Eskom briefing on Infrastructure Programme

Meeting report

Eskom Presentation
Mr Paul O’Flaherty, Financial Director of Eskom, stated that Eskom covered primary energy sourcing; generation; transmission; distribution, customer service and construction. It was more of an engineering, procurement, construction and project management (EPCM) company than a contractor. It did not have complete oversight over sub-contractors nor their employees, and managed only the contractors who were directly contracted to the company.

Eskom was established in 1923 as the Electricity Supply Commission. In July 2002, it was converted into a public limited liability company, wholly owned by the SA government.  It was one of the top 20 utilities in the world by generation capacity (41 194MW). The company generated 95% of the electricity used in South Africa and about 45% of that used in Africa and was involved in generating, transmitting and distributing electricity to approximately 4,5m customers in the residential, mining, industrial, commercial, and agricultural sectors.

To meet the increasing electricity needs of South Africa, Eskom had managed the construction of
31 000MW of new capacity between 1970 and 1990. In the following decade, electricity had been in over-supply and little had been invested in new electricity generation. This had resulted in a gradual loss of skills, knowledge and know-how from Eskom and from South Africa. The organisation had now returned to the cycle of under-supply and was committed to meeting the electricity and related infrastructure needs of its customers and contributing to the developmental needs of South Africa. During the last decade Eskom had invested in re-establishing its engineering, procurement, construction and project management expertise to support a massive expansion programme.

Eskom’s EPCM organisation was undertaking and managing one of the largest construction projects in the world. The Medupi and Kusile projects ranked among the top five power generation projects in the world by capacity. The company’s portfolio was diverse and included projects in the energy, transportation, water and communications sectors. Geographically, Eskom’s newly-constructed projects were positioned all across South Africa.

Through delivery of large construction projects, Eskom had continued to invest in improving its engineering, procurement, construction and project management (EPCM) capability, its people and its systems, processes and tools. The company had aligned its contract management, financial systems, project controls, project system and processes, quality standards and safety with that of its peers.  Increasing the supply from local industry and creating jobs was critical. This required knowledge, skill and technology transfer. The company continued to drive this actively by incentivising industry partnerships, employing local labour and through training.

Since 2005, the company had delivered 5 200 MW of generation capacity, 3200 km of transmission network, and 17 700 MVA of substation transformers. The infrastructure currently under construction would create approximately 40 000 jobs and more than 50% of this spending would be local. Eskom currently had a six-year capital project portfolio worth R453bn. The company had continued to benchmark itself and a number of steps were being taken to understand its performance and improve potential.

Eskom had been facing programme challenges since its inception. The market within which Eskom was operating was extremely tight, with significant demands on suppliers and basic commodities being a feature since 2005. The supplier market was global and limited, and was experiencing shortages of material, components and engineering capacity; fixed price or construction commitments were unable to be secured; increased demand for power plants was leading to significant escalation in prices; it was a seller’s market, not a buyer’s market; contract and risk-sharing profiles had fundamentally changed. Given the reserve margin, the Eskom programme was working with very tight timelines.

Eskom had clearly found itself in a very challenging funding environment. Until October 2010, the company did not have a full funding plan to complete the capacity expansion programme but it now had one. Despite the importance of executing projects on a tight schedule and within a tight budget, it was Eskom’s firm belief that safety was the most important objective of all. The inherently risky nature of major construction activities required constant management and leadership.

The build programme was used to contribute to skills development and facilitate manufacturing capability in South Africa. Skills remained a significant factor for Eskom.  The competition for skills was fierce, both internationally and locally. The new build began with capabilities, processes and systems undefined; the reality was that Eskom currently needed to spend R450bn for the six years until 2017 and be part of the Integrated Resource Plan 2010. The capex for Eskom’s three largest new build projects ranked among the world’s largest construction projects and would result in the most ambitious infrastructure investment South Africa had ever undertaken. The funding plan was R300 billion to 2017, as at 31 December 2011.

Medupi and Kusile would be the third and fourth largest coal-fired power plants in the world, respectively. Both were massive in their scale of construction. Parts and cement weighing the same as 14 super-tankers would be transported over land. Coal to fill Olympic-sized swimming pools would be needed per day. Steel to build five of the world’s tallest building would be used. Water to fill 30 Olympic-sized swimming pools would be used per day. The total distance to transport materials to site was equivalent to at least 40 times around the world. The total generation capacity was 10GW.

In the construction of Medupi, Kusile and Ingula, Eskom would ensure that this contribution was aligned with South African (SA) macro-economic principles. The six principles included a  united, democratic and prosperous South Africa; leveraging the role of state-owned companies (SOCs) to set a foundation for growth and development of the economy; a thriving economy connected to the world and integrated with the broader African continent, a sustainable economy, not harmful to the environment and committed to climate change mitigation initiatives; the eradication of poverty and unemployment and enhancing the potential of each citizen through an integrated education and skills development system.

The Medupi, Kusile and Ingula programme would have a significant impact on local industry, skills, jobs, infrastructure and regional development. Half of the programme would involve the use of local content, thereby directly benefiting the SA economy.  This would ensure a rapid growth in SA’s skills pool, with 40 000 jobs being created directly and indirectly. There would be development of roads and railways as well as spending and investment in local areas. A large share of the Medupi, Kusile and Ingula expenditure would go to the local economy, thereby also benefiting local construction companies. Many skills were being developed as local content requirements kick-started whole new industries in SA. New fabrication and training facilities were being established. The programme would also fuel demand for relevant graduates and artisans and would grow the required wide skill base. Medupi would consume 43% of a year’s relevant university graduation, deploy 48% of a year’s output of artisans, rapidly grow SA’s supply of engineers, artisans and project management experts as well as develop a wide range of additional skills though Asgi-SA commitments. The programme would ensure that new employment opportunities would touch the lives of 160 000 people and would support local and national infrastructure. Each project would measurably impact local towns through local spending and investment.

Mr O’Flaherty gave a general overview of the Medupi power station. The project summary of the power station was that it was a six-unit coal-fired power station with a planned capacity of 4 764MW. In respect of the financial and economic impact, the projected cost to completion was R98,9bn.   This would have an estimated 95% impact on Lephalale town’s gross domestic product (GDP).  Construction had commenced in March 2007, with the first unit planned to supply power to the grid between May 2013 and September 2013, and subsequent units at six to nine-month intervals thereafter.

Medupi had been delayed for various reasons which were particularly related to the Unit 6 civil and boiler. One of the key delay events was civil access, which had its root causes in unanticipated difficulty in levelling the site foundation, the boiler foundation design not being frozen, and issues with civil contractor performance.  Another key delay had been steel modifications which had their origins in ongoing modifications to structural steel design. This had delayed manufacturing and erection timelines, and the manufacture of incorrect pieces which had led to substantial re-work. A further important delay event related to erections, which had their root causes in poor tracking and logistics systems for locating boiler material, boiler materials not being supplied in the order needed to support efficient erection, and issues with boiler erection contractor performance.

A general overview of Kusile power station was given. It was a six-unit coal-fired power station with a planned capacity of 4 800MW, and the projected project cost to completion was R121bn, with an estimated 25% impact on Delmas town’s GDP.  Construction had commenced in March 2007, and the first unit was planned to be commissioned in December 2014, with subsequent Units 2 and 3 at 12-month intervals and units 4, 5 & 6 at eight-month intervals thereafter. 

Ingula power station was a four-unit pump storage power station with a planned capacity of 4 800MW. The projected cost to completion was R21,9bn, with an estimated 7% impact on Ladysmith town’s GDP. Construction had commenced in mid-2006, and the first unit was planned to be commissioned in January 2014.  Subsequent units would be commissioned at 3-month intervals.

Discussion
The Chairperson referred to the stated fact that Eskom was not a contractor but an engineering, procurement, construction and project management (EPCM) company. He further referred to previous incidents in which workers in the employment of the contractors who had been engaged by Eskom, had damaged property while protesting deplorable conditions of work.  While Eskom might not be directly responsible for the deplorable treatment given to workers of the contractors it had engaged, nevertheless this raised a question about the type of companies engaged by Eskom.   He asked how these companies engaged by Eskom treated their own workers and whether they adhered to the Labour Relations Act, as contracts could not be given to companies which flouted the Act.

The Chairperson commented on the issue of incurring foreign debt in order to secure funds for Eskom’s programmes. He asked about the negative implications of these foreign debts. Did it not mean that South Africa might become enslaved to the organisations and banks which granted these loans?

Ms G Borman (ANC) asked who was ultimately responsible for any issues which might arise in respect of the programmes undertaken by Eskom, especially in respect of the labour issues concerning the workers of the contractors.

She asked if the proper skills were available locally to execute the programmes undertaken by Eskom. She asked if the lack of local skills would necessitate the importing of the required skills and expertise.

Dr G Koornof (ANC) asked what the potential contractual delays were, which might inhibit the progress of the programmes undertaken by Eskom.

Dr Koornof asked if Eskom could assure the Committee that if would have the required skills capacity to provide for the successful execution of its programmes. He asked what the average experience of the workforce of the employees at Eskom was.

Dr Koornof further asked if Eskom had designated any unit to monitor the safety record of the company.

He asked what value would be added to local areas in terms of Black Economic Empowerment (BEE) in order to see if people were benefiting from Eskom’s programmes.

Dr Koornof asked if Eskom had made efforts to engage with municipalities to see if the efficient use of electricity had been addressed.

Mr A Mokoena (ANC) asked why Eskom had stopped the Committee from making an oversight visit concerning the disturbances which had occurred at the company previously.

Mr Mokoena asked when last Eskom had declared dividends to the state before it embarked on its build programmes.

Mr Mokoena asked if the present coal reserves in the country were enough to continue to sustain the provision of electricity in the country, or was there a need to import it into the country in the near future.

Mr C Gololo (ANC) asked what percentage of the build programmes being undertaken by Eskom would be beneficial to rural areas in order to achieve the electrification of those areas.

Mr Gololo asked what the reserve margin would be upon completion of the Medupi and Kusile power stations in view of the fact that the current margin was very low. He asked what the life span of these power stations would be after they had been completed.

Mr M Sonto (ANC) asked whether South Africa would not be exposed in respect of foreign interference,  especially in view of the fact that Eskom had some challenges in respect of the needed skills and reliance might have to be placed on foreign expertise.

Mr O’Flaherty responded to the question concerning who was ultimately responsible for issues arising in respect of the projects undertaken by Eskom. He stated that the buck stopped with the Chief Executive.  Eskom had a world-class way of running the projects and there were standardised labour agreements with contractors engaged by Eskom. The company was in continuous engagement with its contactors to ensure that the labour issues concerning their workers were taken into serious consideration.

In respect of the issue concerning foreign debts, he stated that the foreign loans were not structural loans, but rather commercial loans which were secured from the World Bank and the African Development Bank. These loans did not generate any influence over Eskom or South Africa.

Mr O’Flaherty replied to the question concerning whether Eskom could give an assurance that it would have the required skills to provide for the successful execution of its programmes by saying that he could not give such an assurance. There was a shortage in the skills required by Eskom to carry out its projects. The only assurance that could be given was that the company was aware of where skills were lacking and efforts were being made to fill such needs.

He responded to the question concerning whether there was a unit in Eskom which was designated to monitor the safety of the company’s operations. He said safety was a major priority for the company and there was a designated individual who was charged with monitoring the safety of the company’s operations.  Nevertheless, everyone at the company was still accountable for monitoring safety across all lines and divisions.

Regarding how the local areas stood to benefit from Eskom in terms of BEE, Mr O’Flaherty replied that there was a large local content in Eskom’s labour force which came from the local areas.
 
Mr O’Flaherty further replied to the question concerning whether Eskom had made efforts to engage with municipalities. He stated that Eskom, through the Minister of Public Enterprises had conducted significant engagements across the country with municipalities.

In response to why the Committee had not been allowed to make oversight visits to Eskom, he replied that he did not know why the Committee had been stopped from making the visit and that he would have the matter looked into.

In respect of when last Eskom had declared dividends to the State, he replied that Eskom was converted to a company in 2001, and he did not know how money had been moved around before then. However, there had been few dividends out of Eskom, because the company had started to plan for its build programme between 2001 and 2005 and there had been an agreement with shareholders that there would be a moratorium on dividends while the company was doing its build programme.
 
In response to the question concerning whether there was enough coal to sustain the provision of electricity in the country; he replied that the issue of coal was a big challenge to Eskom. The company had only up till 2018 secured 80% of its coal requirements.  Nevertheless, SA had enough coal to support Eskom’s power stations for the next 50 years. There was a need for better control in the coal industry to ensure that Eskom got all the coal supply it required and there was therefore a need for a change in legislation.

Mr O’Flaherty replied to the question concerning the electrification of rural areas. He stated that Eskom was aware of the need to accelerate the electrification of these areas, which was not going quick enough. There were still millions of households which did not get electricity.  However, the challenge was getting the required funds to fulfil the desire to electrify all rural areas.

He responded to the question of what the expected reserve margin would be when the Medupi and Kusile power stations were completed, and the expected life span of these stations.  Provided the demand grew according to Eskom’s estimate of between 2% & 3 %, then Eskom would have more than a 20% margin by the time it completed the Kusile power station. The life span of Medupi and Kusile power stations would be 40 – 50 years after they were completed, which was in line with other existing power stations.

Regarding foreign interference, he stated that there was very tight security at Eskom and all positions in management and senior management were subject to national intelligence checks. There was indeed a risk of foreign interference, but there were strict and stringent controls in place to tackle the issue.

The meeting was adjourned.