Zupta coal contracts, by the numbers

The Gupta-affiliated Tegeta seems to have the Midas touch when it comes to the South African coal business.

The company’s contracts to supply coal to the embattled power utility Eskom at three of its mines – Koornfontein, Brakfontein and Optimum – have ballooned in value since Tegeta took control of them.

At Koornfontein, a R345-million contract mushroomed to R6.9-billion. At Brakfontein, some of the worst-quality coal in the country fetches a generous price as part of a R4-billion contract. And at Optimum, where the previous owner and mining behemoth Glencore couldn’t make it work, new bonus coal supply agreements mean there are now plentiful returns.

This is part of the strange nature of these dealings – some supply agreements appear to be priced very low and others are very high. And, when comparing one supplier with another, Eskom’s prices appear to vary widely.

Coal is a complex commodity, according to coal analyst Xavier Prévost. Comparing apples with apples is a near-impossible task. But even taking this into account, Tegeta’s money-churning mines are being subjected to an intensifying degree of criticism. Procedural issues relating to its coal contracts with Eskom have become the subject of several investigations.

A leaked report by PwC, commissioned by Eskom itself, revealed a litany of procedural issues in awarding the contract to Tegeta’s Brakfontein mine.

The treasury has launched its own investigation into the matter.

The public protector described a prepayment for one supply agreement between Eskom and Tegeta’s Optimum mine as a potential violation of the Public Finance Management Act on Eskom’s part and possibly fraud on Tegeta’s part.

The growing commotion has compelled Public Enterprises Minister Lynne Brown to refer Eskom’s coal contracts, dating back to 2007 and will include those signed with Tegeta, to the Special Investigating Unit (SIU) for examination.

TimesLive reported that President Jacob Zuma is the only person who can issue an official proclamation, which defines the scope and terms of a probe, authorising an SIU investigation.

The shareholding of Tegeta alone raises concern. Zuma’s son, Duduzane, owns 12.8% of Tegeta, according to a recent report by the Public Affairs Research Institute.

Various members of the Gupta family own 36% of the company, Gupta associate Salim Essa owns 21.5% and just over 20% is owned by two off-shore companies registered in the United Arab Emirates, for which ownership details are unavailable.

While the wheels of justice slowly turn, Tegeta’s coal mines are raking in money. Many of the supply agreements with Eskom will still run for years.

Koornfontein mine

Tegeta acquired the Koornfontein mine in 2016 as part of the Optimum acquisition.

The contract under the previous owner, Glencore, was to supply 1.8-million tonnes a year. Tegeta is to supply 2.4-million tonnes a year.According to amaBhungane, Eskom is now paying it R414 a tonne. The original contract value was R345-million but has grown to R6.9-billion, the website of the office of the chief procurement officer shows.

The treasury supported the expansion of the contract with conditions attached. But, according to amaBhungane, “indications are that Eskom failed to meet the conditions but signed anyway”.

The contract runs from 2016 to 2023, but the Komati power station is to be mothballed in 2019. According to amaBhungane, this means Eskom will either have to pay out for the rest of the contract or divert the coal elsewhere and absorb the additional transport costs.

Optimum mine

When the export coal price dropped in 2015, Glencore began incurring losses. According to the supply agreement, Eskom was paying Glencore R150 a tonne. Glencore’s proposals to supply coal at R300 a tonne were not only rejected by Eskom’s the chief executive Brian Molefe, he also resuscitated a R2-billion penalty, which was seemingly orchestrated to force the company out.

Tegeta took the mine off Glencore’s hands for R2.2-billion in April last year and undertook to continue to supply Eskom’s Hendrina power station at R150 a tonne, seemingly providing the utility with a cost saving. But other very favourably priced supply agreements from Eskom have come Tegeta’s way and helped the bottom line.

The same coal that Tegeta supplies to the Hendrina power station is fetching R583 a tonne as part of a short-term supply agreement with Eskom’s Arnot power station.

“That is where the money is. The reported high price they are selling at, plus transport, will make a fortune,” Prévost said.

But Eskom again claimed cost savings, saying the previous supplier to Arnot had supplied coal at R1 132 a tonne.

Eskom has also said Tegeta inherited the contract from Glencore when it acquired Optimum Holdings.

In the record of contract expansions, published online by the chief procurement officer, the extension of the contract for Tegeta to supply Arnot was blocked by the treasury. The contract value was to increase from R235-million to R854-million.

It was Eskom’s R659-million prepayment to Tegeta in terms of a coal supply agreement to Arnot that caught former public protector Thuli Madonsela’s eye.

The money, she found, appears to have been a loan to pay for Optimum Holdings. In her State of Capture report, she said this prepayment was, for Eskom, out of line with the Public Finance Management Act. She warned that Tegeta’s misrepresentation of the actual reason for the prepayment could amount to fraud.

On Thursday, the Daily Maverick reported how emails show Tegeta had originally lobbied for a prepayment of R1.68-billion.

Brakfontein

The Brakfontein supply agreement with Eskom was signed in March 2015 and is worth R4-billion over 10 years. It is to supply the Majuba power station. On average, Brakfontein supplied 1.2-million tonnes of coal in 2016 at R320 a tonne.

This is in line with what the Public Affairs Research Institute has found – that the average price Eskom paid coal suppliers was between R200 and R400 a tonne.

But, Prévost said, Brakfontein’s coal has been reported to be the worst steam coal in the country and is hardly worth R100 a tonne.

The quality of the coal has been called into question as different laboratory tests have come up with different results. Eskom chairperson Ben Ngubane told Parliament this week that testing was an ongoing process because the quality of seams of coal differed.

According to the institute’s report: “Eskom’s coal scientist and a senior laboratory services manager, Mark van der Riet and Charlotte Ramavhona, were suspended after conflicting lab results raised concerns about the quality of coal Eskom received from Brakfontein mine, through Tegeta.”

In August last year, Eskom wanted to extend this contract by R2.9-billion, but it was not supported by the treasury.

Brakfontein was largely the subject of a treasury report on Tegeta’s appointment and its compliance with treasury norms.

The PwC report found a number of problems with the procedure that resulted in Tegeta being awarded this contract.

The report also found many other problems with three other randomly selected contracts.

A treasury presentation on the PwC report findings shows:

  • Tegeta was not subjected to supplier prequalification and registration in accordance with the prescribed Eskom procedure, nor did it complete declaration of interest forms;
  • The contract was poorly formatted, contained a number of errors and ambiguities and was incomplete. There was no evidence of compliance with some of the criteria, specifically those pertaining to financial evaluation;
  • The relative percentage in the price escalation basket differs from mandated standards. Together with quality and the price-per-energy unit, price adjustments are critical financial parameters in multiyear contracts and warrant careful oversight and consideration. No rationale for the deviation from standards was provided. Eskom’s response, according to the presentation, was that the suppliers had pushed back on the standard escalation basket;
  • Despite Eskom’s procurement policy prohibiting single adjudication, one single signing authority entered Eskom into contracts in excess of R3-billion each, committing Eskom to agreements for 10 years or more. Despite having properly constituted tender committees at various levels, there is no evidence that tender committees were consulted.

This week the parliamentary standing committee on public accounts grilled Eskom executives on the irregular process that preceded the granting of the contract to the Brakfontein colliery.

ANC MP Vincent Smith called for the contract to be scrapped before it went any further, only to later realise that it was fruitless and wasteful expenditure.

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