A week before a report recommending the approval of a transformer lease to Coega Steels was tabled at council on Tuesday, a legal opinion obtained by the Nelson Mandela Bay municipality flagged irregularities, warning that the deal should be set aside.
The R25m transformer was procured to provide backup for the Swartkops and Greenbushes substations.
It was being used at another substation as part of an ongoing project.
However, on September 11, an agreement was signed to lease the unit to Coega IDZ-based Coega Steels, at R250,000 a month for a year.
However, a legal opinion found the move contravened the Municipal Finance Management Act (MFMA) regulations for asset transfers.
The regulations require that for a municipality to grant a right to use or control an asset worth more than R10m, a public participation process must first be done.
The council must then approve the decision.
On Sunday, GOOD’s Lawrence Troon reported a case to the Humewood police station for the unauthorised relocation of the transformer against former acting city manager Ted Pillay.
The decision to lease the transformer comes after Coega Steels appealed to the municipality, saying its failed transformer had brought production to a halt and was costing the company about R700,000 a day in losses.
This directly and indirectly affected its clients, suppliers and about 300 employees, many of whom were placed on short-term rotational work as a result.
Coega Steels further indicated plans to expand its operations by the end of 2025, which would see its annual electricity bill rise sharply.
Between January and July 2025, it paid R141m to the metro, and this was estimated to rise to R360m.
Though Coega Steels already has the transformer, the council on Tuesday voted against the decision.
This was after an outcry from councillors, who were angered that the proposal had been brought to the meeting merely for rubber-stamping.
Acting city manager Lonwabo Ngoqo said the agreement and transactions with Coega Steels were unlawful and should be reviewed and set aside by a court.
This is after it emerged that the legislative framework had been flouted, and a formal risk assessment on the potential impact on the city’s network from the removal of the transformer was not concluded.
At the time of publishing, Pillay had not replied to questions.
Coega Steels had also not responded to questions.
A leaked legal opinion seen by The Herald was obtained by the city on October 20, a week before Tuesday’s council meeting.
In it, advocate Shaheed Patel said the agreement may have breached sections of the MFMA.
The document reveals that Coega Steels wrote to the municipality on August 21, informing it of its transformer failure and subsequent production challenges.
The next day, Pillay wrote back and told the company that the municipality would lease a 63MVA Transformer to Coega Steels.
He then revealed the terms of the arrangement despite no approval from the council.
“It is expressly understood that Coega Steels will receive and commission the 63MVA Transformer,” according to an extract contained in the opinion.
“In addition, Coega Steels will ensure that the leased transformer is insured at its replacement value, being R25m.
“A formal agreement for the rental will be drafted to give effect to this lease,” Pillay wrote.
Pillay was seconded to the city, and his term ended in October.
On September 4, former acting electricity and energy executive director Tholi Biyela drafted a memorandum to mayor Babalwa Lobishe, where he proposed that 1% of the value of the asset be used to determine the monthly rental of R250,000.
He said Coega Steels must be requested to ensure the leased transformer is replaced at its replacement value.
The transformer is valued at about R25m with 132/22kV, 63MVA specifications.
He warned that budget and treasury officials had raised several concerns regarding governance and that council approval would need to be sought before a lease was signed.
However, due to the urgency of the request, it was advised that an MOA be signed with the company using a mayor’s resolution.
This would be done to satisfy cautions from the legal services department.
“Upon conclusion of the MOA, permission is granted for the immediate removal and relocation of the 132/22kV, 63MVA transformer from the Sonop Substation to Coega Steel to mitigate ongoing operational and financial losses [at Coega Steels],” the recommendation read.
The memorandum was then signed and approved by Biyela, Pillay and Lobishe on September 4.
The signing of a five-page lease agreement followed on September 11.
On September 12, Pillay wrote a letter to the National Treasury, the provincial treasury and Cogta stating that a due diligence exercise in relation to the MFMA, the supply chain management policy and other bylaws had been undertaken.
Patel, however, in his opinion, said the administrative decision to enter into the lease agreement was unlawful.
“The acting city manager’s unilateral decision, taken within 24 hours of receiving the request from Coega Steels, constitutes not only a procedural breach but an egregious disregard for the statutory checks and balances that govern the disposal or leasing of municipal capital assets.
“Such haste, absent any triggering emergency or authorising council resolution, renders the acting city manager’s decision an arbitrary exercise of public power in direct violation of the MFMA, the transfer regulations, the municipal supply chain management policy, the municipal supply chain management regulations, and the statutory and fiduciary duties associated with that of a municipal accounting officer,” he wrote.
The Herald
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