/ 23 November 2007

ANC front wins huge state tender

One of South Africa’s largest state contracts yet has been awarded to a consortium that includes the African National Congress’s (ANC) own funding company.

The contract, to supply steam generators for South Africa’s first new major power station in two decades, is worth about R20-billion. Eskom, the state electricity company, last week announced the award to a consortium comprising a local and a European subsidiary of Japanese multinational Hitachi.

About 60% of the contract will be performed by the local subsidiary, Hitachi Power Africa, which is 25% owned by the ANC company, Chancellor House Holdings.

Chancellor House has a R3-billion stake in the contract. This may double as Eskom considers extending the order to a second new power station.

The contract award, after a tender process marked by delays, price escalations and a lack of serious competition, highlights the problem of the ruling party being both player and referee: it benefits from contracts emanating from the government it runs.

The Mail & Guardian and the Institute of Security Studies corruption and governance programme last November exposed Chancellor House, named after the downtown Johannesburg building where Nelson Mandela and Oliver Tambo once ran their law practice, as a ‘business front set up by the ANC to make profit on its behalf”.

ANC secretary general Kgalema Motlanthe confirmed in a later interview with the Financial Mail’s Carol Paton that the company was an ‘ANC vehicle” whose sole purpose was to fund the ruling party.

Paton’s notes reflect Motlanthe also saying: ‘The ANC can have an investment vehicle — but it must do business out[side] of government procurement, even outside of South Africa, so there’s no conflict of interest.”

Although the Eskom contract is not the first instance in which Chancellor House has strayed across that line, it appears to be the starkest. Eskom is 100% owned by government and answers to Public Enterprises Minister Alec Erwin.

Eskom failed to answer detailed questions this week, but said it took ‘every precaution to ensure that the adjudication process was thorough and defendable”. Erwin did not reply to questions.

Electricity price increase

The contract award is part of Eskom’s expansion programme to catch up with rising electricity demand. The programme, currently valued at more than R200-billion, may top R1-trillion by 2025.

Eskom has sought approval from the National Energy Regulator to charge consumers 18% more to help fund the programme. Business and labour have condemned the intended increase.

The R20-billion for six steam generators ordered from the Hitachi consortium accounts for the biggest single chunk of the R79-billion Eskom plans to spend on Medupi, its new coal-fired, base load power station near Lephalale in Limpopo. Site preparations started in May.

Medupi will be the first new base load power station constructed locally in more than two decades. Smaller ‘peaking” stations have been commissioned.

Eskom also announced last week that it had ordered turbines worth about R13-billion for Medupi. This contract went to French industrial group Alstom. The Hitachi and Alstom contracts combined were the largest in its 84-year history, Eskom said.

They also appear to be among the largest in South African history, comparing in size with the controversial arms deal, which had a price tag of R30-billion when announced in 1999. The Gripen fighter jets and Hawk trainers, the largest component of that deal, cost R16-billion.

Eskom’s orders from Hitachi and Alstom — and hence Chancellor House’s R3-billion stake — are likely to double in size this month without a further tender.

Eskom said in a press release last week: ‘Based on the Medupi contract, Eskom is currently in negotiations with Alstom and Hitachi for turbines and boilers [steam generators] for its next coal-fired power station as part of its fleet strategy.”

Eskom is planning to build another power station similar to Medupi in Mpumalanga. Engineering News said Eskom Enterprises managing director Brian Dames indicated that the Mpumalanga contracts would be signed before the end of the month. Eskom Enterprises is responsible for Eskom’s capacity expansion programme.

Aim to fund ANC

Chancellor House was set up in 2003 and is wholly owned by the Chancellor House Trust, whose sole aim, although this is not recorded in the formal trust deed, is to fund the ANC.

The trustees, according to the deed, are former North West premier Popo Molefe and Salukazi Dakile-Hlongwane­, a prominent businesswoman.

Their positions reveal an apparent conflict of interest apart from the ANC’s role: Dakile-Hlongwane is listed as a director of Eskom Enterprises and Molefe is a close business partner of Valli Moosa, the former environment minister who chairs Eskom. Molefe and Moosa founded and co-own leading empowerment vehicle Lereko Investments. Eskom did not respond to this at the time of going to press.

ANC national spokesperson Smuts Ngonyama this week said he was unaware of the Eskom deal involving Chancellor House. ‘I don’t have information about that … that’s the TG’s section,” he said, referring to ANC treasurer general Mendi Msimang.

A range of M&G sources have said Chancellor House ultimately answers to Msimang, who did not return calls before the M&G went to press. Chancellor House chairperson Taole Mokoena did not return calls either.

Chancellor House’s MD is former deputy defence secretary Mamatho Netsianda. He deferred comment to Hitachi Power Africa, saying this was ‘the company that did the tender” and that ‘we are like any other company which has an interest in other companies”.

Netsianda did not deny that Chancellor House was set up to fund the ANC, but claimed that ‘we have contributed not a cent — we have nothing”. Asked whether the Eskom tender would change this, he said: ‘I’m not sure about that, we are not economists.”

Hitachi Power Africa MD Robin Duff confirmed Chancellor’s 25% shareholding.

Helge Schulz, spokesperson for German-based Hitachi Power Europe, which is Hitachi Power Africa’s controlling shareholder and partner in the Eskom tender, did not answer directly a question about the propriety of Hitachi’s partnerhip with an ANC company. He said Chancellor House’s role ‘is as invester and adviser on local issues such as skills development, empowerment and socioeconomic initiatives. Hitachi Power Europe can see no conflicts with German or South African compliance rules or international standards.”

Hitachi Power Africa was formed in 2005, with Chancellor House joining as a shareholder that same year. From early on, Hitachi Power Africa aimed to get contracts from Eskom’s expansion programme.

Industry publication Africa Electra quoted Duff in February last year as saying Hitachi Power Africa was negotiating a large independent power contract, but adding: ‘The first new Eskom coal-fired base load station, which is scheduled to come out on enquiry in April this year, is also a target project for us.”

Tender troubles

In spite of South Africa’s pressing appetite for more electricity, Eskom appears to have struggled with the Medupi procurement process. In its 2005/06 results, Eskom projected Medupi’s total cost at R26-billion.

The plan was for the procurement of ‘long lead items” — the steam generators and turbines included — to be finalised by December last year. They were not. Eskom’s board decided that month to double Medupi’s capacity from three to six units.

In February this year Eskom told the M&G: ‘The process is well advanced and will be finalised in the first quarter of this year.” That deadline, too, came and went.

In May Business Report, citing the delays, said Medupi was projected to cost R66-billion. Although the specification for Medupi had since doubled, this was well over double the original cost estimate.

In August, Engineering News quoted Eskom’s Dames as saying the steam generator and turbine contracts would ‘certainly” be awarded by the end of the month. Eskom finally announced the contract awards only on Tuesday last week.

Eskom did not answer detailed M&G questions on the delays or the price escalation. The projected full cost now is reportedly R78,6-billion, three times the original R26-billion figure, although the project has doubled in size.

Hitachi’s Duff said that for its steam generators there was ‘no price escalation from what was tendered”.

No competition

Eskom’s tender process appears to have attracted very little competition — only Hitachi and Alstom bid for the steam generators and turbines, and both appear effectively to have stood back for the other on part of the bid.

Duff confirmed Hitachi had tendered for the turbines contract won by Alstom, but said: ‘We could not meet the original delivery schedule.”

A source close to Eskom confirmed that Alstom had bid for the steam generators contract won by Hitachi, but said Alstom had ‘effectively disqualified themselves” by not meeting Eskom requirements.

In January this year the European Commission competition authorities imposed a record €750-million fine on members of a cartel that included Alstom and Hitachi and were found guilty of colluding to fix prices and share out tenders.

According to the commission, members of the cartel met regularly ‘to prepare sham bids by the companies not supposed to win the tender, in order to leave an impression of genuine competition”.

Both Alstom and Hitachi are appealing the finding.

Eskom said in a prepared statement: ‘Mindful of the importance of robust commercial processes and the inevitable public and media interest, Eskom took every precaution to ensure that the adjudication process was thorough and defendable — Eskom is confident that the processs that was followed has resulted in procurement that is cost effective, competitive, fair, equitable and transparent.”

Eskom said the process was subjected to internal and external review. ‘In this regard an independent audit by Deloittes concluded that the process was thorough and comprehensive.”

The audit, Eskom said, found the process unbiased and in full compliance with laws and policies. ‘Following a detailed integrity check on all employees involved in the process, as well as members of the decision making team, there were no conflicts of interest or any other issues that might bring into question the independence and fairness of the process.”