Tough lessons from Eskom — or not?

When SA was deciding how to go about building two of its most ambitious infrastructure projects, the two coal-fired power stations Kusile and Medupi, there were a couple of choices to be made.

One was whether to turn over the project to a global energy giant as a turnkey project, or to ensure that in the build of the multibillion-rand project local industry got the greatest benefit, breaking the project down into various different contracts.

We chose the latter, and the justification was rather simple. For a government dealing with a jobless crisis, with some 27% officially unemployed, the rationale was quite clear: public spend should yield as much benefit for the country as possible.

So the turnkey option didn’t win the debate, and though the country hadn’t undertaken such an ambitious project for many decades — building stadiums for the World Cup simply doesn’t compare —

Eskom was trusted to manage the process.

Now we know, more than a decade since signing off on the project, that perhaps Eskom was never in a position to handle a project on this scale. There was much wastage in the build itself, short cuts were taken and corruption seeped into the programme, as one would expect with the many different projects and contracts involved in the more than R300bn build. It now weighs like an albatross on state debt.

Given the chance again to decide on turnkey or a project led by Eskom, we can now say, as we face the prospect of loadshedding in winter, that maybe the former would have been better. However, it’s wholly understandable why the government

chose the route it did in the first instance.

It really was a no-brainer. When planning of the build was being done, the country was sitting in the rather comfortable position of being able to follow a counter-cyclical fiscal policy when the global economy went into recession almost a decade ago. After more than a decade of fiscal prudence, the Treasury, led by former finance minister Trevor Manuel, had brought the country to a surplus position. It was a position that provided the space for SA to increase expenditure, while Western states had to, and largely still have to, endure austerity budgets.

Facing a jobs blood bath in the private sector, that fiscal space allowed the state to stimulate the economy and save us from the worst effects of recession. Energy expansion was top of the list of spending needs.

You can find no fault in the state’s thinking, except that it didn’t pay much heed to questions asked at the time about Eskom’s ability to manage the project, by virtue of the parastatal being unaccustomed to managing such massive projects.

Now, given our experiences of the Kusile and Medupi build, I guess the immediate reaction to another massive infrastructure programme, when the country can one day undertake one as public finances improve (let’s be positive), would be a more favourable airing of a turnkey solution.

Policymakers will be lobbied to accept what most African and smaller Asian countries do, and accept a Chinese or other foreign-owned company jetting in their specialists and hiring locals to construct whatever project the economy needs.

There’ll be little push-back from an inconvenienced public. The cost overruns and the instability of energy delivery have prevented anyone from trusting the public sector on another big project.

It would be a sad day. Investment spend, whether public or private, should ultimately stimulate growth in the local economy.

So we have to ensure that policymakers ensure proper governance in relations between the state and the private sector to avoid spending tax money on a foreign multinational building a public road, for example.

The second step is a lot more difficult — ensuring we have an industry to support. Every day, we are overseeing the slow death of the construction and engineering sector.

Aveng, founded in 1944, is sitting with a share price of about R2. Over the past five years, the firm has seen its shares plummet 99%. Group Five is in business rescue and selling off its assets. Its stock is down 98% over the past five years. Murray & Roberts may just be delisted and bought out by German investment holding company Aton GmbH.

It’s clear we’ll soon have no choice over whether it’s a turnkey project or one designed to stimulate the economy. Will we have the skills, the knowhow and even some of the painful lessons from the badly managed Kusile and Medupi build left in the country?

I’ve never liked the “too big to fail” argument much, but on these construction firms, there may just be a point to it.

Energy expansion was top of the list of spending needs

Derby, a former Business Times editor, hosts Power Business on PowerFM