Hi­tachi fine won’t lighten the dark­ness

SA’s power short­age en­dures as the Chan­cel­lor House deal grabs head­lines once more

Mail & Guardian - - Business - Lyn­ley Don­nelly

Power con­struc­tion gi­ant Hi­tachi has paid to make its Chan­cel­lor House headache go away. But al­most a decade af­ter the ques­tion­able deals to build Eskom power sta­tions were done, South Africans still bat­tle elec­tric­ity short­ages and ris­ing elec­tric­ity prices, and wait for the sta­tions in ques­tion, Medupi and Kusile, to be fin­ished.

The fil­ing by the United States Se­cu­ri­ties and Ex­change Com­mis­sion (SEC), which saw Hi­tachi pay $19-mil­lion to set­tle the claims of im­proper pay­ments to ANC fund­ing arm Chan­cel­lor House, de­tails damn­ing al­le­ga­tions of how the rul­ing party stood to ben­e­fit from Eskom ten­ders.

Although the al­le­ga­tions will not be lit­i­gated in the US and have been de­nied by the ANC, there may still be le­gal ques­tions hang­ing over the in­volved par­ties in South Africa, ac­cord­ing to a le­gal ex­pert.

The SEC fil­ing has re­newed con­cerns over links be­tween Chan­cel­lor House, the ANC and se­nior Eskom fig­ures such as Valli Moosa, who chaired Eskom at the time and served on the ANC’s fi­nance com­mit­tee, par­tic­i­pat­ing in its fundrais­ing.

The SEC’s fil­ing of­fers im­por­tant lessons in how state ten­ders should be man­aged and how con­sumers suf­fer when they are not, energy in­dus­try an­a­lysts say, par­tic­u­larly as South Africa re­places its largest coal projects with nu­clear am­bi­tions.

Many in­dus­try ex­perts have crit­i­cised Eskom’s ap­proach to build­ing Medupi and Kusile, the first power plants of their kind to be con­structed in decades.

For­mer Eskom fi­nance di­rec­tor Paul O’Fla­herty told Par­lia­ment in 2012 that the plants were the world’s fourth- and fifth-largest coal-fired sta­tions, but he warned about a skills short­age in the paras­tatal af­ter years of un­der­in­vest­ment and at­tri­tion of ex­per­tise.

In spite of this, and with power short­ages loom­ing, the com­pany em­barked on its ex­pan­sion pro­gramme, in­clud­ing rolling out the ten­ders for Medupi and Kusile, ini­tially val­ued at R69.1-bil­lion and R80.6-bil­lion re­spec­tively.

Rather than opt for mod­u­lar gen­er­a­tion units that can be built on an assem­bly line for less money, Eskom opted for be­spoke, su­per­crit­i­cal plants re­quir­ing the pro­cure­ment, pro­ject man­age­ment and en­gi­neer­ing skills it no longer had.

Against this back­drop, Hi­tachi, to get in on Eskom’s ex­pan­sive ac­tion, and its lo­cal sub­sidiary Hi­tachi Power Africa, chose Chan­cel­lor House as its black eco­nomic em­pow­er­ment (BEE) part­ner in 2005, to bid for con­tracts at Medupi and Kusile.

The SEC’s

fil­ing al­leges that Hi­tachi was aware that Chan­cel­lor House was an ANC fund­ing ve­hi­cle dur­ing the bid­ding process, but nev­er­the­less en­cour­aged the com­pany “to use its po­lit­i­cal in­flu­ence to help ob­tain gov­ern­ment con­tracts” from Eskom — and how Hi­tachi paid “suc­cess fees” to Chan­cel­lor House for its work.

Ac­cord­ing to An­drew Cad­man, a cor­po­rate and com­mer­cial lawyer at Read Hope Phillips At­tor­neys, a vi­tal ques­tion is what Chan­cel­lor House of­fered Hi­tachi as a BEE part­ner, be­sides em­pow­er­ment sta­tus. As it ap­pears in the com­mis­sion’s com­plaint, Chan­cel­lor House, an in­vest­ment hold­ing com­pany with lit­tle ex­per­tise in the energy sec­tor, could only of­fer po­lit­i­cal in­flu­ence, said Cad­man.

Un­der South African law, the Preven­tion and Com­bat­ing of Cor­rupt Ac­tiv­i­ties Act deals with many i nstances of cor­rup­tion, in­clud­ing in­flu­ence ped­dling, he noted. Along with spe­cific of­fences, the Act con­tains the gen­eral of­fence of cor­rup­tion.

This cov­ers a range of ac­tiv­i­ties, in­clud­ing ac­cept­ing, agree­ing or of­fer­ing to ac­cept any “grat­i­fi­ca­tion” for per­sonal ben­e­fit or on be­half of some­one else.

It also cov­ers of­fer­ing any grat­i­fi­ca­tion in or­der to act, per­son­ally or by in­flu­enc­ing another per­son, in a man­ner that amounts to the illegal, bi­ased or dis­hon­est ex­er­cise of any pow­ers.

On Wed­nes­day, the Demo­cratic Al­liance laid charges against Chan­cel­lor House un­der the aus­pices of this Act.

Cad­man said there is a more fun­da­men­tal el­e­ment of South African law that could be ap­plied, how­ever, re­lat­ing to the fidu­ciary duty of a com­pany di­rec­tor to avoid any con­flicts of in­ter­est. This is en­shrined in com­mon law as well as in the Com­pa­nies Act.

To the ex­tent that Eskom could prove that Moosa or any other di­rec­tors were con­flicted when the ten­der was awarded and that Eskom suf­fered dam­ages as a re­sult, the paras­tatal could pur­sue them for breach of fidu­ciary duty, he ar­gued.

N e i t h e r Mo o s a n o r E s k o m re­sponded to ques­tions. But it’s un­likely Eskom will pur­sue this, par­tic­u­larly af­ter a 2009 in­ves­ti­ga­tion by the then public pro­tec­tor, Lawrence Mush­wana, which found that Moosa failed to man­age his con­flict of in­ter­est.

Nev­er­the­less, Mush­wana said that Moosa, de­spite his “im­proper con­duct”, did not in­flu­ence the award of the ten­ders to Hi­tachi.

But i n early 2014 sub­sidiary Hi­tachi Power Europe bought back Chan­cel­lor House’s stake in Hi­tachi Power Africa, af­ter Hi­tachi and Mit­subishi Heavy In­dus­tries merged their ther­mal power gen­er­a­tion oper­a­tions.

The ex­e­cu­tion of the boiler con- tracts at Medupi and Kusile were taken over by the newly formed c o m p a n y Mi t s u b i s h i H i t a c h i Power Sys­tems Africa. At the time, Bloomberg re­ported that the buy­back came as a re­sult of the crit­i­cism of a con­flict of in­ter­est.

A spokesper­son for Hi­tachi Power Europe said that it could not re­spond to the Mail & Guardian’s ques­tions be­cause the set­tle­ment with the SEC was con­di­tional on its con­sent nei­ther to ad­mit nor deny the al­le­ga­tions.

Cost over­runs

Mean­while, South Africa is still wait­ing for the com­ple­tion of both power sta­tions, which are only ex­pected to be fin­ished by 2021.

The cost over­runs on the plants have been ex­ten­sive. The M&G has pre­vi­ously re­ported that the most re­cent, but out­dated, cost es­ti­mates have risen to R154-bil­lion for Medupi and R172-bil­lion for Kusile.

While strug­gling to fin­ish build­ing the plants, Eskom has slid into a deeper fi­nan­cial hole, re­quir­ing R80-bil­lion in sup­port from the gov­ern­ment and foist­ing ever-in­creas­ing elec­tric­ity prices on con­sumers.

Hi­tachi, along­side Al­stom, the other ma­jor con­trac­tor on Medupi, has ex­pe­ri­enced prob­lems. In 2014 it emerged that crit­i­cal weld­ing work on Medupi’s boiler units, within Hi­tachi’s am­bit, was faulty.

Eskom vowed to claw back losses re­sult­ing from the weld­ing faults by call­ing in Hi­tachi’s per­for­mance bond. Eskom did not re­spond to ques­tions on whether it has, in fact, done so, or how much money has been claimed back. The M&G re­ported pre­vi­ously that Eskom has de­ducted R499-mil­lion in de­lay dam­ages to date.

Eskom ex­pert and man­ag­ing di­rec­tor of EE Pub­lish­ers Chris Yel­land pointed out that there is no ev­i­dence that the cost over­runs and de­lays are in any way linked to Chan­cel­lor House’s in­volve­ment.

It was a sleep­ing part­ner and didn’t form part of the projects’ ex­e­cu­tion, he said. It was, how­ever, “gross abuse” of BEE and not in the na­tional in­ter­est.

Ac­cord­ing to Grové Steyn of Merid­ian Eco­nom­ics, though noth­ing crim­i­nal has been proven, in cases where in­flu­ence-ped­dling is brought to bear on state ten­ders, con­sumers ul­ti­mately pay. Con­trac­tors or com­pa­nies fac­tor the price of bribes or “per­for­mance fees” into their ten­der prices, rais­ing the di­rect costs of the pro­ject, he said.

In all, ac­cord­ing to the SEC, the money Hi­tachi paid to Chan­cel­lor House to­talled just over $10-mil­lion. Although this rep­re­sents a 5 000% re­turn on Chan­cel­lor House’s ini­tial in­vest­ment of just over $190 000 for its stake in Hi­tachi Power Africa, it’s a pit­tance com­pared with the over­all cost of Medupi and Kusile.

“Those num­bers are triv­ial com­pared to the value of the con­tract,” said Steyn, adding that the real is­sue is the cost of ap­point­ing the wrong con­trac­tor. Not only does this kind of ac­tiv­ity po­ten­tially raise the di­rect cost of the bid, it also risks ap­point­ing a con­trac­tor that is not the most price-com­pet­i­tive and lacks the tech­ni­cal skills or ex­per­tise to de­liver on time and at the right qual­ity, he said.

Even if no bribes are paid and com­pa­nies are pre­ferred based on their po­lit­i­cal links, for in­stance, this can “quickly close down the space for crit­i­cal in­quiry dur­ing the ten­der process”, said Steyn.

As South Africa em­barks on the 9 600MW nu­clear pro­cure­ment pro­gramme, es­ti­mated at a po­ten­tial cost of R1-tril­lion, the risks of flawed pro­cure­ment are height­ened.

These large nu­clear and coal projects limit the pool of po­ten­tial play­ers and the com­pet­i­tive­ness of the bid­ding process, Steyn said.

The tech­nolo­gies are more ex­pen­sive and the po­ten­tial for cor­rup­tion and in­ef­fi­cien­cies dur­ing pro­cure­ment in­creases rapidly, he added.

More court­room bat­tles

Eskom faces another two pos­si­ble court chal­lenges on the award of ma­jor con­tracts, said Yel­land. The first is for the es­ti­mated R2.6-bil­lion con­tract to re­place steam gen­er­a­tors at its Koe­berg nu­clear plant. The los­ing bid­der, West­ing­house, is chal­leng­ing the award of the ten­der to com­peti­tor Areva in the Supreme Court of Ap­peal.

AmaBhun­gane re­vealed that sus­pected po­lit­i­cal jock­ey­ing has de­layed the ten­der process and has seen the ini­tial award of the lion’s share of the con­tract to West­ing­house re­vised to favour Areva.

Yel­land, mean­while, re­vealed in an ar­ti­cle on the EE Pub­lish­ers web­site that Siemens is con­sid­er­ing a court in­ter­dict af­ter Eskom awarded the con­trol and in­stru­men­ta­tion con­tract for Kusile to en­gi­neer­ing firm ABB. This was af­ter Eskom ter­mi­nated the en­tire con­tract it had signed with Al­stom in 2014 for Kusile’s con­trol and in­stru­men­ta­tion work, open­ing the con­tract to pri­vate ten­der.

“There is some­thing se­ri­ously wrong when there are these kinds of chal­lenges on ma­jor con­tracts of such na­tional sig­nif­i­cance,” said Yel­land.

The steam gen­er­a­tor con­tract at Koe­berg is par­tic­u­larly crit­i­cal be­cause it has al­ready been ex­ten­sively de­layed, he said. “This kind of le­gal chal­lenge places the energy se­cu­rity of South Africa at risk.”

Sim­i­larly, the con­trol and in­stru­men­ta­tion con­tract at Kusile is crit­i­cal to its de­liv­ery. Yel­land said it is not easy for com­pa­nies such as West­ing­house to take such a large client to court, be­cause it may se­verely prej­u­dice the com­pany in fu­ture ne­go­ti­a­tions with Eskom.

Photos: Made­lene Cronjé and Gallo Im­ages

Cur­rent af­fairs: The Medupi power sta­tion (above) and its sis­ter sta­tion Kusile are only ex­pected to be com­pleted by 2021. For­mer Cab­i­net min­is­ter Valli Moosa (left) chaired Eskom at the time Hi­tachi bid for the power sta­tion ten­der.

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