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SIU targets Eskom, Tegeta in R3.7bn coal contract

2018-12-17 00:05

Eskom and Tegeta – the mining company owned by the Gupta family and former president Jacob Zuma’s son Duduzane – have been hauled to court to cancel a controversial R3.7 billion coal supply contract.

In court papers filed at the Pretoria High Court on Friday, the Special Investigating Unit (SIU) has asked the court to declare the agreement, which is still in effect, “unlawful and invalid”.

This is the first time the state has taken any action against Tegeta, which is now in business rescue after the Guptas and Zuma jumped ship in February.

The SIU is also angling for a hefty costs order against Eskom and Tegeta.

“Given the disgraceful conduct evidenced in this application, and the pervasive corruption, abuse, lack of candour and nondisclosure ... the scale of the costs order should be punitive,” the papers state.

SIU communications head Nazreen Sekao Pandor on Saturday said: “It is important for the confidence of the men and women in South Africa to know that we are rooting out corruption and we are not going to be deterred.”

In his founding affidavit, SIU senior forensic lawyer Jason Schmidt said his investigation was based on, among other things, former Public Protector Thuli Madonsela’s State of Capture report, as well as Treasury’s report on Eskom and Transnet.

The papers detail how Eskom – after widespread coal shortages in 2008 led to the first round of load shedding to hit the country – exploited a 2008 emergency medium-term coal procurement mandate to award coal supply agreements between 2013 and 2015.

This was used to hand Tegeta its lucrative contract in 2015, the terms of which Tegeta was allowed to dictate – including the price, coal quality and an extension until 2025.

“Eskom awarded Tegeta’s Brakfontein colliery a contract for emergency coal procurement through an unsolicited bidding process, despite the fact that the mine’s previous owners offered Eskom the same coal, which the power utility rejected for being of poor quality. Eskom continued to decline the offer until the appointment of the ‘Gupta-aligned board’ in December 2014,” the affidavit states.

This board, appointed by then public enterprises minister Lynne Brown, was led by Ben Ngubane and included former Eskom chief executive Brian Molefe. Of its eight members, six had links to the Guptas or their business partners.

Eskom gave Tegeta the contract even though Tegeta admitted in a meeting that it was fined for contravening environmental regulations in 2014. The papers also state that there was no evidence to suggest that Tegeta actually paid the fine.

The papers also detail the lengths to which Tegeta’s management went to hustle a deal.

When Eskom told them it was not interested in the poor quality coal from one section of the Brakfontein mine and was only interested in coal from another seam, Tegeta’s management told Eskom it would be too difficult to mine only that section and offered a “blend” of good and poor coal instead.

“Tegeta motivated for a higher price, falsely stating that it had increased its broad-based BEE ownership and that changes in environmental law justified a higher price,” the court papers state.

Tegeta also wanted changes to the agreement, and an increase in its supply from 65 000 tons to 100 000 tons a month, a price hike and a 10-year contract.

“Four months after the appointment of the ‘Gupta-aligned’ board, Eskom agreed to all the terms and entered into a CSA [coal supply agreement] with Tegeta for the supply of coal from its Brakfontein coal mine initially valued at approximately R3.7 billion,” the affidavit states.

“The CSA included the noncompliant coal. At this stage, Tegeta did not comply with broad-based BEE requirements and also did not have a water use licence. In terms of Eskom’s procurement policy, its board of directors were obliged to inform the Treasury of its transaction with Tegeta and submit the relevant particulars of the transaction to ... the minister of finance for approval. Eskom ... failed to inform Treasury in writing and did not even obtain the approval of the transaction from the minister of finance,” the court papers state.

Just two days after the agreement was signed, Eskom’s chief coal quality adviser, Chris van Alphen, said the blended coal from Brakfontein was wholly unsuitable for the Majuba Power Station in Mpumalanga. But, two months later, Eskom extended Tegeta’s agreement until 2025.

“During 2015, Majuba Power Station had seven suppliers and, even though Tegeta delivered the lowest quality of coal, it demanded the highest rand per gigajoule rate,” the court papers state.

Early in 2016, Tegeta transferred its Brakfontein mines to Shiva Uranium, a subsidiary of Gupta holding company Oakbay, but Eskom nevertheless continued to pay Tegeta.

“In September 2016, Tegeta again offered to increase the coal supply to 200 000 tons,” the court papers state.

“During the SIU’s investigations, we were able to unearth that the vast majority of Eskom’s coal supply agreements were concluded in the absence of any tender process. Suppliers were registered on Eskom’s supplier database without adequate gatekeeping mechanisms,” the papers state.

“Eskom failed to authenticate documentation submitted by bidders/suppliers. No due diligence had been conducted on suppliers’ legislative compliance.

“In awarding coal supply agreements (without a tendering process), bidders that met the necessary criteria required for the awarding of the contract had not received it, while bidders that were noncompliant, such as Tegeta, were afforded an opportunity to rectify their bids.”

The SIU states that failing to adhere to Eskom’s own prescripts and conduct a proper tender process was a contravention of the Constitution, the Promotion of Administrative Justice Act and the Public Finance and Management Act, and the contract should be set aside.

“Tegeta was irregularly allowed to suggest ... a contract period of 10 years in respect of the CSA without involving Eskom’s legal department”, and allowing Tegeta “to dictate the terms” exposed Eskom to “undue risk of litigation”.

The list of respondents in the case includes Public Enterprises Minister Pravin Gordhan and Tegeta’s business rescue practitioners.

A spokesperson for Gordhan said “no relief was sought” against him in the application, “and the court papers will be studied in detail to advise the minister on the most appropriate course of action”.

“Gordhan has been emphatic in declaring publicly that he will support all efforts by law enforcement agencies of the state to hold those to account, and to seek appropriate recourse through the courts from any party that had unlawfully benefited from corruption and state capture at the expense of the fiscus and the public.”

Speaking for the business rescue practitioners, Bouwer van Niekerk said it was “not a given that we will oppose the application”.

However, the punitive costs order should be laid at Eskom’s door, not Tegeta’s, he said.

Eskom spokesperson Khulu Phasiwe said it had not been served with court papers.

“However, Eskom has been cooperating with the SIU in getting to the bottom of the alleged malfeasance that happened in the company in the past few years,” he said.

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May 19 2019