Eskom procurement story hints at greater inefficiency ahead
I’m sure I am missing something. But I have to wonder why the government insists that Eskom go out to tender to give coal miners a chance to truck coal over long distances to Duvha power station instead of doing a cost-effective deal with the coal mine that sits right under the power station and sends it up by conveyer belt. I am deeply puzzled too about why the government chooses expensive, dirty gas-fired powerships to provide two-thirds of the emergency power it went out to procure but declines to make it easy for mining and industrial firms to generate large quantities of clean energy for free to power their own operations and take pressure off SA’s electricity grid. The two procurement stories may tick all the right procedural boxes. But they raise questions about the ever more complex and bureaucratic procurement processes in the public sector and whether they prevent corruption as intended or simply result in dysfunctional outcomes. They raise questions also about whether the government is really serious when it says it wants a more reliable, affordable and cleaner supply of energy for SA — and whether those who claim to want that can stand up against the pressure to dispense patronage. I don’t know the answers. But it’s worth asking the questions.
To cut a long story short, the Duvha coal story began when the mine
— which is one of Eskom’s fixed-cost mines, with a long-term contract out to 2034 — pleaded hardship because the prices it was getting in terms of the formula didn’t cover its costs and it was in financial stress, with the mine shut down since August. Eskom applied to the National
Treasury, as required, for permission to renegotiate the contract, which was refused. Eskom is reapplying for a four-year extension but will have to go out to tender for a 10-year contract to supply the Duvha coal.
Many would argue that of course this should go to tender, and smaller miners and truckers should have a chance to challenge the incumbent and its conveyor belt. And perhaps it should. It’s worth remembering, though, that historically almost all of Eskom’s coal-fired power stations were built where the coal was and designed for that particular deposit. The model was cost-plus or fixed-price contracts that were supposed to benefit both sides, and enabled the growth of SA’s coal industry and provided cheap, reliable power that supported industrialisation back in Eskom’s glory days. As economic growth and demand surged in the 2000s, more smaller mines came in and Eskom started to have to buy more on the spot market. But bringing in small miners at higher prices that had to truck the coal really accelerated in the era of state capture, when then public enterprises minister Malusi Gigaba launched a big junior miner push and insisted Eskom’s coal suppliers be 51% black owned, not just the 26% required by BEE legislation.
The result was to entrench smaller, often poor-quality coal suppliers, and grow an extensive and often expensive trucking industry with a big vested interest in ensuring Eskom procured its coal from far, not near. Transport costs are now a big part of Eskom’s steeply rising coal costs, not to mention the cost to productivity and ruined roads, or air pollution. Surely any tender that goes out for the Duvha coal — or any of Eskom’s coal — should look at the total cost, not just the price at the mouth of the mine.
But all this hints at a deeper issue: that the procurement processes put in place to stop corruption seem instead to have driven a compliance mindset which, instead of ensuring better prices, has simply bred more inefficiency and paralysis. Yet Eskom CEO André de Ruyter is battling to get often outrageously expensive and possibly corrupt contracts renegotiated so that he can try to cut the prices Eskom pays for coal and other inputs. For his trouble he is now under investigation after the procurement chief he suspended for nonperformance accused him of racism.
As for the powerships, there are so many issues with mineral resources & energy minister Gwede Mantashe’s decision to make them the preferred bidders that chances are it will be challenged in court. Meanwhile, De Ruyter, who for the first time in Eskom’s history is calling for companies to be allowed to generate their own renewable energy up to 50MW and feed it into the grid without the cumbersome licence process, is clearly not winning. Mantashe stonewalls. Who that might benefit is a question.
Surely any tender for the Duvha coal should look at the total cost