Eskom told to restart R4bn Duvha tender

Johannesburg - The Johannesburg high court interdicted Eskom on Friday from continuing with a controversial R4bn tender to replace power station Duvha’s damaged boiler.

Eskom awarded the contract to Chinese firm Dongfang in March, even though it quoted R1bn more than its rivals. But in April losing bidders General Electric, along with Murray & Roberts, approached the high court to interdict Eskom from implementing Dongfang’s contract until it has been reviewed and adjudicated again.

The court ruled that Dongfang cannot proceed and the tender has been referred back to Eskom to reconsider.

Murray & Roberts group investor and media executive Ed Jardim told Fin24 that this means Eskom will probably have to restart the bid process.

“This entire issue is bad for South Africa, as we are still without a boiler and it will be delayed now if the bid process has to be restarted. There were obviously some South African jobs on the line,” he said.

He hoped that the process could be restarted speedily.

The tender concerns a new 600 MW boiler at the Duvha power station in Mpumalanga which has to be replaced after exploding in 2015.

Both General Electric and Murray & Roberts believe the selection of Dongfang was not done fairly. The vendors argued in court that Dongfang’s offer was R1bn more expensive than rival bids, even after it dropped its price from R6bn to R4bn.

Eskom opposed the application, arguing that the Dongfang bid was less risky because its price was final.

In its court application, General Electric asked the court to set aside Eskom’s tender award to Dongfang. It argued that Eskom had violated its own processes.

Questions around the bidding process

On Monday Business Day reported that audit firm KPMG had questioned why Dongfang emerged as the winner, after the paper viewed a report by the auditors. Eskom also sneaked an inflated advance payment of R600m to Dongfang for the tender, the paper reported.

Eskom appointed KPMG to do an independent review of the procurement process. Last December an internal report recommended that Eskom should only negotiate with General Electric and Murray & Roberts.

General Electric also said in its affidavit that Eskom’s orginal Request for Proposals provided for the shortlisting of two bidders only, to be followed by negotiations with the bidders.

However, in January the Eskom board’s investment and finance committee put Dongfang back into the contest when it increased the shortlist to four contenders. Dongfang ultimately won the tender.

Eskom’s chief procurement officer Edwin Mabelane recommended Dongfang to the board tender committee as it purportedly presented the lowest risk profile. His submission said General Electric should be disqualified because it submitted a faulty black empowerment certificate.

Murray & Roberts was booted out because of its checkered past relating to collusion during the construction of 2010 Soccer World Cup stadiums.

Jardim told Fin24 concerns around the reputational impact of stadium construction originated before 2013. 

“This was known long before the tender for Duvha’s boiler rebuild was issued,” he said.  “If this was such an issue in the final adjudication, why was Murray & Roberts not excluded from the start, and (why was it) still allowed to progress to the final stage of the bidding?”

Cost escalation fears

Dongfang wasn’t only the most expensive, it also scored the lowest of the three bidders in the safety, health and environment category. Its localisation was also not up to scratch.

But Eskom argued that General Electric and Murray & Roberts’ prices were not fixed, and that they could escalate in future. It cited Kusile and Medupi as an example of a worst-case scenario of cost escalation.

Again, Jardim told Fin24 Duvha is not comparable to Kusile and Medupi.

“We are one of many principal contractors on the Medupi and Kusile projects,” he said. “You cannot draw parallels between the type of contract, scale of capabilities required, contract value or duration of these two projects and the boiler rebuild project at Duvha.”

He said escalation mostly comes down to time – the longer it takes to complete a project, the more it could cost.

“Over the past eight years, there were many highly disruptive labour stoppages, thousands of design changes and other delays, with only a small portion of these events that could be attributed to us.”

He said price escalations are meant to reflect the correct value of money over the duration of the project and are intended to be kept to contract over the whole time period, which in this case is almost a decade.

KPMG also disagreed with Eskom in its report. "Eskom have not done any other evaluation to confirm that the fixed and firm price is indeed more favourable, despite the fact that it is significantly higher than the lowest quoted price," it said.

Enter Trillian

It was ultimately controversial firm Trillian which helped Eskom make the final decision in March, with an "initial risk assessment".  It agreed with Eskom that Dongfang was less risky, because its price was fixed.

“By transferring all escalation costs to Eskom, the suppliers have in effect created a risk-free environment with no consequence to themselves in the event of external events that affect the project,” Trillian recommended.

Trillian told Business Day it was not part of the tender evaluation team, and said it had simply done a "high-level cost benefit analysis over a two-day period".

After the Trillian assessment, Dongfang was awarded the winning contract.

Advance payment

Once Dongfang had been appointed, the the board tender committee then permitted a 15% advance payment, when they had agreed to 10% during negotiations.

KPMG questioned when this additional 5% had been negotiated.

"According to our minutes, further corroborated by the notes made by [Eskom’s commercial division] during negotiations, it was confirmed that a 10% advance payment will be payable," the KPMG report said.

General Electric spokesperson Thulisile Phiri said even though the company has pursued legal action against Eskom, asking it to review the Dongfang decision, this in no way altered General Electric’s commitment to other current Eskom projects.

“We believe that the judiciary process will be an independent mediator regarding the outcome of Duvha, “ he said. 

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