Delays, disputes and a dash of ignorance
Contractual disputes on building sites are as common as dirt. But even veterans of SA’s construction collusion scandal were caught off guard by Eskom’s Kusile and Medupi megaproject disputes.
Eskom has increased its contingent liabilities for legal claims and disputes to R107m from R34m the previous year. The new amount is almost three times the amount of the year before that.
At Eskom’s results announcement last month, Eskom CE Brian Molefe also did not hold back his disdain for construction companies that colluded on World Cup stadiums.
Molefe wondered aloud why the bank accounts of Gupta-owned companies were closed while those of construction firms that colluded were still functional. “They still have bank accounts. They were found guilty. And they are employed at Kusile and Medupi [power plants].”
Construction companies have been lamenting the effects of delays and disruptions on the plants, which resulted in lost productivity and failure to meet contracted targets. A labour dispute over year-end bonuses at Medupi in January 2013 triggered a series of setbacks.
Small-cap construction company Esor was contracted for laying pipes and doing work on underground terraces at Kusile, but it now sits with unresolved claims of R105m against the utility. This is 76% of its market cap of R138.31m.
“A large portion of our claims is based on [labour-related issues] caused by delays in obtaining access,” says Esor CEO Wessel van Zyl. “Where there were multiple contractors, [we] would not be given full access to the area where [we were] meant to do piping or needed to dig a trench. One delay created the next.”
Van Zyl says that for a company as small as Esor, proving cause and effect became a cumbersome task which delayed the claims process. “The problem was that there had been some changes to the working environment. But you are expected to prove that. If you had a number of them occurring daily, you would need a whole commercial team focusing just on them,” he says.
The bigger companies seem to have had better luck at resolving their claims and better experiences than the smaller ones.
Basil Read, like many construction firms, had to implement a five-year turnaround strategy to survive the industry’s trying times. CEO Neville Nicolau said in June the company had made profit of R171m after a loss of R820m the previous year, but there had been one limiting factor — liquidity.
He said the company had legacy claims against Eskom that dated from the beginning of 2015. Basil Read reported a R105m loss on the Medupi and Kusile power station contracts in December 2014 and submitted claims to Eskom for R220m. It was just over half of its market cap of R355.5m. “However, in the past 10 months we have resolved our legacy claims with Eskom. We have worked through them,” said Nicolau.
Aveng says it managed to resolve some of its claims against Eskom with the help of a renewed management team. This contributed to the resolution of R31m in uncertified revenue from Eskom in 2014.
Murray & Roberts says in 2011 its contractual obligations at Medupi and Kusile were burdened by unforeseen obstacles and delays. By renegotiating its contract with main contractor Hitachi, it had derisked its position.
“Yes, there was some commercial uncertainty, but we settled all claims associated with those disruptions,” says group investor and media executive Ed Jardim.
Wilson Bayly Holmes Ovcon was contracted to build a storage facility for burnt coal at Kusile.
The company says its exposure to the energy sector by its participation in the Kusile joint venture had proved the importance of diversification for its performance.
But Ian Massey, director at MDA Consulting, an advisory practice that assists companies that are involved in infrastructural development, says that companies’ contracts with Eskom contained many time bars and notice requirements which were often overlooked. In many cases firms had seen the contracts merely as an opportunity.
“They were not as careful as they could have been,” says Massey. “There are certain skills peculiar to power station contracts which were lost when Eskom stopped building power stations in the 1960s. When the contractors tendered they didn’t consider that,” he says.