Eskom Finance

Eskom should conduct a cost overrun review at Kusile and Medupi

Eskom should conduct a cost overrun review at Kusile and Medupi

Fifteen years down the line, both Medupi and Kusile are still not complete. There are outrageous cost and budget overruns. Both projects have been riddled with massive design and construction defects. And the complete scale of corruption is yet to be established — but how did we get here?

Ronnie Siphika

Ronnie Siphika is the chief executive at Construction Management Foundation and a member of the Construction Sector Covid-19 Rapid Response Task Team. 

It was revealed earlier this week that engineering and construction firms ABB South Africa, Stefanutti Stocks, and Basil Read Joint Venture, as well as Tubular Construction Projects, have been named by Eskom as among the contractors that benefited from overpayments totalling R4-billion in the construction of Eskom’s giant coal-fired Kusile power station in Mpumalanga.

These overpayments refer to financial claims and variation orders that were paid by Eskom to these contractors for additional work. The question of whether or not these claims and variation orders are justified is at the heart of what the Special Investigating Unit and Eskom are attempting to establish through a series of contract governance investigations. 

This scandal reminds us yet again why the performance of construction engineering firms in both the Medupi and Kusile power station projects deserves public scrutiny. It warrants an independent review to help South Africans get a clear picture of why they were delivered late, but more importantly, why there were significant cost overruns.

After all, these are government-funded projects and there is a constitutional obligation that Eskom should be transparent in the procurement and delivery of its infrastructure projects. It therefore holds that the public deserves to understand why these projects failed.

Medupi and Kusile are enormous construction project management disasters. They have failed construction project success by all conventional measures. Traditionally, a construction project is characterised as successful when it has been completed in time, within budget, and has been constructed within the agreed design specifications and quality parameters. Fifteen years later, both Medupi and Kusile are still not complete. There are outrageous cost and budget overruns. Both projects have been riddled with massive design and construction defects. The complete scale of corruption is yet to be established — but how did we get here? 

In construction, it is commonly accepted that the complexity of large capital projects at this scale means that it is hardly possible to complete them without any form changes. Large capital projects will inevitably depart from the original tender design, specifications and drawings prepared by the design team for the contractor.

These changes are commonly referred to as variation orders and they usually have some financial consequence for the client. This can be because of technological changes, statutory changes or enforcement, change in site conditions, geological anomalies, non-availability of specified materials, or simply because of the continued development of the design after the contract has been awarded. These issues are the core of some of the biggest variation orders at both Medupi and Kusile. 

Most standard construction and engineering forms of contract include a clause under which the employer, such as Eskom, or their representative, can issue an instruction to the contractor to vary the works which are described in the contract. A change in shape or scheme, revised timing and sequence, are all usually provided for by the variation clause. The clause will include a mechanism for evaluating the financial effect of the variation, the process of authorisation, and provision for adjusting the completion date, if necessary. The calculation of the price for the extra work could involve payment in excess of the contract rates.

South Africans have a right to know which Eskom managers and companies were involved in this elaborate scheme to loot – but more importantly, what needs to be understood is why and how this occurred in the first place. 

This is exactly what needs to be reviewed extensively in order to show that the R4-billion could actually be the tip of the iceberg, considering how big the difference is between what was budgeted and what was actually delivered at both Medupi and Kusile. 

The recent disclosure by Eskom on the specifics of the variation orders paid to contractors shows the extent of this problem. 

For example, Eskom established in its progress report to the Standing Committee on Public Accounts (Scopa) that ABB South Africa – one of the contractors at Kusile — issued four variation orders amounting to R1-billion. This breaks down to: R251-million for project acceleration, R311-million for additional cabling costs, R290-million for additional acceleration costs, and R179-million for decommissioning. 

Eskom points out that these claims and variation orders were not substantiated in terms of both documentation and records. They also point out that these variation orders do not have all the requisite particulars to assess or verify the delays or costs claimed, and were grossly inflated. How can this even happen? How many more service providers unduly benefited from these deliberate and corrupt contract administration practices by Eskom managers? 

Ironically, almost R550-million was paid to accelerate the project and yet we are not even sure when Kusile will be completed. 

Beyond Eskom managers being corrupt, this shows how ethically bankrupt the South African construction industry has been over the years. The 2010 FIFA World Cup build programme showed us how companies collude to rig bids and allocate work among themselves. 

Medupi and Kusile is likely to show us how corruption is facilitated during the actual construction process, and how money is moved around to achieve corrupt ends. 

This new evidence at Kusile shows accusations that Eskom managers collaborated deliberately with contractors is no longer unfounded. It’s a reality. 

South Africans have a right to know which Eskom managers and companies were involved in this elaborate scheme to loot – but more importantly, what needs to be understood is why and how this occurred in the first place. 

This is important because disputes surrounding these projects still pose a major contractual risk to Eskom in the form of potential litigation. In fact, most of the legal work with regard to Medupi and Kusile involves disputes about contracts and variations. 

The public needs to know the identity of every single company involved, how much they were paid and why – starting with major contractors that were responsible for key aspects of the project. 

To enhance accountability and build trust, Eskom needs to conduct a review of all variation orders in both projects. Not only will this help Eskom to learn how to future-proof themselves from mistakes they have made at Kusile and Medupi, but will also help South Africans understand what really happened at Eskom, considering a large chunk of the power utility’s R450-billion debt was caused by these capital projects. DM

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