Coal supply pipeline remains the root cause of corruption
IOL - BUSINESS REPORT / 29 JULY 2019 - 13:30 / EDWARD WEST
Eskom's coal supply pipeline remains a root cause of its corruption, but there are ongoing efforts to clean it up.
Ted Blom, a former Eskom employee and now an independent energy analyst, claims that rampant corruption, at a rate of R2 billion to R3bn a month in Eskom’s coal supply, continues to this day, in spite of the public and political outcry about the failing utility, and the changes to its board and management.
Eskom, in reply to questions by Business Report, admits that it has unearthed a number of irregularities within the coal procurement process, and has dealt with these matters, but that it could not disclose the details.
LP, NADINE HUTTON
In some instances, the utility said, coal contracts have been suspended or terminated, penalties applies and some suppliers had been blacklisted, internal disciplinary action had been imposed on some employees and others had been dismissed.
Eskom said it “will never be satisfied until its operations are free of corruption”, and that it was working closely with law enforcement agencies, the SIU, the Hawks and state appointed commissions to investigate irregular practices.
A Hawks spokesperson confirmed they were busy with “a myriad of investigations into Eskom”, including into its coal supply. He said these investigations were complex, and thus took time to gather enough evidence to obtain a successful prosecution.
Blom said corruption at Eskom’s coal supply began on a large scale 18 years ago, when an over-eager manager decided to cut costs by shaving R60 million off the exploration bill for a coal mine for Majuba power station.
At 300m deep, the mine was to be South Africa’s deepest coal operation (80-100m is normal), with the longest long-wall mining borer operation ever developed in South Africa.
Six weeks into mining, the borer struck large rock formations that it couldn't cut because the mine hadn't been explored properly.
Mining proved intractable and a concrete slab was put over the hole in the ground. Nothing was said publicly, after all, Eskom was the world's Utility of the Year in 2001.
But Majuba power station was commissioned, and it needed coal, so an emergency coal mandate was developed that allowed Eskom to buy coal on the spot market, or from other mines, outside the 40-year coal supply agreements it traditionally had entered into.
2001 was also the year in which Eskom decided that its coal supply also needed to be part of its black empowerment drive, and so the emergency coal mandate was press-ganged into also being used for this purpose to by-pass the 40-year coal supply agreements with established coal mines that were entered into until then.
It was this mandate that opened the floodgates for corruption.
Where Eskom was previously paying below R200 a ton of coal, the price increased steadily over the years, to the extent that it is now paying short-term suppliers more than R800 a ton. Where Eskom should be paying R30bn to R35bn a year for coal, it is paying R75bn to R85bn. The world price at present is around $60 (R855) per ton for export coal.
Eskom said in response to questions on coal prices that it “cannot divulge pricing sensitive information,” but every effort was being made to limit costs and reach savings targets.
Eskom said it tried to enter into arms-length contracts based on covering the cost base of the mining operations, plus a fair return.
However, this was dependent on the supplier divulging their cost base.
The return was a function of mining and capital risk, a willing buyer and willing seller, as supply demand factors. Potential suppliers were analysed in terms of geology and seam to be mined, stripping ratio, mining method, beneficiation method, coal qualities offered, infrastructure costs, mining equipment costs and mine working costs.
Blom said that broadly, how the predominant method of corruption works was Eskom pays a black economic empowerment (BEE) coal supplier, often situated a long way from the power station to supply coal, paying also for the transport of it to the power station.
The BEE partner does a deal with a mine that is near, or may even already be supplying the power station with coal, and the two parties split the transport cost and profit on the cost that Eskom pays to the BEE supplier.
Over the years, there have been many other variations, such as over-invoicing, ghost deliveries, under-deliveries and deliveries of sub-optimal coal.
In some cases, said Blom, such as at Optimum mine when it was still owned by BHP, at the time, the newly purchased coal never leaves an existing conveyor belt running into the power station from a mine close by.
Blom said he reported the Optimum Mine BEE coal fraud to Eskom management at the time. Blom said Eskom, at one stage, did its own forensic investigation into its coal supply, but the report was never acted upon. This report, according to a colleague of Blom's, listed 54 names of individuals scamming Eskom’s coal supply.
Many of the 54 had since left Eskom, been asked to leave, have joined the supplier side of the coal to Eskom business, or have retired very wealthy.
For example, Just Coal was fined R6.8m by Eskom for supplying bad coal and on other charges. Its trucks have been re-branded and the company continued to trade, said Blom.
In most cases, people who left the business or who were identified by Eskom were simply replaced by the crime syndicates, and there are more than enough funds going around to pay off whoever was necessary. Some remain in the business. Some were acted upon. Eskom said it had no knowledge of the forensic report that Blom referred to.
Blom believes that the new board lacks the coal industry expertise and political motivation to effectively tackle Eskom’s problems.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER