Can Group Five bounce back from Ghana setback?
The construction giant wants a third party to determine its liability for Kpone project delay damages
The $410m Kpone power plant project in Ghana promised so much but has brought nothing but pain for the beleaguered construction company Group Five.
In separate statements, Group Five and its Ghanaian client Cenpower Generation on Friday announced that the much-delayed project has been terminated.
But far from settling the squabble, Friday’s announcements could mark the beginning of a wrangle over the costs of the delay in the project. The project is late by more than a year. It was scheduled to be completed in September 13 2017.
Group Five says gross maximum delay damages exposure is capped at $62.5m, which Cenpower has claimed already. “The group continues to challenge the liability for delay damages, which is to be independently determined through the dispute resolution mechanism set out in the contract,” the company said.
Group Five in November failed to interdict Cenpower from demanding $62.7m for delay damages from HSBC and Standard Chartered, Group Five’s bank guarantee providers for the project.
Sasfin Securities deputy chair David Shapiro says the termination of the contract is a major setback for Group Five. Shapiro says the company will struggle to bounce back after its misfortune in Ghana. “Who will recapitalise the company?” he says.
The Ghana project had become a liability for the group, he says. For the 2018 financial year the loss on Kpone amounted to R1.3bn. The project’s loss in the 2017 financial year was R33m.
Cenpower CEO Theophilus Sackey said the company had given Group Five enough time to address the delays. “Given the continued delays to completion, it has been concluded that it is in the best interests of the project and its stakeholders to terminate the EPC contract,” Sackey said.
He said the delay damages Cenpower, a special purpose vehicle created to develop the power station, has received were far less than the losses the company had suffered.
Prior to taking on the troublesome Kpone power plant contract, Group Five appears to have gone to great lengths to mitigate all conceivable risks.
In its 2015 annual report, the construction group listed in detail several risks pertaining to the project. These included country, regulatory, logistics, procurement, operational and credit risks. In each case, Group Five pointed out how the risks would be managed.
“The group has spent eight years developing this contract, including the formulation of our commercial and execution structure, delivery strategy and associated risk mitigation strategies,” it said.
The group said it had concluded similar projects before and pointed out an almost identical plant it built for Sasol in 2010.
The contract to design and build the Kpone power plant was supposed to validate the company’s strategy to pursue growth in the rest of Africa as the domestic economy began to choke.
The independent power project came at a time when the group was understandably looking to take its expertise to develop, finance, build and operate infrastructure assets to new markets.
This was a move to counter the slow trading conditions in the construction and civil engineering sectors in Group Five’s home market. At that time, there was already noticeable dearth of investment as private sector confidence dipped.
SA’s economic growth had started to slow down. GDP grew by 1.4% in 2014, down from 1.8% in 2015. On the other hand, the rest of Africa was home to some of the world’s fastest-growing economies.
Economic growth in sub-Saharan Africa was 5% in 2014. Fuelled by rising income and urbanisation, the pipeline of opportunities on the continent was attractive, with more immediate prospects for growth.
Group Five declined to comment on the implications of the recent developments, while Cenpower did not respond to questions.