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The real issue Molefe didn’t disclose to parliament

What will the delay on Medupi and Kusile cost?

Acting Eskom CEO Brian Molefe’s briefing last week to the parliamentary portfolio committee for public enterprises was classic Eskom.

Lots of information to talk about, very crucial information slipped in as if it is of little importance and total silence about the real issue.

Molefe and his top Eskom team talked about load shedding, municipal debtors, prepaid meters and funding, to name but a few. It was also slipped in that Eskom’s new power stations Medupi and Kusile will be completed by 2020 and 2021 respectively.

It takes a very clear mind to keep up with the moving target that is Eskom’s completion dates on its new build program and amid all the other information this titbit didn’t receive the attention it deserved.

Eskom in fact (quietly) announced that the completion dates for these two power stations have been moved forward (again) by one year each – without much attention to detail about the reasons for the further delays.

What it kept quiet about, is the cost of these further delays.

To be fair, when asked about it, acting financial director Nonkululeko Veleti said the updated cost will be provided at the announcement of Eskom’s financial results for the year ended March 31. This announcement is usually made in June/July every year.

But how much bad news can be expected in these numbers?

According to Eskom spokesperson Khulu Phasiwe the official budgets for Medupi and Kusile currently stand at R105 billion and R118 billion respectively.

The Medupi number seems fairly recent. In the integrated report dated March 31, 2014, the budget was still at R105 billion with synchronisation of the first unit planned for September 2014. We know the synchronisation only happened only five months later in February this year.

It seems however as if it was considered an understatement at the time. The report stated: “A review of the current R105 billion budget is underway and entails the following:

  • An independent review of the deep dives of the control/cost logs of each contract package and owner development cost in order to quantify the cost impact;
  • The refinement of the integrated project schedule for units 5 to 1. The organisational structure has been reworked, with some reorganisation done for Units 5 to 1. A new unit based organisation is in place, which includes package-based commercial management.”

With the newly adjusted deadline, it seems as if at the very least the cost of a a year and five months delay has not been included in the R105 billion.

Kusile’s R118.5 billion budget is another matter. It has been unchanged at least since the end of March 2012, when the completion date was set for 2018. A year later it was still considered “achievable” by Eskom.

Now we are talking about completion three years later in 2021, the cost of which has not been included.

Economist Mike Schüssler says to get a rough idea of the numbers one may be talking about, you have to take into account the extra cost to pay contractors who will be on site for much longer, management fees as it is public knowledge that Eskom brought in project management skills from overseas to try and get especially Medupi back on track, and even the replacement of some components as the quality of some of the work was questioned.

Eskom earlier disclosed that claims from contractors on the two projects amounted to between R30 billion and R40 billion.

Added to that is the increased cost of borrowings as the revenue from these power stations are further delayed and cost escalate.

He estimates that another R100 billion to R150 billion may be added to the total cost to compeltion of the two projects.

At an interest rate of 9% at Eskom’s current credit rating, he says the utility may have saddled itself with up to R1.5 billion extra cost per month, “conservatively speaking”, he says. “Remember, it is interest on interest and the amount will grow until at least 2020, íf Medupi comes online by then.”

Ratings Africa analyst Leon Claassen agrees with this estimate.

He says it is crucial to know exactly how big the over-expenditure is.

Apart from the direct cost of the delays and interest, the opportunity cost of delayed revenue from the two plants is lost forever, he says.

“Eskom is playing games. It needs to be open and honest about the delays, the reason for it and the cost”, Claassen says. “I suspect the total impact will be scary. Eskom is not giving us the whole picture.”

Molefe indicated that Eskom will engage ratings agencies in an effort to understand what it has to do to improve its ratings. It will also increase its focus on more affordable development financing as a source of funding, to reduce its finance cost.

While Molefe with his Public Investment Corporation and Transnet experience is well qualified to explore these avenues, Claassen says ratings agencies and financiers will ask the same question: What will the total cost of Medupi and Kusile amount to?

“They will need to understand what the cost is, how much will be borrowed and whether the income from the assets will be enough to service that debt.” In this calculation the completion dates of the projects are crucial, he says.

Whether the number is available, but not communicated or whether it hasn’t been calculated, is not clear.

Hopefully Lynne Browne’s drive to get proper answers through an independent investigation will bring further clarity.

It doesn’t seem as if Eskom will be able to hide the real cost of Medupi and Kusile for much longer. And the truth may be really ugly.

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COMMENTS   7

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These people at Eskom (including Molefe) are a bunch of loose cannons. They have absolutely zero ability to plan, run, manage and fulfill a project on time and within budget. The government and Eskom are responsible for a pedestrian economy as a direct result of them not being business savvy and yet still wanting to hold onto all the levers of the economy to the detriment of all the people. The paying residents of Eskom’s intermittent services and the tax payers are shortly going to get gatvol and will institute some form of collective resistance, and even possibly refusing to pay bills until the illegal users are brought to book. The illegal users suffer no financial hardship, all they suffer is black outs when their usage affects all the paying people. The have not’s seem to be getting their fill with this Eskom fiasco

Graham, your comment is very reminiscent of the rest of Africa. Unfortunately we are no longer a step above the other African countries, we are now fully African in every sense of society. Viva Africa!

Eventually everybody will realize that Medupi is nothing else, but the largest scrapyard in the country, stocking up on stainless steel and run by Luthuli House.

Oh goodness, is Eskom only going to start looking for cheaper (development) finance NOW! Let’s see if Molefe can pull it off with the cheaper finance – if we all keep quiet enough about cost overruns at Medupi and Kusile, maybe he’ll persuade financiers…

Oh goodness, is Eskom only going to start looking for cheaper (development) finance NOW! Let’s see if Molefe can pull it off with the cheaper finance – if we all keep quiet enough about cost overruns at Medupi and Kusile, maybe he’ll persuade financiers…

I think the cost increase will kill the golden goose of the paying consumer when passed on. The cost of ESKOM electricity will soon be higher than that of generating it either yourself or in a syndicate for both private and commercial use.

I agree, and then the municipalities would loose a large portion of their income, as well as the ability to disconnect non-paying owners. The tax revolt would begin slowly, but just like the e-toll debacle, gain momentum over time.

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