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Contractors drop R36bn cost bill on Kusile

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Contractors working on the Kusile Power Station in Mpumalanga have submitted claims to Eskom for extra costs totalling R36 billion.

Contractors’ claims are normal on any big construction project and are a mechanism for the companies to claw back from the client unforeseen costs they had to fork out to get the job done.

However, in this case, the extent of the claims was shocking, said economist Mike Schussler.

“Where on earth is Eskom going to get the money to pay it?” he asked.

Kusile’s budget has ballooned from R80.6 billion in 2008, which is when construction started, to R161 billion. Eskom this week confirmed this amount, but qualified it by saying that the estimate was at 80% certainty.

According to Eskom, the R36 billion contractor claim is overstated and a smaller amount is provided for in the budget of R161 billion.

However, it would not disclose the amount.

Eskom will have to provide for the claims in its financial statements for the year ended March 31. This will weaken the power utility’s already extremely weak financial position, Schussler said.

Eskom will battle even more to retain its going concern status.

Schussler said that, in light of these huge claims, Eskom was going to battle even more to secure financing, which could put its ability to complete Kusile in jeopardy.

It is highly unlikely that Eskom will be able to get the necessary funds through the National Energy Regulator of SA (Nersa) by adding it to the electricity tariff.

During its last tariff determination, Nersa was reluctant to compensate Eskom for inefficiently incurred costs at Kusile and its other major building project, Medupi.

That leaves government as the only shareholder that could assist Eskom with a bailout using taxpayers’ money.

Eskom chair Jabu Mabuza recently stated that there was a R250 billion hole in Eskom’s financial position and, as a result, analysts expect another bailout from government at some point.

JSE-listed construction group Stefanutti Stocks said in a trading statement earlier this month that it had several unresolved claims “on a large public sector power project in South Africa”.

The group said it was pursuing the claims, but nevertheless provided R263 million potential unrecoverable costs related to the project, presumably Kusile.

This pushed Stefanutti Stocks from a profit in the previous financial year to a loss.

A construction executive, who declined to be named and whose company has submitted a claim of more than R100 million for work at Kusile, said Eskom responded by putting the company’s entitlement at zero, and added that “we believe we have a very strong case”.

In light of his experience, he believed Eskom’s provision for the claims in its adjusted Kusile budget would be totally inadequate.

Another construction executive who declined to be named said a large portion of the claims were most probably due to the delays at Kusile, especially over the past three to four years.

Kusile was due to be completed in 2014, but only one of the six units is so far in commercial operation.

Eskom has indicated that the construction was 89% complete, but also disclosed that serious design flaws negatively affected output.

One of the construction executives said there were many changes in the design of Kusile and the sequencing of work was inadequate.

As a result, contractors often had to wait for access to their specific work site. The cost related to these delays were out of their control, hence the claim against Eskom.

He said contractors may overstate their claims initially, but one would expect roughly 60% of the value to be credible.

Contracts provide for resolving disputes through arbitration, but parties who are not satisfied with the ruling could take it on review in the high court, which is an expensive and protracted process that could destroy smaller businesses.

He said that, if the claims could be finalised, the payments could bring some relief to the struggling construction industry.

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