The City of Tshwane approved a broadband project that will bind it for 18 years through a build, operate and transfer (BOT) contract to a newly formed company, of which 41% of its shareholding is “still available”.

The project was approved by the city council last week despite serious concerns raised by both the Gauteng and national treasuries about, among other things, a flawed procurement process.

National treasury told the city in a letter dated 29 March that the project should take the format of a public private-partnership (PPP) and advised it to “void the tender and commence with the processes as outlined in the Municipal Systems Act, Municipal Finance Management Act and the PPP regulations.

National treasury has a special PPP unit and all municipal, provincial and national PPPs have to be registered with the unit and subjected to its prescribed and very rigorous procurement process. The development of the city’s new headquarters is currently underway as a PPP.

The city’s decision to proceed despite the objections comes against the backdrop of its prepaid smart metering contract with PEU Capital — also concluded despite the strongest objections by finance minister Pravin Gordhan.

Tshwane mayor Kgosientso Ramokgopa in May last year admitted that the city had in about eight months spent R830m on the contract and it was unaffordable. He announced that the contract was cancelled and would come to an end in December, but it is currently still intact and millions of rand keep flowing to PEU daily.

In an e-mail dated 20 April, about a week before the project was approved by the council, Gauteng treasury said: “The city is clearly financing the project through the private sector and paying off the cost over the project term and hence the argument that the project does not represent a PPP does not convince us.”

It is clear from the correspondence that both the provincial and national treasuries had extensive interactions with the City of Tshwane and found the responses to their numerous concerns wanting.

Altech
The approval of the broadband project comes after Altech Alcom Matomo was appointed in June last year, following what the two treasuries consider to be a flawed tender process.

In terms of the award the project would be designed and built through a special purpose vehicle currently named Newshelf 1327.

Newshelf was registered with the Companies and Intellectual Property Commission in August last year.

Responding to questions from Gauteng treasury, the City said the following about Newshelf under the heading “Funding”: “Debt R1bn (70%) (Absa, DBSA and IDC have all expressed interest in a portion of the debt). Equity: R430 million (30%). Absa has been appointed as sole lead arranger.”

It further said Altech Alcom Matomo parent Altech Radio Holdings would have and maintain a 9% shareholding for five years. Cloudseed and New GX Capital Holdings would each have 25% and 41% is listed as “available”. The city adds that the special purpose vehicle has received a lot of interest in the stake, and is currently shortlisting the interested parties. It would probably be a financial institution interested in infrastructure investment, the city said.

The city further said the special purpose vehicle will have a small management team and is currently looking to find a CEO candidate. The EPC (engineering procurement and construction) and O&M (operations and maintenance) is contracted to Altech Radio Holdings, it said.

All the shareholders in the SPV will be required to give a standby equity guarantee, and further EPC and O&M performance guarantees would be required, the quantum of which will be confirmed by the lender’s technical advisor.

In terms of the contract, the city has to pay an annual off-take amount of R278m. The council approved that R152m of its current ICT operational budget and R43m from the capital budgets of the ICT, electricity and metro police departments be reprioritised for this purpose. The report stated that the city considers funding the R82m shortfall with R40m in 2016/2017 and a further R42m in 2017/2018.

It is further envisaged that the city as “anchor tenant” would receive 30% of the special purpose vehicle’s profits from other clients using the network.

Moneyweb asked the city how much would be spent on the project in the current financial year, ending 30 June. The response was: “The amounts payable are currently estimates and therefore will only be solid once detailed project plans have been agreed upon. All amounts due to service providers are payable upon invoicing and satisfaction by the city (as the client) as prescribed by service level agreement complementing the Municipal Finance Management Act, regulations and prescripts, the same applies in this instance.”

In response to a question about the effect of the national and provincial treasuries’ objections to the project, the city said: “The province and national treasury have not objected to the project, they made comments and provided advisory on the project as required by our intergovernmental relations framework. The effect of such interactions (not objection as you suggest) is limited to the powers and functions of those spheres of government and equally, the powers and functions of the municipality as a separate legal entity is prescribed by national, provincial and local by-laws.”

National Treasury has not yet responded to questions on the matter.