SUNDAY TIMES - How Eskom bowed to Guptas
Sunday Times News By SABELO SKITI, 2015-09-13 00:05:00.0

How Eskom bowed to Guptas

Electricity pylons are seen near Arnot Power Station's cooling towers, east of Middelburg in Mpumalanga province
Image: Reuters/Siphiwe Sibeko

Eskom has gone to extraordinary lengths to make sure the powerful Gupta family landed a R4-billion coal deal.

A Sunday Times investigation has discovered that a Gupta mine failed a coal quality test four times before landing the multibillion-rand deal on the fifth attempt. Then, shortly after clinching the deal, four experienced employees were suspended after again questioning the quality of the Gupta coal.

This week, insiders laid bare the lengths to which the power utility went to hand the Guptas - regularly in the news for their close ties to President Jacob Zuma and for scoring government favours - a deal to supply Majuba power station in Mpumalanga with coal for the next 10 years.

Their mining company Tegeta Exploration and Resources had tried since 2011 to get an Eskom deal, but had been rejected after four tests done by the power utility showed coal from its Brakfontein colliery was substandard. Finally, a fifth test, in March this year, found Tegeta's coal to be marginal - meaning within specifications but risky - paving the way for the 10-year deal to be struck.

However, only two months after it started delivering coal from Brakfontein, the company had its coal rejected due to poor quality.

On August 31, Eskom issued Tegeta with a letter of suspension, saying that inconsistencies had been picked up in the laboratory results after the coal had been tested.

"This is of great concern to Eskom as it now calls into the question the exact nature and quality of the coal that Brakfontein Colliery and Brakfontein Extension supplies to Eskom in terms of the coal supply agreement," the letter states.

"Therefore, as a precautionary measure, Eskom hereby notify you of the suspension of offtake from the mine in order to investigate the root cause of the inconsistency in the coal quality management process."

The suspension came into effect at 4pm that day.

But, in a startling about-turn, the suspension was lifted five days later. The Sunday Times, through several sources, was able to establish that:

  • Instead, the four Eskom staff members involved in the quality control process, and who have more than 50 years' experience between them, were suspended;
  • Eskom executive Matshela Koko bypassed company protocol when he personally stepped in to question the staff about inconsistencies found in the test results; and
  • The two laboratories that conducted the tests, SGS SA and Sibonisiwe Labs, were suspended. A lawyer for Sibonisiwe said the company would comment on the matter later. A representative of SGS SA, which has done business with Eskom for the past eight years, said it could not comment on the case, but said its business practices were above board.

A senior Eskom source told the Sunday Times that Tegeta lodged a complaint to the effect that Eskom staff had colluded with staff at the laboratories in a bid to extort a bribe from Tegeta in exchange for passing the company's coal.

Eskom, in its official response, denied that the Guptas had complained about their coal being rejected, and said the investigation had been triggered by an "anonymous tip-off" over inconsistencies in results from the two laboratories.

Eskom spokesman Khulu Phasiwe said the contract was reinstated after samples of 12 stockpiles worth R15-million, were taken for a third test at the South African Bureau of Standards, which found them to be compliant.

He said the investigation into the four staff members was a separate issue and related to "mismanagement of the coal quality management process".

When asked whether it was normal for Koko - an executive just below the level of CEO - to be involved in handling such disputes, Phasiwe said: "Mr Koko acted within his delegated authority."

He said the two laboratories were suspended pending a forensic investigation into inconsistent results in the analysis of Tegeta's coal.

Coal specification is based on 10 factors, including total moisture and calorific value. These values are then matched to a particular power station.

A staffer at Eskom's primary energy division wondered why Koko had directly questioned his four colleagues.

"Coal gets rejected regularly here and suppliers complain, but you never see an executive get involved.

"Why did he go directly to these four instead of speaking to the divisional head as per protocol?"

Another former employee, who asked to remain anonymous as he still has links to Eskom, said Tegeta had tried to secure a contract at Eskom since 2011 but was hampered by the poor quality of its coal.

"Up to five tests were conducted, the last being March this year, but the coal kept failing. It was odd that they kept doing analysis because other suppliers get one chance, or two at best," this insider said.

He said Eskom would usually do one pre-certification test for a potential supplier.

"I don't know who paid for it, but you normally just test once, and if there's an issue then you test a second time.

"But to do it three, four, five times, that's unusual ... It's expensive. I mean, in whose interest is it?"

The Sunday Times has seen a laboratory analysis report of tests done in March, which shows the coal to be marginal, making it risky for Eskom to use for generating electricity.

Phasiwe defended the decision to award the contract, saying four tests - at R100000 each - were done as part of the pre-qualification process.

He said the repeat tests were because of "quality improvement possibilities".

The awarding of the current deal was not without controversy at the time. The Sunday Times previously reported that former Eskom chairman Zola Tsotsi bent the rules for Eskom to sign the 10-year, R400-million-a-year deal with Tegeta Resources to supply coal via rail to Majuba.

Tegeta did not respond to detailed questions, but the company's Jacques Roux said any inference about interference was inaccurate: "Tegeta operates in line with corporate governance best practice and in compliance with its contractual obligations to Eskom.

"Tegeta is run by a fully qualified operational team, which is responsible for the day-to-day operations and decision-making at the mine, and, as such, matters of this nature are dealt with without the involvement of any of the mine's shareholders."

Poor-quality coal too often a problem

Coal quality has been a problem at Eskom, which purchased 121.67million metric tons of coal in its 2014-15 financial year. The parastatal has frequently blamed mechanical breakdowns and underperformance at its coal-fired power plants on "poor-quality" coal.

Recent examples include:

• Acting CEO Brian Molefe said last month Eskom planned to extract a R2-billion penalty from Glencore's Optimum coal mine because its poor-quality coal had damaged equipment and affected plant performance. Glencore denied the claim.

• Former CEO Tshediso Matona cited "declining coal quality" as one reason Eskom's power plant availability had been reduced from 85% to 75% over five years, during a power status briefing on December 8 last year, when there was extensive load-shedding.

• Matona, at the same briefing, said a "different type, grade and quality of coal" used at Duvha power station had caused increased residue in a boiler that exploded on March 30 2014. The residue, unburnt fuel and insufficient oxygen levels contributed to the failure.

• Poor-quality, fine coal was blamed by the Department of Public Enterprises for damaging conveyor belts at Kendal power station in March 2014, resulting in three units shutting down, the loss of 3000MW of power and rolling blackouts.

-  additional reporting by Andre Jurgens