Medupi Power Station issues: Updates by Eskom and the Department of Public Enterprises

Committee: NCOP Communications and Public Enterprises

Chairperson: Ms M Themba (ANC; Mpumalanga)

Date of Meeting: 11 Sep 2013

Summary

Eskom, and the Department of Public Enterprises (DPE), gave the Select Committee an update on what was happening at the Medupi Power Station. It was noted that Eskom was building 12 units of 800 MW each, although the major focus to date had been on Unit 6. When that was completed, a further progress report would be given. The successes so far had included Back energizing, to provide 400kV of power to the plant, the Boiler Blow-Through which provided steam on start-up and the Water Treatment Plan to ensure that water storage was ready. A serious drawback had been that the first synchronisation was moved from December 2013 to the middle of 2014. Although it was explained that this extension of six months would provide a clean-up for efficient power generation, there were a number of glitches behind this, including continued strikes on site, the need for extensive work on realignment, as a result of fraudulent activities by contractors, insufficient construction labour on site for cabling, and poor productivity. Another major concern had been that there had been and highly sophisticated fraudulent activity, which was found during construction and welding, despite the assumption that the Hitachi engineers and investigators would have picked this up sooner.  Three cases had been handed over to the South African Police Services for investigation and criminal prosecution. In addition, some lapses in quality control had led to certain equipment being incorrectly manufactured. Control and Instrumentation would be controlled by a complex computer system that allowed operators to safely monitor and control what happened to the plant, internally and externally.

Contractor management was being improved now through the Chief Executive Officer (CEO) Forum, which held fortnightly meetings on-site to review progress, identify issues, and agree how to resolve them. A Partnership Agreement between Eskom, contractors and unions was signed and concluded on 12 June 2013. The agreement finalised site-specific agreements at Medupi and Kusile. Some of the labour disputes were outlined, and this had led to recent employee unrests, with the most recent being a Murray and Roberts work stoppage on 24 July. Meetings were held with the unions and employers to try to resolve the stalemate.

The Department of Public Enterprises commented briefly that this Department was undertaking some reviews on such mega projects in order to have a better understanding of the challenges, so that the relevant solutions could be proposed. Some of the Eskom challenges arose through inadequate planning.

Members commented that they had not been expecting such a technical presentation but rather an update on what exactly the current status was. They were adamant that the six month delay would have serious knock-on effects, costing billions and asked about the projections of increases made earlier and how these might rise again. Members thought the strikes were indicative of poor management, asked if the same project managers were still on site whom the Committee had seen, and why employees were not better managed. The control mechanisms and the reasons behind poor productivity testing were questioned, particularly since skills had already been imported to South Africa. Members wondered if penalties applied for contractor fault, and whether the strikes were related to wages, whether wages were paid on local or international rates. Members wanted to know how the Partnership Agreement tied in with the Presidential Infrastructure Coordination Committee, whether the out-of-court settlement by Hitachi was honoured and why Eskom was getting involved in labour issues. They asked about the effect of the delays, load shedding and progress in overseeing construction, and how the 8% increase awarded to Eskom would affect its ability to continue with the build programme. 


Minutes

Update report on Medupi Power Station issues:
Eskom Project Update

Mr Dan Marokane, Group Executive, Eskom, thanked the Committee for the invitation to brief the Committee on the progress made at Medupi, following the Committee’s site visit last year. There had been a lot of progress with construction since then, and he would provide a current overview and a description of what was still needed. He would also give updates on the partnership agreement, recent labour action, technical issues, and some challenges with the contractors.

Eskom was building 12 units of 800 MW each, although there had been substantial focus around unit 6. Upon the completion of unit six, a progress update would also be provided on the subsequent units. Some of the commissioning successes at Medupi were beginning to bring unit 6 to life. He listed some of these successes as follows:

•Back energizing – providing 400kV of power to the plant
•Auxiliary boiler blow through – providing steam on start up
•Water treatment plant – so ensure that water storage was ready

He said the most important step was synchronisation. He explained that the date of the first synchronisation was moved from December 2013 to the middle of 2014. This extended six month window provided for the cleaning up, for efficient power generation. However, there were a number of glitches which led to the potential delay, which were currently being managed by the Medupi project team. He ascribed these to continued strikes on site, the need for extensive work on realignment, as a result of fraudulent activities by contractors, insufficient construction labour on site for cabling, and poor productivity

He explained that the six month delay in the synchronisation of unit 6 could potentially have effects in three areas; control and instrumentation, boiler post weld treatment and boiler welding procedures qualification record.

Mr Marokane explained that welds for the boiler were made using unqualified welding procedures, which led to the need for replacement, and thus re-testing was needed. He added that with the Weld Procedure Qualification Record (WPQR), a Hitachi sub-contractor manufactured certain high-pressure equipment, but due to lapses in  quality control part of the equipment was manufactured incorrectly. In addition, fraudulent activity was also picked up with the Post-Weld Heat Treatment (PWHT), and a sub-contractor of Hitachi had been reported to the South African Police Services (SAPS) and an investigation was under way.

Mr Marokane moved on to discuss Control and Instrumentation (C&I), and said the whole of Medupi would be controlled by a Distributed Control System, which was a complex computer and instrumentation system that allowed operators to safely monitor and control what happened to the plant, internally and externally. The Eskom team therefore was supporting Alstom, with a team of engineers in France, to ensure that Factory Acceptance Tests succeeded. Eskom would therefore be implementing a C & I mitigation strategy for units 6 and 5, for units 4 to 1 and on the Boiler Protection System.

Contractor management was now being improved through the Chief Executive Officer (CEO) Forum. There were fortnightly meetings on-site between the CEOs and the Managing Directors of the contractors. The aim of these meetings was to review progress and identify issues which each contractor needed to resolve. Initiatives to resolve these issues would then be agreed upon. The Forums were established to improve communication between management and to reduce bottlenecks. The Partnership Agreement between Eskom, contractors and unions was signed and concluded on 12 June 2013. The agreement finalised site-specific agreements at Medupi and Kusile.

Mr Marokane listed some of the labour issues that had caused contention, as follows::
- Commuting allowance, where employees requested a one hour commuter allowance in the evening and one hour in the morning
- Travelling allowance issues, in that employees were dissatisfied with certain companies providing buses from Medupi site to the Park Station
- Employees wanted a taxation allowance with the companies paying their tax
- Employees were disgruntled at the “No work no pay” this principle that applied for the period of unprotected work stoppages, and were disgruntled with lesser quantum 
- Employees were aggrieved with the disciplinary processes and sanction followed by contractors

He added that there were recent employee unrests and remobilisation on site. On 24 July 2013, approximately 100 employees of Murray & Roberts; a Hitachi sub-contractor, embarked on a work stoppage. The stoppage rose to 1 000 participants and resulted in damage to vehicles and equipment, and 20 employees were also injured. With regard to the ongoing construction industry strike he said a meeting was held between Civil Contractors and NUM/BCAW on 24 and 26 August 2013, in an attempt to resolve the stalemate.

Mr Marokane concluded that the Medupi project was an exciting challenge which upon completion, would offer exceptional benefits for South Africans.

Department of Public Enterprises input
The Chairperson welcomed representatives from the Department of Public Enterprises (DPE) but  wondered why they arrived late at the meeting.

Mr Jabu Mangena, Director: Energy, Department of Public Enterprises, said that his Department (DPE) was also undertaking some reviews on such mega projects in order to have a better understanding of the challenges, so that the relevant solutions could be proposed. The reviews would also reflect how to do things better when moving forward. He argued that some of the challenges which Eskom was facing had resulted from  inadequate planning.

Discussion
Mr H Groenewald (DA; North West) said he was not impressed, and felt that the whole presentation was a “cover up”. When they had paid a visit to the Medupi site, Committee Members were impressed with the progress made. However, the fact that the completion of unit 6 would now be delayed for the next six months was a serious problem, because Eskom had promised to complete construction on the site at the end of 2013. The delay would cost South Africans billions.

Mr Groenewald argued that the strikes at the site were also an indication of bad management at Medupi. He asked whether the project manager was still the same one with whom the Members met during their site visit. He asked why companies were not managing their employees better, noting that the strikes were taking place on site.

Mr Groenewald asked why and how the productivity tests for cables were poor and wondered if there were no control management mechanisms in place? On the welding process, he said South Africa did not have the skills necessary, which was why it relied mostly on imported skills. He asked why Medupi was still experiencing challenges with welding, whether the skills already imported were still under-qualified. The project manager needed to take full responsibility for the poor quality of the material.

Mr M Jacobs (ANC; Free State) said the presentation was very technical, and this was not really what the Committee was hoping to hear when it had  extended the invitation to Eskom for an update. It seemed to be aimed at engineers, not ordinary South Africans. He asked the simple question whether Eskom would be meeting its targets for Medupi.

Mr Jacobs agreed with his colleagues that management at the site did not seem to be  not competent, nor did the contractors. He wondered what fines and penalties were extended to contractors for the delays caused. In relation to the reasons behind the strikes he questioned whether, particularly given that the companies were international, they were paying workers an internationally competitive wage?

Mr Z Mlenzana (COPE; Eastern Cape) referred to the partnership agreement and asked whether the broader labour agreement at the Presidential Infrastructure Coordination Committee level tied in with the site partnership agreement.

Mr Mlenzana asked if Hitachi had honoured the out of court settlement.

Mr Mlenzana asked what mechanisms were in place to make sure that the country would not be experiencing any load shedding during the six month delay at Medupi.

Mr Mlenzana was interested in the cost implications of the project and he reminded Members that Eskom had at one stage indicated that the costs for the Medupi project would increase from R91 billion to R105 billion.

Ms L Mabija (ANC; Limpopo) asked whether there had been any significant progress in the proposal to establish a sub-committee to oversee the construction at Medupi. If so, she asked how many meetings had the members of this subcommittee held with the Minister of Public Enterprises.

The Chairperson also questioned why this presentation did not address the effect that the six month delay would have on the on-going electricity supply. She agreed with Members that the presentation was indeed too technical for Members to engage with properly.

The Chairperson wanted to know more about the agreement signed by unions and contractors, and why there was still a breakdown in communication and outbreaks of violence, despite that agreement. Reference was made to a stance where unions had bypassed contractors and made demands to Eskom directly and she wanted to know what role Eskom had in ensuring a good working relationship between unions and contractors.

The Chairperson asked how the 8% tariff increase approved by the National Energy Regulator of South Africa (Nersa) would impact on Eskom and its projects. She questioned whether Eskom would need further funding from National Treasury to cover the loss from the delay in construction at Medupi. 

Mr Marokane acknowledged that it was somewhat of a disappointment for South Africa for Eskom to miss the initial date for the first synchronisation. What was very important, however, was for Eskom to have a clear understanding of what exactly was behind the delays. Periodic reports would therefore be provided in order to rectify the delay.

He argued that one of the main challenges with the Medupi project was that there were highly advanced fraudulent activities. He said it was still puzzling that such fraudulent activity could go undetected by Eskom’s quality assurance mechanisms, and said that three investigations had been handed over to SAPS. He acknowledged that there were indeed glitches with Eskom’s quality and assurance systems. Additional support and stop checks had been doubled up as a result.

Mr Marokane told Members that the site management was still the same as when the Members had visited and assured them that this was an extremely dedicated team. A lot of hours were put into meeting all deadlines. He said the appropriate support would be provided to the team, especially given the challenges which had since been identified. He noted that Eskom’s top management was also spending a lot of time on the site to make sure that things were running smoothly and to unlock all bottlenecks.

Mr Marokane said that, in regard to the questions around quality and cabling, the concerns were not so much around the quality of the cable, but were around the rate at which the cables were being drawn from different sites. In relation to the welding, the problems were not so much induced by the need for foreign skills, but rather by the high level of sophistication around the forging of the Post-Weld Heat Treatment and the forging of procures around Weld Procedure Qualification Record.  He explained that the quality of inspectors which were used on site was quite high, and that they too were shocked at the sophistication of the fraud. It would have been expected that a major contractor like Hitachi should have been able to identify fraudulent activity at the onset, but this was not the case, mostly because the sophistication around these frauds was still unbelievable. The technology used was quite complex.

In relation to the role that Eskom played, Mr Marokane said that although labour agreements were between contractors and employees, it had been realised that the relationship between these two parties had a significant effect on Eskom. That was why Eskom felt it necessary to step in and seek to re-build the relationship. He added that amongst the issues identified by Eskom was that some contractors did not have enough capacity to manage their employees. The agreement defined a new way of engaging society and of how industrial relations should be managed.

On the question on the Presidential Infrastructure Coordination Committee, Eskom had written a letter to the Committee to share its experiences with the Medupi project and to also highlight the areas where assistance would be needed, to find the way forward. He explained that the perception that potential investors held about labour relations in South Africa was critical, and this needed to be carefully managed at all times. Organised labour, Eskom and contractors have therefore come together through various meetings and engagements, and where solutions for a better way forward were agreed upon, with agreements then drafted. He assured the Committee that contractors have been more than willing to make things work in a new space. The recent violent activity was therefore not acceptable.

Mr Marokane said that all construction work at the Ingula, Medupi and Kusile power stations would be completed towards the end of 2014. Where contractors’ activity had been the cause of delays in construction, penalties were levied. Hitachi and Alstom were major contractors, and as part of Eskom’s localisation initiatives, they were asked to source local companies, so that the major construction companies were therefore local. These companies were therefore governed by the Construction Bargaining Council, and the wages were therefore localised, not at international rates. However, minimum rates were localised throughout the sites, for the different sectors of the project, to prevent major upsets.

At Medupi, the bulk of employees were first time employees. There were therefore a number of project for skills development, working together with various Further Education and Training Colleges FETs) to ensure that workers were being sufficiently skilled throughout the life of the project, subsequently improving productivity.

Mr Marokane expanded on the agreement reached. The agreement was there to try and resolve a number of disputes between contractors, unions and employees. He said the out of court settlement was in relation to the viability of Hitachi to be able to do the work beyond the settlement. Hitachi was expected to give South Africa a lifeline of financial support for operations.

He said a number of scenarios were played out with regard to forecasting delays. Eskom’s main focus was on delivering on the build programme, ensuring that there was enough capacity to take care of the country’s energy demands, and driving the business after Nersa’s 8% tariff increases. He agreed that the delay would have cost implications, and that increases in owners’ development costs also added to this. He explained that the R105 billion increase projected included claims to contractors. He reiterated that Eskom had the contractual rights to recover all costs incurred as a result of delays from the contractors.

Mr Marokane agreed that the President had requested that a subcommittee be set up with a board; and this subcommittee had been in operation for about three months. The committee produced its first report to the President in August covering all operational issues, some of which were included in the presentation. He concluded that all parties concerned condemned the violent nature of the strike, and it was accepted that due process needed to be followed to ensure proper accountability.

In relation to the funding, he said Eskom was “in a very tight position” in managing the business as a result of Nersa’s ruling. Eskom had a borrowing capacity of around R50 billion for the next few years. Internally, Eskom was looking to improve productivity, to its maximum potential.

Mr Mlenzana referred again to the projection on the R105 billion increase and asked what plans Eskom had to meet the 2014 deadlines, and how confident it was that it could do so, as there were challenges that were worrying.

The Chairperson asked whether the “49 million campaign” was working, and, if so, how much electricity had Eskom been able to save since the inception of the campaign.

Mr Marokane said the Minister and a team from Eskom had communicated on the status of the system, and that it had essentially been a success with Eskom having been able, for the first time, to conduct maintenance in winter. He extended thanks to all South Africans who responded positively to the campaign. The new campaign of “Beating the Peak” was also proving to be a success. In conclusion, he said that the Eskom team was working very hard to make sure that all the 2014 targets were met. If necessary, Eskom would resort to replacement of contractors, as meeting the targets was a major goal.

The meeting was adjourned.