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Jul 13, 2012

Eskom deal means Medupi is no longer a problem contract for M&R

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Eskom|Hitachi|Murray|Medupi Power Station|Construction|Power Station Project Site|Henry Laas
eskom|hitachi|murray-company|medupi-power-station|construction-industry-term|power-station-project-site|henry-laas
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Construction group Murray & Roberts (M&R) says the risks associated with its Eskom-related projects have been dealt with after it reached an ‘in-principle agreement’ with the State-owned power utility relating to variation orders, time extensions and the remaining scope of the civil engineering works at the Medupi power station project site, in Lephalale, Limpopo.

CE Henry Laas told investors late last month that the agreement dealt with all historical claims and, more importantly, defined the scope and value of the remaining works, now estimated at around R3-billion. The full value of the contract was estimated at around R8-billion for the M&R-led civils joint venture, which also included Aveng.

The high-level settlement still had to be signed off by the Eskom board, but Laas said he did not foresee any problems related to the clearing of that governance hurdle.

The solution, together with a deal concluded with Hitachi in the first half of 2011, meant that M&R no longer perceived the Medupi-related orders to represent ‘problem contracts’.

The JSE-listed contractor is also the mecha- nical works subcontractor for the multibillion-rand boiler contract awarded to Hitachi in 2007. The contract value to M&R was estimated at around R18-billion, with about R5-billion having been executed.

“The relationship with Hitachi really changed in June last year, when we came to an agreement on the way forward. Since then, progress on the Medupi site has improved materially,” Laas told Engineering News during a recent interview on the Medupi site.

He also indicated that the progress achieved with both Hitachi and Eskom was enabling the contractors to “claw back” some of the time lost during the earlier phases.

Nevertheless, Eskom was still forecasting output from the first unit at the R91-billion (R120-billion with interest) six-unit project towards the end of 2013. The coal-fired power station, with a final nameplate capacity of 4 764 MW, would be ramped up to full capacity by 2017.

“The relationship is now, such, that the parties are working together and they are delivering the project,” Laas said, adding that he did not expect any costs to M&R as a result of a ‘flow through’ claim by Aveng’s DSE against Hitachi.

Financially, the arrangements were such that M&R was recovering all costs related to the Hitachi subcontract, while it had the potential to earn a profit based on performance.

“There was no profit for us up to the end of June 2011. But, as from July onwards, the arrangement is working well for us and we expect to earn a profit of between 5% and 7.5%.”

On the civils side, the group also expected to secure margins within the 5% to 7.5% range following the settlement.

“There is clear definition of what we need to do and we are all in agreement on the programme; we are also in agreement on the cost and the value to complete the project.

This has effectively derisked the project to a large extent,” Laas explained, adding that in the absence of the agreement, the issue would have probably moved into arbitration.

Edited by: Martin Zhuwakinyu
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