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Two mammoth power plants are sinking Eskom and South Africa

Utility’s botched expansion plan continues to haunt the country.

South Africa’s economy was roaring along in 2007 on the back of the global commodities boom when power shortages struck, bringing mines and smelters to a halt.

Then-President Thabo Mbeki publicly apologised for prevaricating about adding generation capacity despite repeated warnings that supply was constrained, and state power utility Eskom swiftly opened the spending taps. The botched implementation of the expansion plan has haunted the country ever since.

Eskom in 2007 alone approved 13 projects worth more than R200 billion that it said would boost electricity output 56% by 2017. The flagships were two mammoth coal-fired power stations, Medupi and Project Bravo, that were both expected to be finished by 2015 at a total cost of R163.2 billion.

Instead of resolving the energy shortfall in Africa’s most industrialised nation, the plants have been textbook studies on how not to execute large infrastructure projects. Medupi’s completion date has been pushed out until next year or 2021 and Kusile, as Bravo is now called, is scheduled for 2023. The delays have given South Africa months of rolling blackouts, an economy in deep trouble and a huge headache for its president, Cyril Ramaphosa.

While Eskom’s current management and Ramaphosa’s government have sought to come to grips with the problems at Medupi and Kusile, there’s no guarantee the plants will ever perform optimally.

“They needed to basically call a halt to the whole project and do a reset — to go back into the contracts and the design and engineering,” said Mike Rossouw, who was appointed as an independent consultant to Eskom in 2014 and advised it on how to address its construction challenges. “They never did that and haven’t at any stage and the consequences are there for all to see.”

Meanwhile, the anticipated price tag has ballooned to R451 billion, including the costs of interest during construction and fitting the plants with equipment needed to meet environmental standards. That equates to Eskom’s entire current debt, a burden that’s left it unsustainable and reliant on a three-year, R128 billion government bailout to remain solvent.

  

The utility now concedes multiple failings that led to cost overruns and delays, including inadequate planning and front-end engineering development, plus ineffective contracting strategy, execution and oversight. Contractors also performed poorly and incurred limited penalties, while strikes and demonstrations compounded the implementation woes. Turnover at the top — the company has had 11 permanent and acting chief executives since construction began — didn’t help.

Steve Lennon, Eskom’s former group executive for sustainability, recalled how Medupi’s construction went awry when the utility was ordered to fast-track the process.

“The project was under development and implementation at the same time, which is clearly a recipe for disaster in terms of any good practice for major project execution,” he said by email. “There was a shortage of contractor capacity given the worldwide demand for large-scale generation plant at the time. That meant that the main contractors could virtually name their price and conditions.”

Eskom also assumed much of the risk of developing Medupi and Kusile when it decided to coordinate the projects, rather than appointing an outsider to oversee engineering, procurement and construction—a common practice in plant development.

“The South African market at the time was not ready for a single contractor to handle the onerous risk of executing a project of this complexity and magnitude,” Eskom said in an emailed reply to questions. The company also wanted to develop skills and create jobs by bringing in small and medium-sized contractors, it said.

Medupi and Kusile, expected to be among the world’s biggest coal-fired stations, share the same configuration. The latter’s two towering smokestacks and six enormous boilers are visible from the main highway that runs between Johannesburg and the east coast.

Speculation that the plants could be delayed first surfaced in 2008. While Eskom initially denied that the projects had gone off track, it was forced two years later to adjust the time lines and anticipated price.

Eskom Rotek Industries, a wholly owned Eskom subsidiary, was appointed to establish the Kusile site — a process that entailed digging drains, laying pipes and doing the earthworks and terracing. Its contract was terminated early on because it was unable to deliver. That created a bottleneck for other contractors, which filed for damages.

Eskom said it has paid out R14.8 billion to settle the claims, which totalled R252.9 billion, and it filed claims of its own worth R2.6 billion against companies that failed to meet their contracts.

The delays and design changes reverberated throughout the program. While the manufacture of equipment continued as planned, it was left sitting in warehouses or on site with the clock ticking on warranties, according to Makgopa Tshehla, a professor at the University of South Africa and an expert on large construction project management.

The biggest construction headaches were caused by the installation of deficient boilers supplied by Mitsubishi Hitachi Power Systems Africa, according to Eskom. Talks on how to resolve the problems are ongoing, according to Jan Oberholzer, the utility’s chief operating officer.

Mitsubishi Hitachi didn’t respond to questions about the defaults or the discussion of plans. In 2014, Hitachi Power Africa, an earlier iteration of the company, blamed local subcontractors for faulty welds on the Medupi boilers, but Eskom’s former finance director, Paul O’Flaherty, said the main contractors were at fault.

Tshehla says Eskom’s board should ultimately bear most of the blame for failing to properly assess the projects and the related risks, and for not holding management accountable for poor performance.

Oversight deficiencies were compounded by the repeated changes to Eskom’s top management and demands by politicians for them to get a move-on with the projects.

“Eskom was already under the whip for lack of capacity so they were chasing like mad dogs to get those power plants done,” Rossouw said. The management “took on responsibility and risk which I don’t think the board ever understood properly. They were hardly capable of conveying a concise, understandable picture to the board.”

In 2012 Eskom invited then-President Jacob Zuma to attend a pressure test on Medupi’s first boiler to show that the project was running according to plan. Rossouw recounted that management ignored engineers’ advice that the plant wasn’t ready and, when steam was pumped into pipes connected to the boilers, tools and other debris were blown out.

Zuma gave no indication that he was aware anything was wrong. He said in a prepared speech that he was “delighted” with the progress being made on the project and congratulated his minister, Eskom and its workers “for a job well done.” Zuma returned to the plant in 2015 when it delivered its first power to the grid — two years later than anticipated at the time of his previous visit.

© 2019 Bloomberg L.P.

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These so-called power stations were never intended to generate electrical power, it was constructed to generate political power by creating opportunities for cronies. If we understand this, we can actually be very proud of this wonderfully efficient masterpiece in social engineering. These gigantic heaps of scrap-metal are monuments to remind voters about the costs of their populism, collectivism, incompetence, cronyism, cadre-deployment and political myopia.

One comment is a blatant lie. ” “There was a shortage of contractor capacity given the worldwide demand for large-scale generation plant at the time. That meant that the main contractors could virtually name their price and conditions.”

This was conceived post the 2008 financial crash. On the contrary i submit that there was a pool of expertise available world wide. The bottom line is when it comes to project managers you cannot give someone a title and expect they inherit the skills that go with it. This is something the ANC has never understood.

Imagine the glee in the suppliers boardrooms when they reported back that a small bag of incentive could buy anything on these projects, that the people negotiating have no technical knowledge, have no experience, have no desire for success. If someone bothers to go back you will see that one of these stations was supposed to come online in 2012 at a cost of R20 odd billion.

“Eskom also assumed much of the risk of developing Medupi and Kusile when it decided to coordinate the projects, rather than appointing an outsider to oversee engineering, procurement and construction—a common practice in plant development.

“The South African market at the time was not ready for a single contractor to handle the onerous risk of executing a project of this complexity and magnitude,” Eskom said in an emailed reply to questions. The company also wanted to develop skills and create jobs by bringing in small and medium-sized contractors, it said.”

Anybody here who believes the rationale as stated in the second paragraph?

Mr Rossouw is quite right. Add in that the authorities were hell bent on not using the experience that had, very successfully, provided other power plant. This experience also had unrivaled manufacturing capacity in SA (presumably capacity that is now lost). Had the right approach been taken SA would now have two new power plant up and running:Perhaps giving the government something to crow about?
This whole business is a tragedy of quite monumental proportions.

“unrivaled manufacturing capacity”

Wow, do you actually believe this? They really brought up a generation of sheep.

So the coal costs have gone up 6folds(but the tonnage remains flat! have coal prices gone up that much or is Eskom being raided by coal producers? ), employee costs up 3folds but MW output only up 2WM and to cover the above and the new debt prices are up 4.5folds. This just looks like very poor management of the highest order…

Coal prices are pretty much all over the place.
Like in the start of 2007 it was ~50USD per ton, and right before the financial crisis in 2008 it peaked at 160USD per ton

And it been going up and down since trading between 120-60USD per ton.
Its now at 45USD per ton, but as early as Jan 2019 it was still at 90USD per ton, so its taken a massive nose dive this year.

but you do the math:
2007 : 50USD * 7 = 350 ZAR per ton.
2019 : 90USD * 14 = 1260 ZAR per ton.

So the cost of coal did go up by a factor of about 3.

But the recent massive slump in prices should help Eskom immensely.
45USD x 15 = R675 per ton today.

When I last checked Eskom uses about 113M tonnes of coal P.A
So we are taking about savings of around 113M x R600 savings per ton
= R67.8B saving, if they can buy a years supply of coal at these prices.

When last did we as South Africans achieve something to be proud of?? (And I am not talking now about the 9000 species of Fynbos that doesn’t grow anywhere else in the world.)

The first heart transplant!!! O..sorry…that was a politically incorrect comment. Let me try again.

The Ndlovu Youth Choir!

“Vuvuzela”?
….cellular ….”call me back”? ( actually was wide spread in South East Asia before hand)

The #imstaying cretins should read and comprehend this.

And the people who still live in SA. You sound a bit like a braai moaner who doesn’t take his own advice.

ANC misrule is worse than apartheid.

Nope, not even close.
Try to live your life without basic human rights and being dictated by the state what you can and cannot do.

I just want to clarify I am not defending the mismanagement of Eskom, because it is truly spectacular, BUT, stripping people of basic human rights is way too much of a price to pay for anything.

Zimbabweans have been ruling themselves since 1980. Unfortunately one cannot eat “basic human rights” like the right to vote. What good has “the right to vote” brought them?

@jnrb
It goes far beyond the right to vote, choosing where you can:
live,work,shop or even take even use a toilet is not something to take lightly.

And any comparison to Zim would be flawed since they don’t even have a functioning democracy, with voter fraud well documented.

The real question would rather be: Would people in China have preferred their government which suppresses free speech and everything it disagrees with in return for economic growth?
Based on the Hong Kong protests, I think once people have tasted democracy and all the freedoms that come with it they are not willing to go back.

“please forget our sins and look at the monsters who learnt all our tricks”.

POWER provided to you, courtesy from ex-terrorist revolutionaries(?)

This sadly, must be the ANC’s best effort.

(The 2nd image with heading “Build Bill”/Medupi, refers:
What’s the deal with the Blue…White…Orange bars???
I thought one is not allowed to publicly display the old Apartheid-flag? or something resembling it?)

Wrong way round boet. Just because it is ugly, doesn’t make it the old flag.

Using large-scale infrastructure development as opportunity for local employment, skills development etc all good; but the SA version is populism first and business principles second, leaving a situation that labour on these power station projects receives exorbitant allowances and bonuses enforced by Eskom – and in this, the labour unions are to be blamed as much as government, ANC, Eskom and whatever. Add unnecessary and exorbitant dollar-based employment of droves of expat project overseers and managers, taxi mafia, the questionable Hitachi/ANC relationship and Eskom engineering personnel being too young, inexperienced and not fit for quality and compliance management and commissioning… boom, the projects go bust. But the labour unions are as guilty as ANC/EFF populism – and the deplorable trend of unnecessary expensive overseas recruitment for project management and controls personnel is a disgrace that must end.

Another unaccountable SA project manager hoping for a freebie. No thanks.

Silver lining. Thinking. Building nuclear. Biggest in the world. just to show we can. Lucky it is coal fired.

The procurement of the two power plants was too hasty and using old technology but the main aim was the corruption.

If above all true then appears to be gross dereliction of duty by many top Eskom cadres.

Criminal and civil charges should be instituted against the top management that ordered the fast tracking and did not implement the basics of project management.

Name them and jail them.

The deployment of cadres was for the purpose of enabling spoils to victor and loyalty to the inner circle. Like the Mugabe example. Now that the tendons are cut and the beast has fallen to its knees we need to invoke the power of magic and make it stand once again.
For an appropriate backcloth hell will freeze over at the same time. The victors and the next generation of cadres have had their fill and left the land to their extended families. Over and out.

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