Eskom says it is adhering to global contracting norms at Medupi

31st January 2011 By: Terence Creamer - Creamer Media Editor

State-owned power utility Eskom stressed on Monday that its direct civils contract with engineering contractor Murray & Roberts (M&R) was being implemented with strict adherence to the international contracting norms and standards and that all claims arising as a result of scope changes and variations were following due process.

The contract is being governed under the standard conditions outlined by the International Federation of Consulting Engineers, or Fidic.

At the weekend, the JSE-listed construction group issued a cautionary notice warning shareholders that the company could report an interim loss for the six months to December 31, 2010, owing to “arduous” progress in the resolution of outstanding claims, including claims relating to the Eskom build programme.

M&R CEO Brian Bruce said that scope changes and variations had become the norm, rather than the exception, at the R125-billion Medupi power project, in Limpopo, where M&R had been contracted directly to perform the civils work and indirectly to complete the steel erection work for the boilerhouses. The civils contract was valued at R3-billion when it was awarded to M&R in the first half of 2008.

Bruce warned that, with 53% of the contract having been completed, that contract sum had already been exceeded, and added that it was necessary to find resolution to the claims before the advanced payments for the contract were utilised.

“Clearly, if we were to pursue a work stoppage on the basis of nonpayment, it would have a serious impact on the progress of the works [at Medupi],” Bruce warned.

But Eskom CFO Paul O’Flaherty, who prior to joining Eskom worked in the construction industry for Group Five and the Al Naboodah Construction Group, in Dubai, told Engineering News Online that Eskom was adhering to Fidic contracting principles.

Under the model, contractors had a certain number of days to lodge claims, while the client had a set timeframe to respond. Claims were either settled, or directed towards an arbitration process.

“There are certainly claims from Murray & Roberts, but we also have claims against some of the contractors. So, where we sit at the moment, there are no overdue payments from us, we are following due process, we have the funding plan in place . . . and we intend to ensure that the project runs on time and on cost,” O’Flaherty said.

Under a revised schedule, Eskom expects to synchronise the first 800-MW unit to the national grid by late 2012. Once completed, the six-unit, dry-cooled power station will have a nameplate capacity of 4 800 MW.

Eskom was unable to comment on the matters surrounding the steel erection contract for the boilerhouses at Medupi and Kusile, as those subcontracts were awarded to M&R by Hitachi, which won the main boiler contract.

O’Flaherty acknowledged that the contract had attracted variation changes, but that, given the scale of the project, these were not “abnormal”.

“You must remember, there has never been a contract of this size in South Africa,” O’Flaherty added, noting that the Gautrain rapid rail project was one-quarter of the size. “We need to go through the detail of their [M&R’s] claims. If it is due to them, we will settle,” he added.

Eskom refused to be drawn into a debate about M&R’s accounting practices, which a number of market observers felt lay at the heart of the announced impairment. It also refused to debate whether the contracting model required adjusting, as suggested by Bruce.

Bruce argued that future public sector contracts could become unappetising to contractors, unless the legal dispensation was changed to allow contractors immediate recourse in instances where there had been material scope changes.

The South African legal system had not evolved sufficiently, Bruce said, to enable a contractor to seek relief from the courts when a contract’s scope changed. Such evolution, he argued, had already taken place in territories such as the US, Australia and part of Europe.

But a number of market observers have laid much of the blame on the decision by M&R to recognising “uncertified” revenues in the first place. One analyst has even suggested that M&R desist from such a practice until the legal framework was in place to facilitate immediate recourse in cases of scope changes and contract variations.