Eskom should conduct a cost overrun review at Kusile and Medupi power projects

Eskom should conduct a cost overrun review at Kusile and Medupi power projects

Early this week it was revealed 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 some of the contractors that benefited from overpayments totalling R4 billion in the construction of Eskom’s giant coal fired Kusile Power Station project 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 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 to that will South Africans help paint a solid picture on why they were delivered late but more importantly why the significant cost overruns. Afterall – 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 a massive construction project management disaster. 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.  15 years later the both Medupi and Kusile are still on 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 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 capitals 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 have are the core of some of the biggest variations 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 his 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.

This is where dispute between Eskom and its contractors at Kusile power station and exactly what needs to be reviewed extensively in order to show that the R4bn could actually be a tip of iceberg considering how big the difference between what was budgeted and what was actually delivered at both Medupi and Kusile. The recent disclosure by Eskom on the specifics variation orders that were paid to contractors shows the extent of this problem.

For example, Eskom established in its progress report to the Standing Committee of Public Accounts (SCOPA) that ABB South Africa – one of the contractors at Kusile – issued 4 variations order amounting to R1bn. R251m was project acceleration, costs R311m was for additional cabling costs, R290m for another acceleration costs and R179m was 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 R550m 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 South African construction industry has been over the years. The 2010 FIFA World Cup build programme showed us how the companies can collude to rig bids and allocate work amongst 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 that the idea that Eskom managers collaborated deliberately with contractors is no longer an unfounded accusation. It’s a reality.

South Africans have a right to know which Eskom managers and companies that were involved in this elaborate scheme to loot and the specific variations orders and claims that increased costs, completion dates but more importantly what needs to be understood is why they occurred. This is important because disputes that occurred in these projects still pose a major contractual risk to Eskom due potential litigation. In fact – most 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 learn how 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 R450bn 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.

Comments are closed.