ATC211129: Report of the Portfolio Committee on Public Enterprises on the oversight visit to Eskom (Medupi and Kusile Power Stations) and SAFCOL, dated 24 November 2021

Public Enterprises

Report of the Portfolio Committee on Public Enterprises on the oversight visit to Eskom (Medupi and Kusile Power Stations) and SAFCOL, dated 24 November 2021

 

1.         Introduction

 

The Portfolio Committee on Public Enterprises (the Committee) having undertaken an oversight visit Eskom Medupi and Kusile power stations in Lephalale and Witbank from the 21-22 June 2021 and to SAFCOL (Highveld and Mpumalanga operations) from the 23-24 June 2021 respectively. The activity in the oversight visit scheduled for 25 June 2021 was concluded on 24 June 2021. Members travelled to their respective destinations on 25 June 2021.

The purpose of the visit was to investigate progress being made in the implementation of the turnaround strategies of these companies. Furthermore, to assess the socio-economic impact of the companies in the communities in the adjacent areas, with specific focus to support to small and medium enterprises, skills development, job creation and transformation in general.

 

1.1       Delegation

The Committee delegation included the following members:  Mr K Magaxa (Chairperson of the Committee, ANC), Mr N Dlamini (ANC), Ms C Phiri (ANC), Ms J Mkhwanazi (ANC), Ms V Malinga (ANC), Ms M Clarke (DA), Ms R Komane (EFF), and Mr E Buthelezi (IFP). The delegation was accompanied by the following parliamentary officials: Mr D Mocumi (Committee Secretary), Ms Y Cele-Ntshinka (Committee Assistant), Mr R Mnisi (Content Advisor) and Mr S Mokoena (Principal Communication Officer).

 

1.2       Background

Eskom has undertaken a massive build programme to build Medupi and Kusile power stations, in order to increase the generation capacity of Eskom and address issues of security of electricity supply in the country. The build programme has been marked by numerous scandals of corruption and maladministration that have led to delays in the completion of the projects and the escalation of costs.

 

Eskom has also been affected by a history of maladministration, corruption and under-performance. There are improvements in correcting the defects at both Medupi and Kusile power stations. The Committee was briefed on improvements and adjusted time schedules for these power stations.

2.         Visit to Medupi Power Station

The Committee visited the Medupi Power station and the delegation from Eskom included: Mr Bheki Nxumalo (Group Executive, Group Capital), Ms Nthato Minyuku (Group Executive, Government and Regulatory Affairs), Dr Titus Mathe (General Manager, Generation Engineering), Mr Mandla Mthembu (General Manager, Mechanical Engineering), Ms Natasha Sithole (General Manager, Stakeholder Management), Ms Zandi Shange (Acting Project Director, Medupi Project), Mr Gabriel Mkhonza (Supplier Development and Localisation Manager), Mr Rofhiwa Nemutandani (Engineering Manager) and Mr Wikus Janse Van Rensburg (General Manager, Medupi Power Station).

The Department of Public Enterprises was represented by the following officials: Mr Avhasei Ramuhulu, Mr Donald Nkadimeng, Mr Lebohang Tekane and Mr Nkoliso Mbaleki.

The Committee received presentations on the progress update on the Medupi Power Station, the defects and performance of the power station.

 

2.1       Medupi Power Station Project Update

The Medupi Power Station project is located in Lephalale, Limpopo. It is a green-fields coal fired power plant and it is the first base load station to be built by Eskom in twenty years, after Majuba Power station. In identifying the location, Eskom undertook feasibility studies in order to determine the most viable plant location for the Medupi power station. Some of the criteria used included the availability and accessibility of primary resources such as coal and water; the ability of the new power station to connect to the existing network/grid; environmental acceptability; as well as cost of production.

 

The presentation on the project update gave a comprehensive account on the project thus far and the challenges hindering the completion of the project. It was report that the construction of Medupi Power station is 100% complete, the only work that is outstanding is the rectification of the boiler defects. The total project cost is R145,6 billion, however, the actual spend to date (May 2021) was R123,0 billion. At the time of the visit there was 2 499 Contractor employees and 301 Eskom employees.  The demobilisation commenced (from a peak of approx. 16 797 employees in 2013).

 

2.1.1     Work to be completed

 

The following work still need to be completed on the power station - Unit 1 – There is a need to resolve the AVR fault.

Balance of Plant (Outside Plant)

 In terms of outstanding work outside of the power station:

• Ash Silo 3;
• Ash Disposal Facility;
• Coal Stockyard; 
• Excess Coal Stockyard; and
• Hydrogen and Nitrogen.

 

Common scope

• Defects closure on different plant areas–aimed towards finishing the project
• Review of Databooks
• Handover documentation to Gx.

 

 

2.2       Medupi Legacy Project

 

It was reported that the project has contributed to the economy of Lephalale and the country as a whole. Amongst the contribution, included R2.9 billion invested by Eskom in social infrastructure in Lephalale since the inception of the project, i.e. roads, housing, bridges, electricity, sewer plant, traditional halls, classrooms, SAPS cabins etc. Contractors have formally trained 4 617 South Africans, 60% of which are from Limpopo. Contractors have invested over R34 million to build, equip and maintain training centres i.e. Tlhahlong and Onverwacht Training Centres.

The Medupi Leadership Initiative was created to enable reintegration of demobilised workers into the economy at a sustained level of economic empowerment. About 1 500 job beneficiaries, 16 602 trained in Financial Literacy, 2 000 on Drive Your Life and 1 304 on Modular Employable Skills courses.

Through its enterprises and local economic development, 116 local business owners have been trained through Eskom entrepreneurship development initiatives, including the Eskom Contractor’s Academy (94). This was achieved through working together with the Lephalale Enterprise Development Centre

On Corporate Social Initiatives (CSI) R106 million was spent on CSI from inception to date benefitting at least 80 000 people; focusing on education and health infrastructure.

- Extensive training at 31 schools with a total of 620 staff members

- Approximately 6 000 children treated per annum by the paediatric mobile clinic

- 6 clinics expanded and given medical equipment benefitting approximately 80 000 people.

 

2.3       Medupi and Kusile Boiler Defect Progress

The following were reported as the defects in the power plant and progress in resolving the defects:

2.3.1     Reheater Spray Flow - Reheater modification reduced reheater spray flow, but low load and transient stability worsened, new solution being developed in lieu of reheater modification.

2.3.2     Low Load and Transient Operation (In lieu of reheater modification) - Continue to work with MHI as OEM on low load and transient operational issues.

2.3.3     Gas and Heater (Mechanical and erosion) - Power Station to ensure operating of steam preheater and GAH soot blowing according to the operation Manual.

2.3.4     Milling Plant - Technical solutions accepted. Working with MHI as OEM to include self-cleaning filter in seal air in let from Primary Air.

2.3.5     Pulse Jet Fabric Filter Plant (Contractor Modifications) - Contractor modifications only partially successful and is made difficult by operational issues regarding compressed air.

2.3.6     Pulse Jet Fabric Filter Plant (In-house redesign) - Power Station to ensure quality of compressed air, operate within differential pressure and cell out of

service margins as per the operating manual and maintain pulsing system functionality.

2.3.7     Duct Erosion - Agreed technical solutions for all systems. Hot duct system solutions still need to be proven.

 

2.4        Medupi Power Station Performance Update

The unplanned breakdown analysis of he power station reveals that the following are contributing factors: Milling Plant contribution (56%), Ash Plant contribution (17%) and the Turbine/Generator Plant (24%).

 

3          Findings

The Committee made the following findings:

3.1       Medupi was operating all six units, and that had brought stability to the grid. Appreciated progress made in the construction of Medupi and the rectification of defects, however it failed to address the issue of loadshedding.

3.2       The artisans trained by the project could be used in any of the Eskom power stations or any industry that is in need of the skills. However, the demobilisation of workers will have an impact on the employment rate in the region.

3.3       The Committee noted with concern that there was no progress that had been made to ensure that some of the parts are manufactured locally.

3.4       Although there were monthly meetings between Eskom and major boiler contractors to monitor their performance and report to the Shareholder, the defects in the power stations would hamper the productivity and efficiency of the stations. 

3.5       The Committee noted with appreciation that there were investigations underway, and Eskom was co-operating with the SIU to ensure that all companies and individuals found guilty of wrong doing are brought to book.

3.6       Although the introduction of Independent Power Producers will boost the grid, it was important to ensure that the cost of IPPs would not affect the financial sustainability of the company.

3.7       The budget for Medupi had not changed since 2018, but the overruns caused by the delays in the completion of the project has seen the cost escalate to R145 billion.

3.8       The Committee noted with concern that contractors had done shoddy work at Medupi, and the delays of the two mega stations were contributing to loadshedding, including the reliability of the old power stations.

3.9       The Committee was satisfied that the executives in Eskom had declared conflict of interest, including having undergone vetting by state security agency.

3.10      The Committee raised concern regarding the escalating costs of the Medupi project, and implored on the management to investigate the inflated prices of service providers, including coal contractors.

3.11      The Committee was appalled that there was no vetting done in terms of the appointment of contractors and sub-contractors (due diligence), hence the workmanship was below standard.

3.12      The Committee noted with concern the absence of representatives of the board of Eskom during the oversight visit.

3.13      The Committee appreciated the incubation programme and the support for small and medium enterprises, however was concerned whether those companies were sustainable.

 

4.         Recommendations

The Committee made the following recommendations:

4.1 Minister of Public Enterprises

The Committee resolved that the Minister of Public Enterprises should consider:

4.1.1     Ensuring that project timelines and budget are adhered to at all times.

4.1.2     Developing a stakeholder and communication plan on the demobilisation of workers at Medupi and inform the end user on the implications of this project.

4.1.3   Ensuring that there are no restrictions from Eskom to employ suitably qualified                                        and skilled employees and contractors to ensure that the Medupi and Kusile projects are completed on time and perform optimally.

4.1.4     Ensuring that there is consequence management for contractors and project managers who had done substandard work at the power stations.

4.1.4     Ensuring that there is a proper maintenance plan at Medupi.

4.1.5     Constant monitoring of coal prices and quality delivered at Medupi in order to ensure that there are no price inflations which will affect the generation of electricity.

5.         Visit to Eskom Kusile Power station

 

The Committee visited Kusile Power Station and was received and taken on a site visit to the power station. The areas visited included a coal stock storage facility, an ash evacuation facility, air cool condensers, turbines and boilers. The Committee also visited the incomplete flats that were constructed to accommodate artisans to familiarise itself with the extent of the project. 

 

 

 

 

 

6.         Kusile Power Station Project Update

 

The Committee received a comprehensive progress update on the construction of the Kusile project. It was reported that the Total Project Cost amounted to R161 billion, however the actual spent to date was R 141.7 billion (as at April 2021).

 

6.1 Progress on construction

The project has completed the construction of units 1 – 3, while units 4 – 6 are almost complete.

• 1st Unit completed - Aug 2017
• 2nd Unit completed - Oct 2020                                     
• 3rd Unit completed -  Mar 2021                                     
• 4th unit synchronised - Jun 2022 (Construction is at 98.36% complete)
• 5th unit synchronised - Jun 2023 (Construction is at 92.89% complete)
• 6th Unit synchronised - Nov 2023 (Construction is at 85.24% complete).

 

6.2       Challenges

1. Coronavirus – Covid-19

• 245 cases to date (GCD / Contractors / Engineering / ERI)
• 215 recoveries
• 2 Covid-19 related fatalities
• Future waves and virus variants – speed of vaccination – upcoming public holidays and winter.

 

1. Liquidity of Construction contractors (State of Construction Industry)

• Impact of contractors going into liquidation and business rescue (Tubular / CBZ).
• Eskom ability to close dependence/interface gaps / speed of procurement for replacement.
• Delays in Placement of Contracts (Fly Ash, Ash Dump Phase 2, Coal Offloading Hoppers etc).

 

      (c) Time for Procurement cycle

• Timeous modification of existing contracts – technology lock-in and interdependencies.
• No defined timeframe for the procurement approval between Project-Eskom-National Treasury.
• Unprecedented situations arising out of “alleged Corruption” investigations.

 

1. Timeous replacement of “spares” loaned to operational units – Medupi & Kusile

• Long lead items – technology lock-in – warranties and guarantees.

 

6.3       Socio-economic impact

The project has contributed immensely to the economic development of the region. To date corporate social investment spent by Kusile Contractors amounts to more than R260 million. Corporate Social Investment spent by Eskom in Kusile amounted to R25 264 108.76, distributed as follows:

• Education – R14 955 525.80
• Capacity Building – R4 902 918.96
• Social and Poverty Alleviation – R3 484 484.00
• Environmental – R1 058 180.00
• Health – R863 000.00.

 

The defects for Kusile and Medupi power stations are exactly the same, and Eskom was implementing the same roadmap and interventions of both power stations.

 

7.         Findings

The Committee made the following observations:

7.1       The Committee was appalled by the wasteful expenditure that occurred with the incomplete project to build flats for artisans. The construction of the flats did not serve the purpose and have seen costs escalating from R260 million to R800 million. Although it was reported that Eskom was engaging with the Department of Human Settlements on how government could utilise the flats for better use, the process would follow the agreed disposal of property procedure. The contractor involved in the construction of the flats was Liviro Pty Ltd.

7.2       The Committee welcomed the R1.5 billion recovered thus far from the contractors who have been implicated in irregular contracts and with inflated prices.

7.3       Concern was raised that the support and promotion of businesses owned by youth, women and people with disabilities were not getting enough support from Eskom Supplier Development Programme.  

7.4       The Committee appreciated that action has been taken against all the contractors and suppliers of Eskom who have been implicated, and encouraged Eskom to blacklist such companies. Some of the contractors who were implicated in irregular contracts, and shady workmanship have gone into business rescue, which has affected the process for Eskom to recover the money.

7.5       Noted that the biggest cost in the generation of electricity is the cost of coal, however, the price per megawatt will decrease as soon as the construction was complete.

7.6       The Committee was concerned that, since the beginning of the construction, Eskom has not yet secured a water use license for Kusile.

7.7       The skills that have been developed in Medupi and Kusile will be utilised in other stations of Eskom that require technical skills.

7.8       The Committee welcomed the strategy for the disposal of ash, through selling to companies through the Eskom Rotek, a subsidiary of Eskom.

7.9       The Committee was disappointed that the conveyer belt had not yet been completed, and is not in use which has caused heavy traffic of trucks along the power station. The Committee noted that some of the short term coal contracts will come to an end, and allow for coal to be supplied through a conveyor belt from the mine.

 

 

8.         Recommendations

 

The Committee made the following recommendations

 

8.1 Minister of Public Enterprises

 

The Committee recommend that the Minister of Public Enterprises should consider:

8.1.1     Ensuring that Kusile is completed within the revised timelines and budget.

8.1.2     Limiting the congestion of trucks at Kusile by ensuring that discussions with adjacent mines are facilitated to ensure supply of coal by other means such as conveyor belts.

8.1.3     Ensuring the production of Gypsum is processed further in order to capitalise on beneficiation for additional revenue for Eskom.

8.1.4     Ensuring that retention bonds are used as a recourse for delays and sub-           standard work that has been performed.

8.1.5     Ensuring an update is provided to the Committee on the 336-unit Wilge Residential Development near Witbank that was meant to house artisans working at Kusile power station.

8.1.6     Ensuring that the operational costs and costs associated with running the Power Station are presented to the Committee.

8.1.7     Providing the Committee with the breakdown on demographics in Kusile and the impact of the project in terms of its socio-economic indicators.

8.1.8     Providing the Committee with real project value with no deviations and the intended break-even costs associated with the project.

 

9.         Visit to SAFCOL

The Committee was welcomed by the Chief Executive Officer of SAFCOL, Mr Tshepo Monaheng accompanied by his team. The Chief Executive Officer conveyed the apologies of the Board and took the Committee through a brief verbal presentation on the operations and challenges facing the company.

 

 9.1      Overview of the operations

SAFCOL conducts its business through the sustainable management of plantation forests and other assets. Revenue is generated from the sale of logs and lumber, as well as other non-timber related products. The plantations are situated in Limpopo, Mpumalanga, KwaZulu-Natal and Mozambique.  Approximately 60% of the land on which the company operates is under land claims. The company employs 1 472 permanent employees.

 

9.2       Challenges

In terms of challenges facing the company, these are some of the interventions:

• SAFCOL is working to replace old technology and equipment in forest and processing.
• SAFCOL on replacement of the Enterprise Resource Planning (ERP) system.
• Revision of the high Timbadola cost structure.
• SAFCOL is working with relevant industry and other role players to combat timber theft.

 

9.3       Enterprise Development

The company has a comprehensive enterprise development programme, which seeks to develop youth and women owned businesses in order to grow their companies in the forestry business. A total of R1 215 624 was invested towards enterprise development initiatives. The types of ED initiatives undertaken during the financial year can be summarised by the following contributions:

• Direct costs incurred in supporting Enterprises: 94.48% of total investment
• Costs incurred towards overhead costs for ED beneficiaries: 5.52% of total investment

 

9.4       Land Claims

 

The Committee had an engagement with representatives of land claimants from the Mapulane Tribe. The claimants complained that since they launched their claims for land, they have not received their title deeds. The applications were launched as far as 2007. The Department of Agriculture, Land Reform and Rural Development has not been helpful and have taken years to assist. Their major concern was that the main claimants are very old and others have already passed on. However, they expressed their gratitude to SAFCOL for the constant support in the process. They hailed the company for always availing job and business opportunities for the communities, including training and capacity building for the youth. 

 

   9.5    Site visit to operations

 

The Committee visited the plantations and operations of SAFCOL including SAFCOL Highveld Region operations, Belfast Plantation; Agroforestry /ED, Kuphukani women co-operative (Mayflower) – small scale farming and the social infrastructure projects such as Muzomuhle multipurpose centre, Robinsdale foot bridge; Harmony Hill Clinic and Hlabekisa/Simile.

 

9.6       Visit to Harmony Hill Clinic

 

As part of investment on social infrastructure, SAFCOL has built a clinic for the community. The clinic serves a broad community and offers a variety of services, medical assistance, psycho-social and HIV counselling, and also has a vegetable garden for the community.

 

The Management of the clinic expressed gratitude to SAFCOL for building the clinic, as the community was using a community hall before, and there was no privacy for patients. They requested additional container rooms to store garden and cleaning equipments, two cleaning staff and a garden maintenance person.

 

10.       Findings

The Committee made the following findings:

10.1      The Committee acknowledged the need to invest in advanced machinery, but also noted the threat technology posed to jobs in the forestry industry.

10.2      The Committee noted with concern that SAFCOL has not yet invested in beneficiation in order to manufacture and export processed and finished products. However, the Committee welcomed the plans and vision of the leadership of the Company to invest in sawmill plants.

10.3      The Committee applauded SAFCOL for having maintained a healthy relationship with communities and claimants, as that was fundamental to the values that governs state-owned companies.

10.4      The Committee applauded the company for the enterprise development initiatives of SAFCOL and encouraged the company to expand the programme to reach more young people through co-operatives.

10.5      The Committee noted with concern the long period it has taken to resolve the land claims of communities, and that that has caused the delays in beneficiaries receiving their dividends and title deeds. It has also caused infighting in some communities. The Committee also learned that the majority of the claimants are the elderly, and many have passed on before their claims were resolved.

10.6      The Committee noted with appreciation that SAFCOL has built a state of-the-art primary health care facility for the community. However, the provincial Department of Health in Mpumalanga has not provided the clinic with adequate support in terms of non-clinical staff such as cleaners, security and gardeners. Furthermore, the clinic complained that medication does not arrive on time and the delay has an impact on the quality of service.

 

11.       Recommendations

11.1      Minister of Public Enterprises

The Committee resolved that the Minister of Public Enterprises should consider:

11.1.1   Ensuring the sustainability of SAFCOL in terms of operations, financial, governance and assert its future role in the forestry industry.

11.1.2   Addressing the issues of land claims at SAFCOL and presenting a new of model of land ownership to the Committee.

11.1.3   Ensuring SAFCOL develop initiatives for beneficiation, including investments in saw mills.

11.1.4   Identifying business units or activities which will require partnerships and investments to ensure that SAFCOL remains sustainable.

11.1.5   Ensuring that SAFCOL develop a model of co-ownership and co-operation with communities in order to build and support co-operatives and subsidiary companies.

11.1.6   Ensuring that underutilised State land, such as that which is owned by the Department of Environment, Forestry and Fisheries, is transferred to SAFCOL for maximum utilisation and sustainability of the company.

 

11.2      Minister of Agriculture, Land Reform and Rural Development

The Committee resolved that the Minister of Agriculture, Land Reform and Rural Development should consider:

11.2.1   Ensuring that land claims on the land where SAFCOL operates are resolved and settled speedily.

11.2.2   Ensuring that relevant community structures are set up and that the beneficiary list gets finalised so that communities with shares in the subsidiary companies are identified so that their shares can be transferred to them.

 

12.       Conclusions

The Committee will continue monitoring and providing oversight to SAFCOL during this financial year, including having a joint meeting with the Portfolio Committee on Agriculture, Land Reform and Rural Development to find a solution to the speedy resolution of land claims affecting SAFCOL.

 

Report to be considered.