Progress on the build programme.
This year’s AGM follows on Eskom’s announcement of a further delay of Medupi’s first unit to deliver power in December 2013. Many questions have been asked about the implications of the delay for the security of supply, the economy and Eskom’s ability to manage mega projects.
Government has placed at its core of delivery the infrastructure development programme in order to create much-needed jobs, develop skills and industrialise our economy.
The importance of delivering on capacity expansion projects to increase overall Eskom generating capacity cannot be understated.I am accordingly extremely disturbed by these further delays being experienced at Medupi.
Eskom remains Medupi’s owner and is responsible for the management and execution thereof.
As soon as I was made aware of the technical challenges of the project, I immediately intervened and convened a meeting with Eskom and key contractors at which meeting all the parties gave me their assurance and cooperation to resolve the technical issues and recommitted themselves to the December 2013 deadline.
It was on this basis that as the Shareholder Representative, I had made very strong statements and held the parties accountable to the deadline.I had to put everyone under pressure to deliver.I have held a very firm view that everything must be done to comply with the project schedule of December 2013 and that all the parties, particularly the contractors, must fulfill their obligations.
It was for this reason that I fully supported Eskom in imposing penalties on the contractors, which included the calling of the performance bonds. Despite this commitment, and against my better wishes, it became clear that this deadline was no longer achievable due to the failure of the factory acceptance tests - the control and instrumentation – conducted in June 2013.
Faced with all these technical failures, I then directed the Board immediately to inform the public of these challenges, consistent with the approach we had adhered to of being transparent and accountable with regard to the build programme.
Cognisant of the challenges that face the Medupi project such as the inadequate front-end project planning and the required turnaround times, we still maintain our firm expectation that the company should deliver as committed under the overall project schedule.
Clearly, a new effort is required to address the deficiencies experienced during the project management and to ensure that this project begins to deliver. In view of this latest project delay, the department has commissioned an independent consultant to delve into the challenges of the project.In brief, the consultants will amongst others, assist the department and Eskom with the following:
a) Assess project and engineering management capabilities within Eskom and advise on any structural improvement that may be required; and
b) Ascertain the full extent of any risks to the build programme, including having a closer view of the drivers or areas that are causing delays and cost escalation and the delivery schedule.
The scope of the study is broader than the Medupi project as its mandate focuses on the entire build programme. Necessary lessons have to be drawn from the Medupi implementation in order to guide our actions going forward in relation to the rest of the build programme.
Furthermore, I have dispatched the Director-General, Mr. Tshediso Matona, together with senior executives from Eskom to go to meet with Alstom in France in order to express our displeasure at the delays, get first-hand information and understanding of the causes for the delays as well as the remedial steps they will speedily take to get the project back on track.
This does not preclude any other remedial actions that Eskom will want to pursue as part of the contractual obligations.
From the shareholder perspective, it is important for us to be forward-thinking in order to mitigate against current and future risks associated with the inter-dependency of our infrastructure projects.
The outcome of this study will inform what corrective action the Shareholder should take in relation to Medupi.
Part of the challenge of implementing Medupi as a mega-project is constantly to draw important lessons that could serve to guide the further implementation of other infrastructure projects.
During my budget speech in May, I reported that Eskom is codifying the lessons learnt in implementing the build programme into a comprehensive toolkit and has established an Institute for Project Management to provide training based on this tool-kit.
What we should be cautious not to do is make rash and uninformed decisions which could destabilise Eskom and put at greater risk the delivery of the build programme. We believe that the critical questions prompted by the delays are as follows:
a) Impact on the security of supply
b) Impact on the economy; and
c) Eskom’s ability to manage and execute mega projects.
With regards to the security of supply, the revised date of delivery of first power to the grid puts pressure on the already constrained power system.
The situation is exacerbated by the recent tariff determination, wherein Eskom has limited means to secure levers to ensure security of supply.
There will be a need for Eskom to look at reprioritising within its operations to ensure the lights are kept on.
To address the potential shortfall of supply in the next few months, Eskom, with the assistance of government, will be looking at short-term supply-side and demand-side options that can close the gap.We will provide further information in this regard as it becomes available.
In addressing the question of economic impact, contrary to publicised assertions, Eskom has assured us that it continues to provide quotations to customers for new connections despite the constrained power system.
However, due to the sluggish global economy these quotations are not being converted into real business investments.
With regards to Eskom’s ability to manage mega projects, I am cognisant of the fact that at the commencement of the New Build Programme, the last plant previously constructed by Eskom was the Majuba power station which began construction in 1983 and the first unit went commercial only in 1996 – 13 years after the construction had begun.Whilst not condoning the recent delays, Eskom is doing far much better this time around than was the case in relation to the Majuba Plant.
During this long interregnum between Majuba and Medupi, much requisite capital project management skills had been lost and Eskom had to proceed almost from scratch mobilising these skills.Furthermore, the construction of the Medupi project commenced in haste despite the fact that planning and development work had not been completed.
Consequently, there was inadequate project management capacity within Eskom the lack of which, together with the depth of experience, led to inability to provide requisite oversight and supervision of projects of this complexity and magnitude.
Going forward, the following initiatives have been introduced:
a) Eskom has mobilised its resources closely to monitor the performance of its contractors to ensure the successful delivery of the project and are further reviewing their processes to institute claims and penalise non-performing contractors and subcontractors. In addition, the company has, without fear or favour, called the performance bonds of both Alstom and Hitachi which is a remedy provided for in the contracts; and
b) I am advised that Eskom continues to invest on improving its engineering, procurement, construction and project management (EPCM) capability, its people and systems, processes and tools. Following strong intervention from the Shareholder, the Eskom Board subsequently established a dedicated committee to oversee the Build Programme.
I believe that Eskom has learnt lessons from the challenges of Medupi and am confident they are making necessary efforts to respond to them, including enforcing their contractual remedies, whilst enhancing their capacity more effectively to manage their build projects.
Our experience in having identified the risks to delivery on Eskom’s committed schedule for Medupi and our robust engagement with the company on this issue validates the activist style of our oversight as a Shareholder, and we intend to maintain this engaged stance going forward and for the State-Owned Companies in our portfolio.
This is consistent with the philosophy and purpose of the Presidential Infrastructure Coordinating Commission (PICC) for the Government’s wider infrastructure roll-out programme.Performance for the year under review
To now turn our attention to the company’s performance in the year under review, I am pleased with the overall financial results of the Company:
Eskom remains in a steady financial position in the short- to medium-term having generated a surplus of R5.2 billion in financial year 2012/13. Once again this surplus will be reinvested in the business to continue to improve the financial position of the company as continues to implement its build programme.
During the financial year under review, Eskom managed to increase the required funding towards the committed build programme to 83% of the R300 billion. A strong financial position is key to the company being able to secure funding at competitive rates. I also note that Eskom has also managed to ensure that the lights are kept on since the 2008 electricity challenges. In this regard, I would like thank the South African people in partnering with Eskom and heeding the call to use electricity efficiently. However, much more is required from all electricity consumers to create headroom as we go through an extremely constrained system.
Eskom’s Distribution and Transmission performance has also improved.
In line with the government objectives of increasing access to basic services, Eskom electrified 144 558 homes including 142 schools and clinics in the financial year. This means that up to 4.3 million homes have been electrified since the inception of the electrification programme in 1991.
Eskom continues to play a key role in the transformation objectives of the country. For this year alone, the company spent approximately R100 billion to B-BBEE companies with R5.7 billion going towards black owned companies and R1.2 billion to black youth owned companies. Whilst I find this totally unsatisfactory, it does however mean that Eskom has great potential to play a catalytic role with regard to transformation. However, the distribution of this leverage needs to be more equitable and that is the reason why we have made a firm commitment during our budget vote that transformation and industrialisation will receive our increased attention during the current financial year.
In conclusion, Eskom is an important driver for the economy and an intimate part of the lives of all South Africans who are touched, in one way or another, by what it does. It belongs to you. We know that its success is a matter of deep interest to you. As its Shareholder we remain steadfast in our commitment to ensure that it delivers on its mandate to change and improve our lives through both vigorously pursuing its commercial as well as developmental mandate.
It is therefore imperative that it succeeds in what it does, particularly with regard to delivering on new electricity capacity that the economy requires for growth, investment and job creation.
I thank you.
Notes:
1) Notwithstanding the increase in debt, the company is still within the targeted debt to equity ratio of 70:30 as agreed with the Shareholder and it has sufficient liquidity to service its interest obligations when they are due.
2) I have taken note of the National Electricity Regulator of South Africa (NERSA) revenue decision as announced on the 28th of February 2013 including the implications of the decision, in particular the resulting shortfall of R225 billion. It is clear that this shortfall cannot be closed through Eskom efficiencies alone. In this regard I have asked Eskom to consider options on how this shortfall can be addressed including the impact it will have on the business going forward.
3) Further there are engagements within relevant government departments to ascertain the level and extent of government assistance that may be required to address the implications of the tariff decision going forward. Eskom has been encouraged to continue working closely with this forum so that the appropriate assistance can be determined and Government can respond accordingly.
