South Africa’s Blackouts Follow Alstom, Hitachi ‘Let-Down’

South Africa’s state power company was “let down” by contractors including Alstom SA (ALO) and Hitachi Power Africa, whose errors helped delay the startup of Africa’s biggest power plant for more than two years, according to the utility’s former finance director, Paul O’Flaherty.

The Hitachi Ltd. (6501) unit put back the construction of the first boiler at Eskom Holdings SOC Ltd.’s Medupi power plant in the northern Limpopo province by changing its design hundreds of times and putting it together with faulty welds, O’Flaherty said. Alstom, based in Paris, left Eskom engineers wondering whether they could put together the control system to protect the boiler after three tests failed, he said.

“Without deflecting on Eskom’s and my personal accountabilities to deliver this project for the country on time and on budget, I felt seriously let down by certain of the major contractors,” O’Flaherty, 51, said in an interview in Johannesburg.

The cost of that delay was accentuated last week, when Eskom implemented rolling blackouts across South African cities for the first time since 2008. Eskom is still battling to start the 4,788-megawatt coal-fired plant, the first major power facility in the country on which construction has started since 1983.

Photographer: Alexander Joe/AFP/Getty Images

The Medupi power station stands outside the northern South African town of Lephalale in this 2011 file photo. Close

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Photographer: Alexander Joe/AFP/Getty Images

The Medupi power station stands outside the northern South African town of Lephalale in this 2011 file photo.

Stymied Growth

Electricity shortages have stymied growth in Africa’s biggest economy, leaving the government struggling to bring down its 24.1 percent jobless rate as Eskom has been unable to provide power for companies that wanted to expand. Contracts for Medupi were awarded in 2007 and the plant was slated to start producing power in 2012.

Major customers including BHP Billiton Ltd. and Glencore Xstrata Plc (GLEN) have, at times, been asked to reduce power usage by 10 percent. Mining accounts for about 60 percent of South Africa’s exports.

“We have sorely needed investment growth and we’ve had very little,” Gina Schoeman, an economist at Citigroup Inc. (C) in Johannesburg, said in a Feb. 26 interview. “Electricity shortages have been a significant contributor to this. The big industrial companies would definitely produce more if there was more electricity supply.”

Hitachi Power Africa said it made no major design changes to the Medupi boilers and the faulty welds “were related to local subcontractors,” according to an e-mailed response to questions. Eskom’s requirements that a large part of the work had to be done locally has meant Hitachi was subject to “a reduction in productivity and the sub-standard quality of work produced by some local suppliers,” it said.

Boiler Protection

Alstom said it wasn’t solely responsible for the delays.

“The boiler-protection system is a complex system and in the case of Medupi, the configuration requested by Eskom is demanding and unusually complex compared to industry standards,” Alstom said in an e-mailed response to questions.

The project was further delayed by strikes.

Medupi, when complete, will be the world’s largest dry-cooled power plant, meaning that it doesn’t rely on water for its cooling.

The 90-year-old power producer is spending about 500 billion-rand ($47 billion) on expansion by 2017. When Medupi, the coal-fired Kusile plant and 1,322-megawatt Ingula hydropower facility come online, Johannesburg-based Eskom’s 42,500-megawatt capacity will be expanded by a quarter. Medupi’s delays also increased its cost by at least 15 percent to 105 billion rand.

Hitachi’s 20 billion-rand Medupi contract and Alstom’s 13 billion-rand deal are the biggest in Eskom’s history.

‘Double Whammy’

The power plant’s boiler heats water into steam to drive an electricity-generating turbine. Alstom is designing the software to ensure the boiler doesn’t overheat and get damaged.

In December 2012, six months after it was supposed to perform a pressure test on the first Medupi boiler, Hitachi informed Eskom that it had been alerted that the heat treatment on a number of welds wasn’t done properly, O’Flaherty said. Alstom informed Eskom in the same month that tests on the boiler protection system had failed.

“We were hit by a double whammy,” O’Flaherty said. “Eskom engineers thought Alstom simply couldn’t get the job done. And we found out that the welds on Hitachi’s boiler were faulty and would have to be replaced. It was a huge blow.”

Minister of Public Enterprises Malusi Gigaba summoned the companies’ global heads, who promised to deliver power by the end of 2013, O’Flaherty said.

Strike Delay

“The meeting was brought to apply more pressure to all parties to make sure the Medupi project is accelerated,” Mayihlome Tshwete, Gigaba’s spokesman, said in a March 3 interview. The minister “wasn’t happy.” The companies didn’t bear sole responsibility for the delays, he said.

While Eskom brought Siemens AG in to develop the protection system for two boilers, trying to change contractors for the remaining four boilers would delay the project even further.

In January 2013, construction of Medupi was hit by another delay, this time a five-month strike by workers at the site in Lephalale, 278 kilometers (173 miles) north of the capital, Pretoria, protesting over issues including different pay for the same work. South Africa’s Murray & Roberts Holdings Ltd. (MUR) and Aveng Ltd. (AEG) were among construction companies employing about 17,000 workers at the site.

‘Too Much’

The strike was caused by the inability of subcontractors to manage their workers, O’Flaherty said.

“The way labor was run by the subcontractors was not acceptable,” said O’Flaherty, who intervened to resolve the disputes. “There was no supervision and workers were not being treated fairly.”

Gigaba also “asked questions of the executive,” Tshwete said. “Is it not too much for one person to be finance director and head of the build program?”

Prolonged labor unrest and “technical challenges” related to Alstom and Hitachi’s work contributed to Medupi’s delay, Eskom said in a written response to questions. “Eskom has and will continue to exercise its contractual remedies against Hitachi.”

Murray & Roberts and Aveng didn’t provide responses to queries they acknowledged receiving from Bloomberg News.

O’Flaherty declined to say why he resigned last July. At the time of leaving he was “confident” that unless there was further labor unrest or major technical problems, Medupi’s first boiler would be functioning by the middle of 2014, he said.

CEO Leaving

The former Eskom executive is currently working for a construction company in Dubai, he said, declining to give more detail. He is also a non-executive director on the board of Austro Group (ASO) Ltd., a South African manufacturing company.

Eskom has committed to producing some electricity from the plant by year-end, after initially saying that it would take four to five years from when construction started in 2007.

Eskom Chief Executive Officer Brian Dames will step down from his position on March 31. He joined the company as a graduate trainee in 1987.

Hitachi’s contract with Eskom was probed by the Public Protector, South Africa’s graft ombudsman, because Eskom’s chairman at the time, Valli Moosa, was a senior member of the ruling African National Congress

Chancellor House Holdings Ltd., the investment arm of the ANC, held 25 percent of Hitachi Power Africa at the time. Hitachi said on Feb. 27 it has agreed to buy that stake.

Interest Conflict

While Moosa “failed to manage the conflict of interests”, Hitachi’s contract award “was not in any way affected”, the Public Protector found in an August 2008 report.

Moosa said Hitachi was picked by company executives and the decision was reviewed several times before it reached him. He further requested an independent review be carried out by auditors Deloitte, who gave it the “green light,” he said in a Feb. 26 phone interview. The Hitachi and Alstom contracts have been audited several times, including by a “third party” and there is no evidence of any manipulation, O’Flaherty said.

“Chancellor House bore no influence at all,” O’Flaherty said. “Hitachi and Alstom simply had the best overall bids based on the criteria requested in the tenders.”

Eskom and the contractors bear responsibility for the delays, Tshwete said.

“It would be very hard to take the issues at Medupi and reduce them to one single factor,” he said. “I think there was shared responsibility. We’re a developing country so a complex project like this is always hard to get done.”

To contact the reporter on this story: Franz Wild in Johannesburg at fwild@bloomberg.net

To contact the editors responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net Karl Maier

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