Economic and social impact of infrastructure roll-out programme: briefing by Eskom and Transnet

Meeting report

Briefing by Eskom
Mr Brian Dames, Eskom’s Chief Executive, told the Committee that the Minister of Finance had said in his budget speech that investment in infrastructure projects was occurring in the context of the imperatives of transformation and economic competitiveness.  There was thus a need for improved planning and management of these projects. Over the coming period of three years, over R800bn would be spent by the fiscus on companies, and this budget would not be affected by budget cuts as infrastructure was crucial for the country. Mr Dames said that concomitant with the infrastructure programme, skills had to be developed to sustain the country going forward.  Eskom’s funding for the build programme was finalised. It was codifying the lessons it had learnt in the build programme into a project management toolkit. It had employed an integrated approach, using standard project management philosophy, but had developed curricula with specific courses for each project position and for contractor training.

Medupi and Kusile power stations were in the top five largest power stations in the world, according to capacity. These infrastructure projects included sub-projects in transport, water and communications, and were geographically spread out. They were aligned to global standards, and would lead to the creation of 40 000 jobs and an increase in the local supply of goods and services, as 50% of the budget would be spent locally.

Medupi and Kusile were being built faster than any other power station in South Africa -- three times as fast as Majuba, which had been built when Eskom’s building capacity had been at its peak. South Africa was not alone in seeing delays in project completion, with delays of two years also being seen in Europe. The delays in South Africa were because of logistics, the quality of boiler welds and the use of low grade steel in boiler manufacture.

The capital investment in electricity generation, the refurbishment of old substations and the distribution network, was unparalleled.  In 2003, Eskom had been tasked to build new capacity of 6 000 MW, refurbish 23 775 substations, put in place 4 686km of transmission line and return to service three power stations generating 3 800MW at Camden, Grootvlei and Komati. The Kriel and Duvha power stations had been refurbished, and the Ingula power station was being built to cater for peak renewable energy demand.

The challenges Eskom faced was that the contract environment had changed. The market was a suppliers market, and fixed price contracts could not be secured. The timeline of the project had a tight reserve margin, as the projects had been put on hold in 2010 because there was no clear funding plan. This, however, had been resolved. Another challenge was the lack of skills. Eskom strove to integrate skills development in the build process. Contractor performance in terms of capacity and performance was still maturing, and this had meant that Eskom had to take a greater supervisory role over contractor work. While a project labour agreement had been signed, poor adherence by all parties had resulted in a three-month strike at Medupi.  Eskom was now taking a more active role and facilitating the partnering agreement.

Medupi
Mr Paul O’Flaherty, Eskom’s Financial Director, said the first unit was anticipated to be operational by the end of the year, with the commissioning process expected to start in July. There had been delays because there had been no proper pre-planning stages and because of a 15-month civil works delay. The boiler contractor had encountered challenges with the design, resulting in completion being pushed back to December 2012. Since then, there had been the challenges of strikes, the software for the controller system which had failed factory tests, the fact that some boiler welds had to be heat treated, while other welds had issues around quality control.  This had pushed completion back to December 2013 -- in total, a 33-month delay. After the commissioning of the first unit, the other five units were expected to come on stream at six-monthly intervals.

These issues had held up other work, such as electrical, fire and water mechanical systems, which needed to be put in place.  Eskom had sent its own staff to the controller system’s manufacturer in Paris to work on that issue. Extra welding teams had been brought in to deal with the welding problems. It was resolving access challenges to allow electrical cabling to be laid, and it was expediting the fabrication and delivery of components for the fire and water mechanicals at the plant.
The project had created significant jobs, infrastructure development and skills and enterprise development. In Lepahlale and the Waterberg region, 43% of the R1.67bn spent would accrue locally.

Mr Dames said management had paid increased attention to projects. There were tighter independent commercial reviews. Weekly monitoring had been initiated and a Medupi Leadership Initiative sought to negate the effects of demobilisation on the area.

Kusile
Mr O’Flaherty said the target for completion of the first unit was December 2014. The moratorium on projects, which had been lifted in 2010, had resulted in the biggest delay. The boiler weld problems of Medupi had been replicated in Kusile, as it was the same boiler from the same supplier. There had been violent industrial action in 2011. The boiler design and steel quality issues were the same as for Medupi. Subsequent commissioning of units was anticipated to occur in eight to 12-monthly intervals.

Other challenges at Kusile were getting a water use license and civil works delays.

Ingula
Work had started in 2008. This included underground civil works and the largest underground cavern in the world. It was expected to be commissioned in 2014.

Transmission lines
There had been significant strengthening of the Northern Cape network. The challenges it faced were getting a water use licence, environmental impact assessment studies, and access to land.

Discussion
Ms G Borman (ANC) asked what the difference between the Project Labour Agreement (PLA) and the PIA was. Did welding inspections not pick up on the faulty welding spots?

Dr G Koornhof (ANC) asked what five areas needed Eskom’s intervention. What did ‘generally achievable’ mean. Had the study on Medupi’s cost overruns been completed?

Mr A Mokoena (ANC) asked how the performance monitoring committee was connected with the performance monitoring office of the Department of Performance Monitoring and Evaluation. What role would independent power producers play?

Mr E Marais (DA) said he was concerned about the use of low grade steel.

Ms N Michael (DA) said that she was concerned that Medupi was behind schedule and that the country had at best a 3% buffer. What were the civil works delays?  What action was being taken against the boiler manufacturing company?  Could Eskom expand on what the geotechnical delays were?  Had Eskom taken action on the labour problems at Medupi?  Were coal supplies secure and was the coal, wet coal?

Mr Dames said that Eskom needed to stay within the collective bargaining process and this was applied consistently with all parties signing the PLA. Lessons had been learnt on how to improve the PLA, as some workers had not been fairly treated because of a lack of transformation in private companies. This had been the intention of the partnering agreement.

He said 9 000 of the 53 000 welds needed to be heat treated. There had been inspections at multiple levels (four tiers). and they were awaiting a report as to why it had happened.

Eskom had engaged with the relevant contractors on the five critical issues, and the contractors had given commitments for commissioning by the end of the year to be ‘generally achievable’. He believed that there was still a risk of it not being done by then, but Eskom was leaving no stone unturned to attain that, although ultimately it was in the hands of the contractors to deliver. The geotechnical issue related to the rock conditions at Medupi, and it had been resolved to build from the bottom rock. The other issue concerned the turbines being of a new design and adequate time was needed, approximately six months, for seismic design issues to be resolved.  Eskom was keeping contractors accountable for delays.  

Mr O’Flaherty said they were doing everything they could for the contract to be remedied. The only other step would have been termination, and termination of the contract would have been catastrophic. They were pushing the companies hard in terms of bonds and penalties.

Mr Dames said the independent power producers’ role was to generate 3 000MW, while Eskom would generate 42 000MW.  85% of the country had universal access to electricity, and 144 000 connections had been made the previous year.

There was 50 00MW of company requests for electricity supply in the pipeline. There was no load shedding. The reserve capacity at present was more than enough for 20 out of 24 hours. It was only in the peak period that Eskom currently requested that usage be reduced.

Medupi's civil works were complete and the last boiler was being built.

All contactors were dealt with according to the contract conditions and he anticipated long legal battles.

Eskom had appointed mediators around the issue of transformation at companies, and had met with the chairpersons of companies to address labour issues.

There was no wet coal and there was enough coal stock, although there were still issues around the quality of the coal.

Briefing by Transnet
Mr Brian Molefe, CEO of Transnet, said that it was implementing its market demand strategy and had spent R300bn over seven years. It was procuring 1 064 locomotives, which would increase capacity by 1 117m tonnes. Capital investment by December 2012 had reached R14.4bn out of a total R19bn. There had been under-spending in the freight and container terminal divisions.

Mr Thoba Majola, General Manager, Transnet Engineering, said the Class 19E locomotives were for the coal line, and had all been delivered. This would improve reliability and the locomotives had the capability to regenerate electricity.  All 100 of the Class 43 diesel locomotives had been delivered and 1 236 of the jumbo rail wagons had been built.  A double-decker wagon designed by Transnet to carry cars was awaiting approval from the Rail Safety Regulator, but they were not expecting any hitches in this process.

Mr Karl Socikwa, Chief Executive of Transnet Port Terminals, said the stacking area for containers at Durban’s container terminal was being re-engineered to extend the stacking area. R44m of a total R66m had been spent. R1.8bn had been spent on acquiring the land of the old Durban airport and on feasibility studies to develop it into a container handling port.  R455m of a total budget of R679m had been spent acquiring seven tandem-lift ship-to-shore cranes for Durban. At Nqura, R167m of R179m had been spent on the port’s container terminal to extend the quay wall to 1 310m and to complete the paving works. Growth at the terminal was outstripping expectations.  R202m of R251m had been spent on Cape Town’s container terminal to make six new cranes operational.

Mr Molefe said that Nqura had experienced 84.6% growth, year on year.

Mr Mlamuli Buthelezi, COO Transnet Rail Freight, said the heavy haul export lines had spent R585m of a total of R772m on the iron ore line, and R741m of R846m had been spent on expansion of the coal line.

Ms Sharla Pillay, Chief Executive: Transnet Pipelines, said that the new 24-inch pipeline to Jamieson Park had been commissioned. The flow rate was 500 cubic metres per hour.

Mr Molefe said that the ore line had an ultrasonic detection system which ran ahead of the train to mitigate the risk of train derailment. The Durban harbour entrance widening was complete. The expansion of the manganese line was complete. The Kimberley to De Aar line had been doubled through the addition of a new line.

Ms Sanet Vorster, Acting Chief Executive of Human Resources and Training, said that Transnet had employed 5 077 people, while 20 855 indirect jobs would have been created. At Transnet, the gender profile was 32% female and 68% male. Africans comprised 4 141 of the total people employed.  460 bursaries had been awarded under the skills development program.   

Mr Molefe said that by June/July of 2013, the group executive structure of Transnet would be 50% male and 50% female. The addition of protection officers had resulted in a decrease in crime incidents.

Mr Mark Gregg-Macdonald, Planning and Monitoring Executive, said Broad-Based Black Economic Empowerment (B-BBEE) spending had increased to 43% of Eskom’s total measurable procurement. The capital investment plan of R300bn over seven years had increased to R307b.

Mr Molefe added that the R307b was for the remaining six years, plus an additional year, so there had been no alteration to the original plan.

Mr Buthelezi said the freight rail capacity to Richards Bay and Maputo had been developed. The line to the Waterberg area needed an extra line, which could possibly extend into Botswana.  The leg from Lephalale to Thabazimbi was being strengthened and a new line from Thabazimbi to Ogies and Ermelo was being developed. This line would link up with the Swazi corridor line to Richards Bay and Maputo around 2018/19. A second new Overvaal Tunnel line was being developed to mitigate against a bottleneck risk at the tunnel. The coal export line needed locomotives that were both AC and DC current-driven.

Mr Molefe said new loops were being instituted on the iron ore line to Saldanha and the berthing capacity at the port was being upgraded.

He said that as Transnet was building railway lines, it was also putting in fibre optic lines for use by both itself and the country. The manganese line was being upgraded between Hotazel and Kimberley, as well as from De Aar to Nqura. Durban was getting an extra container terminal and the dig-out port was at the feasibility study stage. Cape Town’s container harbour was being deepened and new cranes had been added, while Nqura had received more cranes and equipment and Richards Bay harbour had received a new rail line loop.

Ms Raisibe Lepule, Results Management Office executive, said Transnet was looking at diversifying its revenue streams and reducing its dependence on mining products.

Mr Molefe said that teams were assembled to target problem areas in capital execution programmes.

Mr Gregg-Macdonald said that a few branch lines held the potential for private public partnerships.

Discussion
The Chairperson said that there had been an outcry in the media over Transnet monopolising engineering contracts.

Ms Michael said she was impressed with Transnet and its transparency, as well as its collaboration in laying down fibre optic cable.

Mr Marais asked why Transnet was behind in its spending on the iron ore line expansion. 

Mr Mokoena said Transnet’s ultrasonic detection unit should be adopted by the Passenger Rail Agency of SA (PRASA).  He asked if CCTV cameras were fixed to wagons to reduce theft. How did branch line privatisation fit in with the developmental objectives of the government?  If trains bypassed Ermelo, how would it impact on the economy of the town?

Dr Koornhof asked why there had been underspending on Transnet’s pipeline projects. What were the initial and the current estimated costs for the project?  Had environmental impact assessments (EIAs) been done on the Durban dig-out port development?  How did Transnet manage red dust in Saldanha and coal dust in Richard Bay?  Had Transnet approached the private sector for funding for the dig-out port project?

Ms Borman asked what role Transnet was playing in community participation regarding the dig-out port. What success was the road-to-rail initiative achieving?

Mr Molefe responded that no engineering studies had been done on the dig-out port, only EIA’s, for example, on the extent to which jet fuel had impacted on the soil, flora and fauna of the area, and their possible relocation. They would not do anything without the agreement of the Department of Environmental Affairs (DEA).

The iron ore line expansion was behind on spending because the expenditure was not linear, but in “spikes” of one big payment or because of invoices not being processed. It was not a matter to be concerned with.

The ultrasonic unit was a small part of a big Transnet project, for which R1bn on research and development had been budgeted.  It was recruiting young engineers who were involved in projects such as measuring how much electricity was used by locomotives, and how the energy generated when stopping a train could be captured or fed back into the grid.  Other projects were on making level crossings safer.

There were 60 branch lines, and three were ready to be concessioned.

Ermelo would not be negatively affected, because with the advent of a new rail link to Swaziland there would be more trains passing through -- and even possibly trains from Botswana.

The costs of the pipeline were initially R12bn, and now stood at R23bn. The pipeline initially was intended to be only 16 inches wide, but was now 24 inches wide and included two terminals and holding facilities.

Mr Gregg-Macdonald said a fatal flaws study had been done for a dig-out port to see if there was any critical issue that stood in the way of a port being built. Construction was planned to start in 2016 and 70 million cubic metres of soil would have to be dug out.

He said funding could be found for the container terminals, but there was difficulty in finding funding for the port infrastructure.

Transnet had been to a number of community engagements, the latest being at Wentworth.

Mr Molefe said that the most constructive criticism had been the request that Transnet train community members ahead of the project. Transnet would follow this matter up.

He said there had been an increase in volumes in the road-to-rail freight initiative.

There was a big opportunity for the private sector in component manufacturing for the locomotives, as Transnet could not produce the components, which was a niche product market.

The meeting was adjourned.