China’s Mpumalanga power grab
Dubious procurement, inflated costs, wasted millions and rumours of corruption — amaBhungane lays bare the reality of how a project meant to overhaul Mashishing’s electrical infrastructure turned bad
If you’re looking for a masterclass in mismanagement, Mpumalanga’s Thaba Chweu municipality offers just that. Ballooning costs flowing from dubious contracts for an electrical substation could be the financial death blow for the municipality’s main town, Mashishing (Lydenburg).
The small municipality is already one of the worst-performing in a province full of dysfunctional local councils. But what started as a R118m project to build a 132kV substation in 2012 has spiralled to well over three times that cost. Six years later, and with a price tag of about R400m, construction of the Duma substation has ground to a halt.
Earlier this year, not long after the first bricks were laid, the municipality ordered the contractor, a state-owned Chinese company, to stop construction. This came after criticism from opposition councillors, activists and residents that there was no need to sink such a vast sum into a substation in the first place — and that the municipality had signed away most of its electricity revenue stream to pay for it.
But the contractor, China Sinogy Electric Engineering Co (CSEEC), insists the substation is sorely needed. It says the town’s substations are old, poorly maintained, overburdened and unsafe — "some even have live wires exposed".
There’s no disputing that Mashishing’s electricity infrastructure is in a sorry state. A June 2012 audit of the town’s substations notes scant record-keeping; faulty, incorrectly calibrated instruments; poor servicing; and health and safety threats.
"I am very concerned at the state of the substations in Lydenburg town," the report’s author concludes. He recommends simple corrective measures, such as appointing a few qualified technicians and engineers, and granting a bit more maintenance funding.
The municipality didn’t respond to questions about this — or anything else.
But CSEEC says it conducted its own audit using "an independent SA consulting engineer", though it refused to share it, citing business confidentiality.
Critics of the Duma project say the line about a growing demand for electricity is pure fiction, especially because the town is in decline.
The municipality, of course, doesn’t agree. From the outset, Thaba Chweu’s ANC administration has justified the construction of Duma on the grounds that it is necessary for a host of planned developments, among them a glitzy hotel and mall, golf estate of 1,000 housing units, eco-estate, private hospital and an extension of the town’s residential area.
But these projects remain pipe dreams. A former municipal director says the developments were planned as far back as 2008, but none got off the ground.
The reality is that the town has been falling apart for years. Its dependence on mining meant local industry suffered after the global commodities rout. Today, it’s something of a post-industrial dust bowl. There are a few new townhouse developments on the outskirts — cookie-cutter complexes with aspirational names that suggest Mashishing’s economy has not yet drawn its last breath. But beyond that, everything suggests the kind of dorp that symbolises the steady decay of small-town SA.
Over the past few years the amount Thaba Chweu owes Eskom has rocketed to nearly R500m — staggering for a municipality of little more than 100,000 people. In this context, it’s hard to see how the municipality’s development dreams are anything but completely out of touch.
In June 2012, Thaba Chweu municipality — which includes the towns of Sabie and Graskop — appointed a company called Tsebolo Minerals as "transaction adviser" for the Duma substation project. Tsebolo would end up receiving R15.9m. Later, it would be criticised for receiving payment for services it allegedly never provided.
Shortly after Tsebolo was appointed, the municipality apparently decided to turn the project into a public-private partnership, or PPP (the resolutions would later be disputed).
It was then supposed to register the PPP with the National Treasury and keep it in the loop. Documents from October 2012 show that the project was registered, with the Treasury appointing one of its own advisers to assist the municipality.
In November that year, a letter from the Treasury advises the municipality to "seek the views and recommendations of the National Treasury and the Mpumalanga provincial treasury at all phases of the project", and to involve the Treasury’s PPP unit "throughout the procurement process". Instead, the municipality zig-zagged before arriving at what seems to have been a preordained destination.
Red flags soon popped up. The municipality invited interested parties to bid, but found that the preferred bidder "was unable to meet the requirements of the project".
Then it requested a closed bid and appointed LPJ — a black-empowered SA company jointly owned by a South Korean electrical firm. LPJ seems to have closed and the Korean firm’s SA operation seems no longer to exist.
A month after LPJ’s appointment, Chinese company Sieyuan Electric entered the frame. It sent a letter of guarantee to Tsebolo Minerals, the transactional adviser, concerning the financing, design, construction and maintenance of Duma substation for 15 years.
The letter also refers to a meeting on June 24 2013 between Sieyuan, Tsebolo and China Development Bank, in which the latter agrees to finance the project. Sieyuan says it would "be making payments to Tsebolo Minerals to cover the development costs" and asks that Tsebolo "get us appointed by the municipality … to start with design work".
On July 3 that year, a letter retracting LPJ’s appointment was signed by the then municipal manager. It states: "There has been no development or any sign that LPJ SA would ever be able to raise the required funding."
That same day, another letter appoints Sieyuan and sets aside a substantial 6.25km² of land for the Duma project. (Sieyuan’s director failed to respond to questions.)
A few weeks later, on August 1, a PPP agreement was signed between the municipality and Sieyuan. That contract was ceded to CSEEC soon afterwards.
In response to questions, CSEEC says Xiaodong Li, the director of Sieyuan who also happens to be a CSEEC director, "introduced the companies to each other for the purpose of ceding the PPP ... in line with the respective strategies of both companies". The contract was ceded "at no cost".
Another red flag lies in the expanding scope of the project. It was initially due to run for six years, which then became 15. A note from September 2014 says the project would include the replacement of two smaller substations in the town and installation of 15,000 smart meters.
The project seems to be growing even today. When amaBhungane visited Mashishing earlier this year, it was shown four new Chinese mini-substations being built around town, each next to an existing substation that, in some cases, was only a few years old.
Engineers and experts say even if the town were in need of more power, there are far cheaper and more readily available ways of getting it. For example, an electricity master plan points to a hydroelectric plant 16km outside Mashishing that has the ability to supply 2.6MW, but "is not operational now and is not contributing to any demand of the town".
A former technical services director says: "The saving for the municipality by using the hydrostation was R200,000 per month in terms of the amount of power generated, based on what they would otherwise be paying Eskom." The fact that the hydroplant is idle, he says, is entirely due to mismanagement.
A forensic report commissioned by the municipality says Thaba Chweu owes R10.2m to the contractor brought in to run the hydroplant. So instead of generating electricity, the plant is creating "an unmanageable liability to the municipality".
But even if Duma were completed, there is no guarantee that Eskom would be able to fully supply the substation. A letter from the power utility to the municipality says: "Eskom is experiencing electricity generation, transmission and distribution constraints … capacity is going to be severely constrained for the next seven to 10 years."
Many are also wary of what the municipality might have signed away in its agreement with CSEEC.
A document presented to Thaba Chweu’s mayoral committee says: "There is a danger for public sector partners that they could [lose] the most valuable assets, in other words, the potential profits that could accrue to the public sector."
Under the CSEEC agreement, a joint account would be set up to receive money from electricity users. This would be used to pay Eskom, lenders, contractors, the consultant (Tsebolo) and the municipality. After paying Eskom and the lenders each month, the remaining funds would be divided as follows: a 20% fee to the municipality, a 15% "retainer fee" to Tsebolo (on top of its R15.9m "development" fee), and another 20% to CSEEC for "maintenance". Profits would then be split 50:50 between the municipality and CSEEC.
However, there are important schedules missing from the contract amaBhungane has seen, and neither CSEEC nor the municipality would provide the full contract.
And, as if the municipality were not already sacrificing enough of its revenue stream, documents from 2014 refer to changing the profit-sharing to 70:30 in favour of CSEEC.
It is unclear why Tsebolo should get a 15% retainer plus R15.9m for setting up the deal. Tsebolo says "the share of net income is to pay the permitted retainer fees in the PPP Manual".
In 2015, as the project scope grew, CSEEC brought in Chinese subcontractor Hexing to install smart meters in households. This added R50m to the project cost.
Hexing’s conduct seems to have earned it some enemies. Internal correspondence, interviews with former employees and an audio recording of a senior Hexing insider suggest the company may have engaged in underhand practices.
In March this year, several local employees were suddenly laid off and replaced by Chinese workers. Some say the locals were pushed out because they were reluctant to go along with certain questionable decisions. Photographs show that Hexing employees from China were brought to SA on visitor visas, not work visas. One former Hexing employee says this was standard practice.
E-mails between Hexing staff show that in November 2017, more than two years after the company signed on, it had still not received the necessary certifications to commence work. It did not have a valid certificate of good standing from the department of labour, or a construction certificate. Yet it was operating.
Staff were frantically trying to get the department to issue the certificate and were concerned that it was watching them closely, especially after an accident in which a crane fell over.
A former employee says a Hexing manager pressured employees to pay a labour department contact to expedite the awarding of the certificate. An employee was allegedly forced to drive to Pretoria to hand over the bribe, but was unable to meet the contact.
Hexing did not respond to written questions but threatened legal action, saying allegations against it are without foundation and highly defamatory. "As the subcontractor of [the] main contractor, we make performance in accordance with the agreement signed between us and fully obey the applicable regulations/laws … including employment [laws]."
As costs at Duma rose, so did the concerns of municipal councillors.
A damning forensic report by Audit & Risk Management Solutions, which the council commissioned last year to look into allegations of misconduct and mismanagement, brought matters to a head.
What it means
The municipality is floundering in a swamp of debt and allegations of corruption and mismanagement
Why would a municipality seemingly neck-deep in sleaze commission such a report? Sources suggest the timing was critical.
Two sources say there were signs of growing division in the Thaba Chweu ANC, with rising discontent against the dominant faction linked to then premier and current deputy president David Mabuza and his ally, regional ANC chair Gillion Mashego.
In 2017, the new municipal manager was Patrick Kgoale, who is thought to be outside of Mashego’s camp. It was the council that pushed for the forensic investigation.
But it is understood the regional ANC was furious with Kgoale for allowing the probe and that once the report was submitted, the municipal management refused to make it public.
After protests and opposition threats of legal action, the report was released. Its findings are not pretty.
The report details unbridled incompetence and plunder at the struggling municipality and says more than R350m has been wasted since 2011. Most of it is impossible to recover.
It suggests millions were misspent on lawyers; tender processes were flouted, with R42m blown in irregularly appointing 10 security firms; supply chain rules were routinely ignored; the municipality had paid for services that were not delivered; and R5.6m was spent on a road that did not exist.
"We found that 16 projects had cost variations which exceeded 20% or R20m of the initial cost, in contravention of the National Treasury instruction," the report says.
"Fruitless and wasteful expenditure … was due to interest incurred on the Eskom overdue account. The interest amounted to R97.9m as at June 30 2017."
The forensic report suggests millions were misspent on lawyers; tender processes were flouted; the municipality had paid for services that were not delivered; and R5.6m was spent on a road that did not exist
In May, amid the furore over the report, the mayoral committee received another, equally scathing report — this one on the Duma project.
It found that the Treasury had not been consulted, no feasibility assessment had been conducted on the preferred bidder’s proposal, and there was no contract management plan in place.
The Treasury says the project "was deregistered a long time ago when the municipality decided not to follow PPP procurement processes".
The report further notes that Duma’s cost ballooned from R118m to R410m. "It is not clear what is the role of the transactional adviser [Tsebolo Minerals] in the agreement and why it was necessary to have [director Badisang Mokwena] co-sign the agreement," it says. It slams the R15.9m paid to Tsebolo for services it "deduced" were not received.
Mokwena disputes this. He says the contract is entirely above board. Nonetheless, the council decided to suspend the project after receiving the report. Against the fallout from the broader forensic report, it may have felt it had more urgent matters to attend to. No longer defensible, the Duma project was halted, pending a review.
EFF councillor Exodus Mabanne says there is a lack of political will to clean up the mess because the dysfunctionality serves the interests of the local ANC barons. "Thaba Chweu is the ANC’s milk cow," he says.
Local activist Joel Ledwaba agrees: "Thaba Chweu municipality is an ATM for ANC politicians."
It’s a refrain often heard in Mashishing, including from dissident ANC members critical of the Mabuza-Mashego faction.
Ledwaba alleges the regional ANC is deeply implicated in Thaba Chweu’s corruption, with infrastructure grants siphoned into private pockets and ANC coffers.
A source who worked closely with the municipality’s administration speaks of officials openly talking about directing a slice of project funding to party interests.
Two councillors say only three of more than a dozen officials implicated in the forensic report have been suspended — and that on full pay, with no disciplinary process in sight.
Others have seemingly been rewarded. One official — said to have authorised payments of R47,000 to a contractor to maintain mini-substations, even though no work was done — is understood to have found his way into a more senior position.
One who did not survive is Kgoale, the municipal manager. Some say it’s because he was not sufficiently loyal to the regional ANC. He was replaced by Siphiwe Matsi, who is herself criticised in the report.
Part of the problem is that Thaba Chweu’s management is a game of musical chairs, with a resultant loss of institutional memory. It has had at least 10 municipal managers since the provincial government last placed it under administration, in 2011.
What ultimately happens with Duma remains to be seen. The municipality continues to carry unsustainable Eskom debt. And there is still no sign of the luxury hotel, the eco-estate or the hospital.
The amaBhungane Centre for Investigative Journalism, an independent non-profit, produced this story. Like it? Be an amaB supporter to help it do more.