The story behind Eskom’s ‘unlawful’ Koeberg contract

Johannesburg - The spotlight of controversy continues to shine on an Eskom contract with Areva to replace six steam generators at its Koeberg nuclear power station, which was set aside and ruled as “unlawful” and “unfair” in a scathing judgment by the Supreme Court of Appeal (SCA) on December 8 2015.

However, Eskom has refused to answer questions from EE Publishers on the implications of the judgment, except to say (on January 12 2016) that it has now reached a firm decision to apply for leave to appeal the judgment at the Constitutional Court, and that its lawyers are currently preparing the appeal papers.

“As a result, it would not only be premature but also inappropriate for Eskom to respond to the balance of your questions at this stage,” said Eskom spokesperson Khulu Phasiwe.

Of course there should indeed be serious concerns in respect of Eskom’s tender adjudication processes and the impact of the SCA judgment (and any subsequent appeal by Eskom to the Constitutional Court) on the programme of upgrades to extend the life of South Africa’s 1800 MW nuclear power plant beyond its current 30 years of commercial operation.

It took Eskom literally years to place the steam generator replacement contract with Areva in the first place, and the judgment has now effectively ordered Eskom to start the procurement process again, and to do it fairly and lawfully this time around.

An application for leave to appeal to the Constitutional Court, the hearing at the Constitutional Court itself, and a final judgment is not generally a fast process, while the time needed by Eskom to start the procurement process all over again is anybody’s guess. So Eskom appears to be caught somewhere between the devil and the deep blue sea, while the clock ticks on relentlessly.

Could there be any safety issues arising from delays in the Koeberg steam generator replacement project, and continued operation of the Koeberg reactors beyond the planned outage deadline of June 2018 for the replacement of the steam generators?

This most particularly, given the urgency and criticality cited in placing the contract with Areva in the first place, where a three-month float in Areva's project plan was indicated as a deciding factor. What is the risk of the National Nuclear Regulator of South Africa shutting down Koeberg due to safety concerns resulting from any further delays beyond June 2018, and could this impact on security of supply and load shedding in SA?

These are questions Eskom is simply not prepared to answer publicly at this stage.

However, while it appears almost inevitable that the installation of new steam generators will miss the planned 2018 nuclear reactor shutdowns initially scheduled for their replacement, and perhaps even the next planned reactor shutdowns 18 months later, fortunately the existing steam generators are considered to be in relatively good condition, allowing the nuclear power plant to run to end-of-life in 2024/25.

How it all began

The whole sorry saga began in 2012 when Eskom put out a tender for the replacement of six steam generators at its Koeberg nuclear power station in the Western Cape, at a cost estimated at about R5bn. After some 30 years of successful commercial operation, such upgrades were deemed necessary to extend the 40-year operating life of the nuclear power plant still further.

The tender was divided into three lots. Lot 1 was the manufacturing and delivery of replacement steam generators, Lot 2 the installation and associated work, and Lot 3 the engineering and safety analysis needed for the replacement. The tender requires that the replacement must take place during planned reactor outages in mid-2018.

After various expressions of interest, the shortlist of qualifying suppliers consisted of Japanese-owned US supplier Westinghouse, which did the original design for the type of nuclear reactors used at Koeberg, and French supplier Areva, whose predecessor, Framatome, supplied the existing steam generators using reactor technology licensed from Westinghouse, one of Framatome’s founding shareholders.

But as anyone familiar with the political and procurement landscape of state-owned enterprises in South Africa might have predicted, things sometimes do not go quite as expected or as planned.  

In December 2012, Eskom’s technical committee recommended to the Eskom Executive Procurement Sub-Committee (EXCOPS) that Westinghouse be awarded the tender on Lots 1 and 3, and that Areva be awarded the tender on Lot 2. The EXCOPS made this same recommendation to the Eskom Board Tender Committee (BTC) the following January. Despite these recommendations, the BTC concluded that it did not have the expertise to make a final decision, and appointed Swiss firm AF Consult to advise on technical matters.

In July 2013, AF Consult made various recommendations, the most significant of which was that Eskom should take into consideration its previous experience with the bidders, as well as certain “strategic considerations”. The initial invitation to tender recorded that tender evaluation would be based on various criteria including supplier development and localisation, financial offering, and technical elements involving safety and quality.

As foreign-owned entities, BBBEE requirements did not apply to either bidding companies. AF Consult suggested that bidders should be asked to improve their localisation and development of skills applicable for work on nuclear power projects in South Africa, as well as show the robustness of their construction schedule in completing the project on time.

None of these were mentioned in the original bid specification requirements. Areva and Westinghouse were both asked to submit further bids, but the tender evaluation criteria remained unchanged.

Once again the technical committee made the same recommendation to the EXCOPS – that Lots 1 and 3 be awarded to Westinghouse and that Lot 2 be awarded to Areva. This suggestion was declined, and the issue of a single composite contract for all three lots was put on the table. Both bidders were invited to engage in parallel negotiations, and it was mentioned that “high-level decision factors” and “strategic considerations” would be taken into account, but what these were was not disclosed, and no mention was made about changing the bid criteria.

In a lesson of the dangers of social media, it also came out in an article in the Mail & Guardian that members of the BTC had gone on a four-day “nuclear training trip” to France in December 2013, organised by none other than Areva shareholder Électricité de France (EDF). The trip took place during a critical stage in the tender process and made the BTC vulnerable to a serving of the French persuasion.

'Died and gone to French pastry heaven'

During the trip to France, BTC chairperson and Eskom board member Neo Lesela posted on Facebook that she had “died and gone to heaven”, a statement accompanied by pictures of French truffles, pastries and tarts at the Hotel De La Marine in Normandy. Amid the lavish treats, the training manual “Engineering for the nuclear plant” appears to have been pushed aside in favour of a “piece of heaven”.

The post was quickly removed from the social media site, and all pictures from the French trip deleted when it became clear that this piece of heaven would give Lesela “hell to pay”. It would seem that her lavish entertainment at the expense of EDF may not be the kind of thing that should be served to presumably impartial members of the Eskom Board Tender Committee in the middle of a multi-billion rand bidding process.

Needless to say, further bids were put forward, and after much back and forth between the EXCOPS, BTC and high-ranking Eskom executives, the decision was finally made in August 2014 to award the full tender (Lots 1, 2 and 3) to Areva. In explaining this decision, the BTC stated that while both bidders were technically capable of completing the work and meeting targets laid out in the criteria, Areva was the best choice in terms of the management of Eskom’s risk.

But there was one risk Eskom perhaps had not bargained on.

Upon notification of Areva as the successful tenderer, Westinghouse sprang into legal action, accusing Eskom of acting irrationally and unlawfully in placing the contract with Areva. The case initially went to the Gauteng High Court in September 2014 in an effort to stop Eskom signing the deal with Areva, and to get Eskom to hand over documents pertaining to the awarding of the tender. However, Westinghouse subsequently withdrew its application to stop the contract, in order to first examine the documents requested more carefully.

But while the application to stop the contract was withdrawn, Eskom was ordered to hand over the relevant documents to Westinghouse, and was given five working days to do this. When Eskom failed to comply with the court order by the due date and further generous time indulgences, Westinghouse filed a contempt of court application in November 2014. The company later withdrew this application when the documentation was eventually provided by Eskom, literally hours before the contempt hearing.

Westinghouse subsequently pursued its application in the South Gauteng High Court, Johannesburg to review and set aside the contract award to Areva, but on March 28 2015 the judge ruled in favour of Eskom, and dismissed the review application by Westinghouse, who promptly took the judgment on appeal.

Social networking blunders aside, Eskom and Areva vigorously defended the validity of their contract in the Supreme Court of Appeal in Bloemfontein, while Westinghouse stuck to its guns and argued that any new considerations resulting in the awarding of the bid to Areva must be considered to be bidding criteria, and that these new criteria are irrelevant as they were not included in the published criteria.

The SCA judgment delivered on December 9 2015 confirmed that Eskom did indeed take into account considerations that were extraneous to the tender evaluation criteria as set out in the invitation to bid, and that the decision to award the tender to Areva was both unlawful and unfair.

Although Westinghouse asked to be substituted for Areva as the successful bidder, the Appeal Court did not grant this. However, the Supreme Court of Appeal did order that the contract award be set aside and referred back to Eskom for reconsideration.

- EE Publishers.

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