Protracted legal battles loom for Eskom
ESKOM is preparing for years of legal wrangling to recover costs incurred by the delays from key suppliers at Medupi, including French equipment manufacturer Alstom and Hitachi Power Africa.
The utility awarded a R20billion contract for boilers to Hitachi and R13-billion for steam turbines and control and instrumentation software to Alstom in 2007.
At the time, Medupi was expected to cost R87-billion. Now it has called performance bonds on both contracts after the suppliers failed to meet crucial deadlines. Medupi’s costs are now estimated at R105-billion, excluding interest.
A standard feature in construction contracts, a performance bond is typically 10% to 15% of the contract price, placed by the contractor with a bank as guarantee. Eskom has called performance bonds from both Hitachi and Alstom, but warned this week that refunds might be difficult to obtain.
Any refunds from contractors would take a “long time” because Eskom would have to deal with “massive legal contractual issues”, CEO Brian Dames said this week. The focus now was on finishing the station, although Eskom expected to be engaged in “tough legal issues for years to come”, he said.
Hitachi has already challenged Eskom in court. The bond will now be used to secure its performance until the completion of the last unit.
This week, Hitachi said it had completed 97% of the work on Medupi’s unit 6 boiler and was on track to meet Eskom’s original December 2013 deadline.
Eskom drew 10% of Alstom’s R13-billion contract for Medupi in March. The company said the scale on which the control and instrumentation system was being developed for Medupi was unprecedented for both it and Eskom.
“The configuration requested by Eskom is challenging and requires customisation that is taking some time to develop,” said an Alstom spokesman.
In April, Eskom said Hitachi needed to repair 9 000 faulty welds from a total of about 53 000 on the boiler.
Alstom notified Eskom in December that its boiler protection system software was not oper- ating as planned.
During an April site visit with journalists following a work stoppage of several months, Eskom played down concerns over delays, saying Hitachi and Alstom, the two main contractors on site, had committed in writing to have the unit ready for so-called hot commissioning by July.
This would have enabled synchronisation of the unit with the national power grid by December. The process has now been delayed by six months.
Paul O’Flaherty, who stepped down as Eskom’s financial director this week, said it was “highly unlikely” that there would be any power from unit 6 before July 2014.
Public Enterprises Minister Malusi Gigaba said he was “disturbed” by the further delays and admitted that there was inadequate front-end planning at Medupi.
The minister said senior stakeholders and Eskom executives would be going to France to meet with high-level Alstom executives to get the project back on track.
Gigaba said the same measures would not be needed in dealing with Hitachi, because the contractor said it would still make the deadline.
Eskom has been accused of handling Hitachi with kid gloves
Medupi’s costs are now an estimated R105-billion
because the ANC’s investment arm, Chancellor House, owns a 25% stake in the local subsidiary. Hitachi Power Europe holds 70% and Makotulo Investments and Services 5%.
Makotulo’s directors are Susan Peiser and Seadimo Chaba, a businesswoman who has held senior positions in Denel, the private sector and the Gauteng provincial government.
It remains to be seen how profitable Hitachi’s South African venture will be. Hitachi’s power systems segment reported a ¥33.9-billion (R3.4-billion) loss in the year to end March 2012, its latest available financial statements.
The loss is attributable to additional expenses and delays “related to difficulties experienced with some boiler materials in overseas thermal power generation systems projects”, it said in its annual report, without providing specific details.
The controversial Chancellor House deal, concluded in 2005, caused an outrage when it became public. Opposition parties, notably the Independent Democrats, lobbied international financial institutions, including the World Bank and African Development Bank, not to provide loans to Eskom given the ANC’s involvement.
The World Bank approved a $3-billion loan for Medupi, despite the US, UK and the Netherlands abstaining.