procurement and contracts managed through external service provider;

• Payment for metering distributed through contract lifecycle.

• High transitional management requirements in transferring data from the SDM to the external service provider. This is to ensure that current meters are still read and that all information is accurately transferred onto the metering systems.

All risk transferred

• Technical: External

• Financial: External

• Operational: External

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.



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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 meters are installed;

• sites where the prepaid vendors are located; and

• 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.



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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.



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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.



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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)



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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.

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

INCREASING RISK TO SDM

OPTION 1

Variable unitary fee

based % commission of value of tokens sold

OPTION 2

Variable unitary fee based on a

monthly fee per meter installed and operational

OPTION 3

Partially fixed unitary fee:

1. Fixed portion to cover debt service costs incurred by private party

2. Variable portion based on a monthly fee per meter installed and operational

OPTION 4

Fully fixed unitary fee payable

periodically based on a fee per meter

installed



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Figure 6-2 presents a high-level representation of the possible flow of money under the selected option:

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.

SEKHUKUNE DISTRICT MUNICIAPLITY

RING-FENCED COLLECTION

ACCOUNT

PRIVATE PARTY CONSUMERS

DEBT CAPITAL PROVIDERS

EQUITY CAPITAL PROVIDERS



7-20

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;

• bid process;

• evaluation of the bids received; and

• 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.

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.

Figure 7-1: Proposed Project Structure



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• 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.



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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.