OPINION | Eskom should start with a cost overrun review at Medupi and Kusile

iStock

Earlier this week it was revealed that Eskom had named engineering and construction firms ABB South Africa, Stefanutti Stocks and Basil Read Joint Venture, as well as Tubular Construction Projects, as contractors that had allegedly benefited from overpayments totalling R4 billion in the construction of Eskom’s giant coal-fired Kusile Power Station project in Mpumalanga. 

These alleged overpayments refer to financial claims and variation orders that were paid by Eskom to these contractors for additional work.

Some of the contractors have pushed back against the allegations, and the question of whether these claims and variation orders are justified or not 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 Medupi and Kusile power station projects deserve public scrutiny and some independent review that will help South Africans paint a solid 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 massive construction project management disasters. They have failed by all traditional measures that are used to measure construction project success. 

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.

Some 15 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 scale of corruption is yet to be established, but how did we get here?

Variation orders

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 consequences 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 at the core of some of the biggest variations orders at both Medupi and Kusile.

Most standard forms of construction and engineering 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.

Tip of the iceberg?

This is where the dispute between Eskom and its contractors at Kusile power station needs to be reviewed extensively in case R4 billion is actually 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 variation orders that were paid to contractors shows the extent of this problem.

Eskom stated in its progress report to the Standing Committee of Public Accounts (Scopa) that ABB South Africa – one of the contractors at Kusile – issued four variation orders amounting to R1 billion. 

R251 million was project acceleration, R311 million was for additional cabling costs, R290 million for further acceleration costs and R179 million was for decommissioning. 

Eskom says that these claims and variation orders were not substantiated, in terms of both documentation and records. It also says that these variation orders do not have all the requisite particulars to assess or verify the delays or costs claimed and were grossly inflated. 

If this is accurate, how can it even happen? How many service providers unduly benefited from unacceptable contract administration practices by Eskom managers?

What acceleration?

Ironically, almost R550 million was paid to accelerate the project, and yet we are not even sure when Kusile will be completed. Beyond Eskom management, 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 can collude to rig bids and allocate work among themselves. Medupi and Kusile may, unfortunately, show us how corruption is facilitated during the actual construction process, and how money can be moved around to achieve corrupt ends.

South Africans have a right to know which Eskom managers and companies were working together, and if so, the specific variations orders and claims that increased costs and completion dates. More importantly, what needs to be understood is why. 

This is important because disputes that occurred in these projects still pose a major contractual risk to Eskom due to potential litigation. In fact, a great deal of the work obtained by the legal profession at Medupi and Kusile involves disputes about contracts and variations. The public needs to know every single company involved, how much they were paid, and why – starting with major contractors that were responsible for major 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 assist Eskom in learning how to future-proof themselves from mistakes they have made at Kusile and Medupi, but it will also help South Africans understand what really happened at Eskom, considering a large chunk of Eskom’s R450 billion debt was because of these capital projects.  

Ronnie Siphika is the Chief Executive at the Construction Management Foundation, an independent construction and infrastructure policy and research think tank. Views expressed are his own. 

ZAR/USD
17.20
(+0.87)
ZAR/GBP
22.58
(+0.50)
ZAR/EUR
20.41
(+0.43)
ZAR/AUD
12.42
(+0.22)
ZAR/JPY
0.16
(+0.86)
Gold
2033.18
(+0.20)
Silver
26.69
(+1.99)
Platinum
957.00
(+2.51)
Brent Crude
44.34
(+0.63)
Palladium
2149.56
(+1.01)
All Share
57328.17
(+1.92)
Top 40
53000.40
(+2.02)
Financial 15
9871.33
(-0.07)
Industrial 25
76063.13
(+1.49)
Resource 10
59201.25
(+3.27)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 859 votes
It depends on how the funds are used.
74% - 5684 votes
No. We should have gotten the loan elsewhere.
15% - 1138 votes
Vote