Chancellor House made 5000% return on Hitachi deal

Johannesburg - Hitachi’s $19m settlement with the US Securities and Exchange Commission provides insight into how the company became a crucial supplier to South Africa’s behind-schedule power plants that have yet to solve the country’s electricity shortage.

The SEC last week said Hitachi had “inaccurately recorded improper payment” to an arm of South Africa’s ruling African National Congress. Hitachi neither admitted guilt nor denied the allegations, the SEC said in a statement.

It said the Japanese company landed $5.6bn in contracts to build boilers for new power plants intended to boost South Africa’s electricity-generation capacity by about 25%, while what it described as an ANC “front company”, Chancellor House Holdings, made a 5 000% return on its investment in the local Hitachi unit.

A decade after the construction of the plants was ordered, with four years of delays, Africa’s most developed economy is left with regular power cuts. The shortages fed into a 1.3% economic contraction in the second quarter. The ANC and Chancellor House weren’t accused of wrongdoing in the SEC complaint.

A Hitachi spokesperson in the UK, Kelly Smith, said the company is unable to comment, because of its settlement conditions. The ANC “categorically states” that it wasn’t “involved, implicated or approached to answer on anything relating to the charges brought against Hitachi”, the party said in a statement. The office manager at Chancellor House said Managing Director Mamatho Netsianda wasn’t available to comment, and the company didn’t respond to emailed questions.

Investment arm

The ANC has referred to Chancellor House, named after a building former leader Nelson Mandela once worked in as a lawyer, as its investment arm. The company is also active in real estate, mining and oil and gas, it said on its website.

In April 2013 state power company Eskom Holdings said that Hitachi had agreed to repair about 9 000 faulty welds at the Medupi power plant and that the company, along with other equipment suppliers, had assured it that a timetable that would allow Medupi to start power generation by the end of 2013 would be adhered to.

The first of Medupi’s six units began supplying power to the national grid in mid-2015, with the rest yet to start up. Eskom said delays would boost the cost of the plants and then Public Enterprises Minister Malusi Gigaba said “the country can’t afford any delays”.

Economic cost

“This continues to devastate our economy,” Mmusi Maimane, leader of South Africa’s main opposition Democratic Alliance party, said in a statement last week. “The Hitachi tender has cost South Africa dearly. The failure by Hitachi to deliver on their contractual obligations has been one of the underlying reasons for the lengthy delay in bringing Medupi online, resulting in countless job losses and cost the economy billions in lost revenue due to prolonged” power cuts.

Eskom’s tendering process for the boiler contracts was “open, legitimate and above board”, spokesperson Khulu Phasiwe said by phone.

Eskom hadn’t ordered a major new power plant since the mid-1980s, so in 2006 the government completed its studies and gave the final go ahead to build two of the world’s biggest coal-powered facilities, at about 4 800 megawatts each: Medupi and Kusile.

Boiler and power station-supplier Hitachi Power Europe was keen to land some of the contracts in South Africa. By 2005, it set up a joint venture with Chancellor House called Hitachi Power Africa in preparation, according to the SEC complaint.

The company’s acquisition of a stake in Hitachi’s African unit met the government’s Black Economic Empowerment criteria necessary to qualify for state contracts, the SEC complaint said. Chancellor House was “doing its very best” to help Hitachi win the boiler contract, Hitachi officials said in internal communications, according to the SEC.

In 2007 Eskom said it awarded Hitachi a contract for Medupi’s boilers without specifying whether there were other bidders. The next year Hitachi won a similar contract for Kusile.

‘French multinational’

Eskom had initially awarded the Medupi boiler contract to a “French multinational”, according to the SEC. Hitachi learned that there were “difficulties” in the negotiations between Eskom and that company, the SEC said, and “directed Chancellor to help Hitachi win reconsideration of the boiler component of the Medupi power station contract”.

Hitachi’s European unit agreed on a success fee with Chancellor House if it was able to help win the boiler contracts, the SEC said.

In October 2007, an internal Hitachi memo said Eskom’s ANC-led board could give it the deal, stating: “Balance of political power in board (ANC driven currently in our favour).”

Chancellor House paid $190 819 for its stake in 2005. By July 2008, Hitachi’s African unit started making payments of success fees, which it reported as "consulting fees", and dividends totaled about $6m. In February 2012, it also paid Chancellor House $4.5m to buy its 25% stake, giving the ANC front company a 5 000% return on its investment, the SEC documents showed.

Meanwhile, the delays were adding up at Medupi and some of them were down to Hitachi. The construction of the boilers was slowed by faulty welds that Hitachi said “were related to local subcontractors”.

Robin Duff, the local Hitachi unit’s chief financial officer, said there could be an issue when asked about its arrangement with Chancellor House in an April 2010 interview in Johannesburg.

“If government is acting as umpire and player, that is a conflict of interest,” he said.

Duff, who hasn’t been accused of wrongdoing and didn’t answer calls to his phone, also said the payments going to Chancellor House had been “ring-fenced” for disadvantaged black South Africans such as women, youth, the disabled and the aged.

We live in a world where facts and fiction get blurred
In times of uncertainty you need journalism you can trust. For 14 free days, you can have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy. Invest in the future today. Thereafter you will be billed R75 per month. You can cancel anytime and if you cancel within 14 days you won't be billed. 
Subscribe to News24
Rand - Dollar
Rand - Pound
Rand - Euro
Rand - Aus dollar
Rand - Yen
Brent Crude
Top 40
All Share
Resource 10
Industrial 25
Financial 15
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders