Business

Transnet: More expenses in the pipeline

Lynley Donnelly

Like many other state endeavours, the costs of Transnet's latest fuel project have kept on soaring, writes Lynley Donnelly.

Public Enterprises Minister Malusi Gigaba says the lessons learnt from the megaproject will bode well for future ones. (Madelene Cronjé, M&G)

Transnet's new multi-product pipeline, sullied by R14-billion in cost overruns and three years of delays, joins a list of very big, very expensive state capital projects that have come to weigh on South African consumers.

But Public Enterprises Minister Malusi Gigaba denied it was evidence that state-led development of the economy was failing as the country embarked on its R4-trillion infrastructure roll-out plans. Last week, he outlined the findings of a review of the pipeline project. The price tag rose from R9.5-billion when it was launched in 2008 to the R23.4-billion it will now cost.

The review, which investigated the project's soaring costs and delays, was not released publicly because it was deemed to present "corporate challenges in terms of the company's reputation and risk assessment", Gigaba told the Mail & Guardian this week. Nevertheless, it found that "systemic failings" at all levels contributed to the cost overruns and delays.

Problems included the still unexplained replacement of the main engineering, procurement and construction contractor in the early stages of the project. This was followed by the appointment of a second contractor who performed poorly. The review found that Transnet Capital Projects, which was responsible for project management, also lacked sufficient capacity and depth of experience for a megaproject and governance structures, and systems of control were inadequate.

Gigaba said the project had been rolled out under pressure because of  concerns over the security of the supply of fuel to South Africa's inland region. "That meant we were in a position where we had to act speedily, beginning the build process when land acquisition and environmental issues had not been resolved."

Sufficient oversight
It also came at a time when South Africa had not implemented large capital projects of this size and scale for many years and the "capabilities and best practices in terms of capital projects management had not been built properly". The same could be said of Eskom, which has seen rising cost estimates for its Medupi and Kusile power stations.

Sufficient oversight mechanisms and capabilities did not exist in the department of public enterprises, Gigaba said, and the establishment of the department's project management office was supposed to address this. At company level there was also no clear delineation of roles between Transnet Capital Projects, tasked with constructing the pipeline, and Transnet Pipelines, the client in the company. "This meant there were governance and control problems, which have now been addressed," said Gigaba.

Transnet did not have the advantage of a presidential infrastructure co-ordinating committee, which could have addressed the problems of delayed land use applications and environmental permits when it began the pipeline build. The development of strategic bodies like the commission, along with policies such as the national development plan, meant the state could now plan ahead for future infrastructure requirements, Gigaba said.

Transnet has worked to address internal problems. It has created an oversight structure that is chaired by chief executive Brian Molefe. All chief executives from the group's business units participated to avoid the confusion over role designation and responsibilities that had hampered the pipeline, said Gigaba.

The project is an expensive learning curve. In 2010, a 7.5c/litre addition was made to the fuel levy to help Transnet to pay for the increase in the specifications of the pipeline from 16 inches to 24 inches.

Petroleum pipeline tariffs that the national energy regulator granted to Transnet have also steadily increased. In 2011 it was granted an additional revenue allowance in the tariff to ensure it could cover debt repayments and maintain its credit rating. This allowance will be recoverd by customers over time. Transnet has applied for a 22% tariff increase for the 2013-2014 financial year.

Gigaba said the government had learnt from the new multi-product pipeline, along with projects such as the 2010 World Cup and the Gauteng freeway improvement projects. "We are now much better placed to implement projects of this scale."

The government would "never agree to the proposition that the state had no role to play" in the economy, Gigaba said. However, it cannot implement megaprojects alone. The state has signed a memorandum of understanding with Business Leadership South Africa, among other bodies, to draw on private sector expertise and resources. 

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