Dongfang bagged R600m from ‘rigged’ Eskom deal • Chinese win tender even though offer was R1bn higher

• Gupta-linked firm Trillian reviewed bids in the 11th hour

Eskom sneaked an inflated advance payment of R600m to Chinese firm Dongfang for a controversial R4bn tender to supply a new boiler at its Duvha power station in Mpumalanga.

This emerges from a report by audit firm KPMG, seen by Business Day.

Eskom decided to award the tender to the state-owned Chinese company even though its offer was R1bn more expensive than rival bids, just days after the bids were reviewed at the 11th hour by Trillian, an advisory firm majority-owned by Gupta lieutenant Salim Essa.

The advance payment provides further evidence for claims made in court proceedings by losing bidders Murray & Roberts (M&R) and General Electric (GE) that the tender was rigged to favour Dongfang.

KPMG, which was appointed by Eskom to conduct an independent review of the procurement process, said the board tender committee had consented to a 15% advance payment, which was 5% higher than “what was agreed to between the parties” during negotiations.

“According to our minutes, further corroborated by the notes made by [Eskom’s commercial division] during negotiations, it was confirmed that a 10% advance payment will be payable,” the KPMG report said.

This means Dongfang was paid an advance of R200m more than it should have been and raises suspicions that Eskom quietly continued to negotiate with Dongfang after final offers were submitted, which would have been unfair to the other bidders.

“This is not in keeping with Eskom’s policy which states that all bidders should be provided with an opportunity to prove a best and final offer post negotiations,” said the report.

This is one of several red flags raised about the deal in two KPMG reports and other documents seen by Business Day.

They reveal Eskom appeared to bend over backwards to award the tender to Dongfang despite being warned of a host of irregularities. Dongfang scored lowest by far of the three bidders in the safety, health and environment category because it failed to submit key documents and also fell short on local content. The documents also reveal that Dongfang initially quoted R6bn to do the job.

This left Dongfang at a severe disadvantage in point weightings because both GE and M&R quoted R2.9bn.

Following negotiations, Dongfang somehow managed to shave R2bn off its quote.

A crucial reason GE took Eskom to court is that its original request for proposals stipulated only two of the short-listed bidders would make it to the negotiations phase.

An internal report dated December 23 recommended that Eskom should only negotiate with GE and M&R. Dongfang did not make the final list.

But on January 20, the board’s investment and finance committee resolved to increase the short-listed suppliers from two to four. Dongfang was back in the race.

On March 8, a submission to the board tender committee, signed off by Eskom’s chief procurement officer Edwin

Mabelane, recommended awarding the contract to Dongfang, which “presents the lowest risk profile”.

M&R and GE had a history of cost overruns and their prices were subject to escalation, whereas Dongfang’s was fixed. GE was disqualified for submitting a fraudulent black empowerment certificate and M&R because of its involvement in collusion during the 2010 soccer World Cup.

But KPMG disagreed, accusing Eskom of being “arbitrary and capricious” by disqualifying GE. A legal opinion by Mchunu Attorneys that Eskom hastily sought on the same day found no evidence of fraud or grounds for disqualification.

KPMG also poured cold water on Eskom’s argument that GE and M&R’s bids were riskier than Dongfang’s because their price was variable.

Eskom finance had already conducted “total cost to completion” modelling to compare all three bids on a common basis. This had resulted in GE’s price escalating to R3.5bn and M&R’s to R3.8bn, KPMG said.

“Eskom have not done any other evaluation to confirm that the fixed and firm price is indeed more favourable despite the fact that it is significantly higher than the lowest quoted price,” KPMG said. Once again, Dongfang’s prospects looked shaky.

Then Trillian entered the fray. On March 23, just eight days before Eskom’s deadline expired, the politically connected advisory firm submitted an “initial risk assessment” of the bids.

Trillian repeated Eskom’s prior argument, rejected by KPMG, that although Dongfang’s price tag was much higher than its rivals, it was less risky because it was fixed.

Trillian then posited a worstcase scenario, suggesting that if costs escalated at the same rate as with Kusile power station, then GE’s bid would rise to R4.5bn and M&R’s to R4.9bn — both substantially more expensive than Dongfang’s final shrunken quote of R4bn.

Trillian confirmed that it had conducted a “high-level cost benefit analysis over a two-day period”, but stressed it was not part of the tender evaluation team. It denied it had been part of any wrongdoing.

Eskom defended its decision in court on Friday and insisted its price risk assessments were based on objective criteria.

It pointed out that the amendment allowing it to negotiate with four bidders was needed because none of the bidders complied with all the requirements.

“It follows therefore that all of the bidders stood to gain from the amendment,” Eskom’s acting commercial GM Charles Kalima said in an affidavit.

Another audit firm, SekelaXabiso, had undertaken a risk analysis of M&R and GE’s bids and “confirmed the rationale adopted by Eskom in arriving at its decision”, he said.

Judgment in the case was reserved. Eskom said it was unable to comment further.