Eskom Fines Hitachi, Alstom for Medupi Project Delays

Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--After threatening for some months to come down hard on contractors causing delays in the construction and commissioning of the 4,800-megawatt (MW) Medupi thermal power project, South Africa's state-owned power utility Eskom (Johannesburg) has served the main contractors Hitachi Power Africa (Johannesburg) and Alstom (OTC:AOMFF) (Paris, France) with a bill for cost overruns. The bill includes the cost Eskom has incurred by taking over the project management of its contracts.

Eskom said last week that Hitachi had agreed to pay damages for the delays. Hitachi Power Africa is 25% owned by the African National Congress (ANC), the political party in power. Chancellor House, the ANC's investment arm, has approached Hitachi Power Japan (OTC:HTHIY) (Tokyo) to call in the contractual performance bond and claim the losses incurred. At the center of the claim is the delay caused by re-working the faulty boiler welding of about 9,000 welds.

Both contracts with Hitachi and Alstom contain penalty clauses between 10% and 15% of total value. Eskom and the contractors have not disclosed the amounts involved. Other delays included the failure of Alstom's boiler protection system under safety testing. Earlier this year, Eskom said that any construction delays would cause construction costs to escalate from $9.12 billion to $10.5 billion. This excludes other expenses, such as owner development costs and interest.

Alstom said that the company's contractual obligation did not allow it to disclose the financial details of its performance bond, which was called in by Eskom earlier this year. The bond did not cover its entire Medupi contracts. The larger of two contracts relates to the steam turbine generator, which is reported to have progressed well and has incurred no penalties.

Because of ANC's connection to the Hitachi contract, the power industry and the public have found some relief. Eskom and the government sent a signal to contractors that they will be held accountable for project complications.

The project also has suffered from labor strikes, which may be connected to some contractors, not necessarily Hitachi and Alstom, lengthening the term of the project to receive bribes to continue at their own pace. This meshes with laborers' wish to retain their jobs for as long as possible.

Medupi is now scheduled to feed its first 660-MW unit's power to the grid in the second half of 2014.

For related information, see July 10, 2013, article - Eskom Lambasts Alstom, Hitachi as Medupi Mega Power Plant Continues to Face delays.

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