Eskom: coming to the boil
Eskom accuses losing bidders of relying on false information about the Duvha contract awarded to Dongfang Electric
Eskom says it changed the terms of a R4bn boiler tender controversially awarded to Chinese state-owned company Dongfang Electric Corp to avoid paying a R1.7bn insurance penalty.
One of six boilers at Eskom’s Duvha power station in Mpumalanga blew up in March 2014, taking 600MW of power off the grid amid a steadily worsening load-shedding crisis. After three years of wrangling with insurers and cancelling then reissuing the tender, Eskom awarded the contract to Dongfang in March.
The award came just eight days after politically connected advisory firm Trillian gave Dongfang’s bid the thumbs-up in a last-minute risk assessment of the bids submitted.
But losing bidders GE and Murray & Roberts (M&R) have cried foul.
GE has asked the court to interdict implementation of the contract until it can be reviewed and adjudicated again. It says Eskom rigged the tender to go to Dongfang even though it was not on the final list of two short-listed bidders and its bid was R1bn more expensive than those of its rivals.
M&R has applied to join the proceedings.
In an affidavit filed last month, GE head of sub-Saharan Africa George Njenga said Eskom’s request for proposals stipulated that two bidders would make it to the final short list. He said M&R and GE were the only short-listed suppliers when final bids were submitted on March 3.
"Eskom’s conduct in awarding the bid to a tenderer that did not qualify as one of the two short-listed bidders at the desktop stage of evaluation is highly suspicious," said Njenga. "At the very least, it gives rise to a reasonable apprehension of bias in favour of Dongfang Electric on the part of Eskom."
But last week Eskom hit back, accusing GE of relying on "false rumours" and incorrect calculations, and asking the court to dismiss its application with costs.
In his responding affidavit, Eskom’s acting commercial GM, Charles Kalima, pointed out the power utility was under pressure to award the tender by March 30 or face paying a R1.7bn penalty to a consortium of insurers and reinsurers headed by AIG.
Eskom was worried "several deviations and exclusions" contained in the remaining bids could "affect the successful and timely conclusion of the tender process". To mitigate this risk, on January 20 the board tender committee expanded the number of short-listed bidders from two to four.
Kalima disputed GE’s calculation that Dongfang’s bid was 25% more expensive than its rivals, claiming it was only 11.8% more expensive.
Whereas Dongfang’s price was "fixed and firm", GE’s bid price "was subject to escalation by 75% of its price schedule" he said.
Citing its experiences with GE in building Medupi and Kusile power stations, "which resulted in increases of 28% and 45% respectively", Eskom chose to "avoid the risks associated with cost price adjustment linked contracts" by awarding the deal to Dongfang.
Kalima said audit firm KPMG evaluated Eskom’s tender process and concluded it was "fair and in line with Eskom’s [supply chain management] procedure".
On March 8, just five days after all bidders submitted their final offers, the tender committee approved a recommendation to award the contract to Dongfang.
However, KPMG in a draft audit report raised a concern about the Dongfang recommendation and suggested Eskom conduct a "sensitivity analysis" of the risks associated with GE and M&R’s bids.
Eskom appointed another audit firm, SekelaXabiso, to undertake this analysis, which "confirmed the rationale adopted by Eskom in arriving at its decision", Kalima said.
However, several questions remain, many of which will have to be aired in court because Eskom is keeping the SekelaXabiso and KPMG reports and the Dongfang contract under wraps.
For one, Trillian’s risk assessment report, seen by the Financial Mail, appears to contradict Kalima’s figures. It says GE’s "bid price per tender submission" was R3bn, M&R’s was R3.3bn and Dongfang’s R4bn — which is 25% more expensive than GE’s.
Kalima appears to have relied on Trillian’s assessment that GE and M&R’s bids are risky because they carry too high a proportion of variable costs subject to escalation.
It’s also unclear what KPMG’s concerns were, what SekelaXabiso’s "sensitivity analysis" entailed, and whether Trillian’s cost-escalation calculations would withstand scrutiny.
Ed Jardim, group investor & media executive at M&R, says his company decided to join GE’s application against Eskom because of "the lack of understanding of the contract award to Dongfang".
He says M&R cannot comment on Trillian’s risk assessment as it "did not interact with Trillian in any way". However, he questions the validity of comparisons between Kusile and Duvha.