Johannesburg - Eskom has taken action to punish contractors responsible for the delay in commissioning its Medupi power station, making good on its warnings earlier this year that it would hold them to account.
The two biggest contractors, the ANC-linked Hitachi Power Africa and Alstom, have been served a bill for cost overruns and to pay Eskom for stepping in to manage their contracts. Some contractors, including Hitachi Power Africa, had agreed to pay delay damages, the power utility said on Thursday.
In the case of Hitachi Power Africa, which is 25 percent owned by the ANC’s investment arm, Chancellor House, Eskom has approached its parent company, Hitachi Power Japan, to call in the performance bond and claim its losses.
The damages relate to the late completion of the power station’s units. Eskom did not disclose the amount. But both contracts contain penalty clauses of between 10 and 15 percent of total value.
Eskom announced a further six months delay in the commissioning of Medupi’s Unit 6 in July this year. It is expected to start generating power to the grid in the second half of 2014.
When announcing the delay, Eskom attributed it to Alstom’s boiler protection system failing safety tests, as well as defective welding for boilers by Hitachi, among other things, and it still had to fix about 9 000 defective welds. “This is rework due to their negligence and performance. Costs associated with Eskom having to supervise this will also be charged to the contractor,” it said in an e-mailed response to Business Report.
When Eskom announced the delays, it said this would push its construction costs from R91.2 billion to R105bn, excluding certain costs such as owners development costs and interest.
The penalty clause allowing it to claw back the cost overruns applies to all contractors it employed in the construction of its power stations. Not only will the contractors be funding the correction of their work defects, penalty clauses state that they have to pay for extended labour hours.
While the defects are being corrected, Eskom said it had the right to withhold 15 percent of payments due until the corrections had been made.
Eskom said its other penalty options included nominating sub-contractors for contractors which failed to meet their obligations or “stepping in” and defining an area of work which the contractor has to hand over to the power utility. Eskom can also terminate a portion or the whole of the contract but said it was reviewing its options because it wanted to avoid further delays on Medupi and Kusile.
An Alstom spokesperson said the company’s contractual obligation did not allow it to disclose the financial details of its performance bond that was called in by Eskom earlier this year. But the spokesperson explained the performance bond called was not for its entire Medupi contract.
For Medupi, Alstom was awarded two contracts. The larger related to the steam turbine generator, which has progressed well with no penalties or performance bonds being called up.
The controls and instrumentation contract is the one that Eskom called in a performance bond on and Alstom said its value was much lower.
“Those challenges are related to the boiler protection system, which in turn is only a small portion of the controls and instrumentation contract. So, in fact, only a very small portion of the total value of our Medupi contracts is affected,” the company said in an e-mailed response.
Hitachi did not respond to requests for comment.
The public enterprises ministry spokesman, Mayihlome Tshwete, said it was time Eskom held people to account and applied necessary pressure to get the power stations finished on time with no safety concerns.
“We’ve made it clear that Eskom must do all it has to do to ensure that these type of delays are not without punitive action. As a shareholder we’ve been waiting to see this happen,” he said.
Lynn McGregor, a senior fellow at Stellenbosch University’s corporate governance unit, said Eskom’s management and the board had put out the right messages to contractors. She said sometimes delays in major projects stemmed from corrupt practices where contractors were bribed to cause delays and this needed to be rooted out. “Millions of rands each year are wasted because of unfulfilled promises by contractors to deliver. It is a long-standing practice probably caused by choosing contractors who think they can delay to suit themselves.”
But she said the question of having no more delays was another matter. “This has a long way to go. On the other hand, improvements like penalising contractors gives a message of what is expected.” - Business Report