The witch trials of Megawatt Park

Written by Ciaran Ryan. Posted in Journalism

This article first appeared in Moneyweb.

Matshela Koko, the former acting CEO of Eskom once described as ‘the face of corruption’, recently tweeted out a chart showing operational performance under different Eskom management teams.

The chart shows power generation performance, which has been in steady decline since 2000 but improved sharply once Koko and then-chair Brian Molefe took over. Load shedding also stopped during their tenure between 2015 and 2017.

Performance has just as abruptly taken a turn for the worse since Jabu Mabuza and Phakamani Hadebe have taken control of the electricity company. The chart is extremely flattering to Koko and Molefe.

Source: Matshela Koko (via Twitter)

Koko and Molefe were maligned in the press and by political parties as ‘Gupta stooges’. The deal that sank their careers at Eskom was a coal supply agreement concluded with Gupta-owned Tegeta (now in business rescue), which was presumed to be corrupt. Glencore, the former owner of Optimum Coal Mine, became a forced seller when it was slapped by Eskom with a R2.1 billion fine for the supply of sub-standard coal to Hendrina Power Station. In stepped the Guptas, who, with no money of their own, managed to pick up Optimum with a R1.6 billion guarantee from Eskom and a coal pre-payment of R658 million.

On the face of it, it looked dirty as all hell. Eskom had acted as an enabler in what amounted to the theft of a key Glencore asset.

Reality is somewhat more nuanced. Firstly, the Eskom fine has not gone away but may end up being substantially less than R2.1 billion, as Optimum – now also in business rescue – hunts for a new buyer who will want to make peace with Eskom. Secondly, Eskom’s coal costs had been escalating at 17% a year since 2008 and Koko made it a priority to bring this under control. He contacted Eskom’s mining suppliers and laid down the law: the average delivered cost was to be no more than R437 per ton, which was the average cost of good quality coal for Eskom at the time.

He saw an opportunity to rein in runaway coal cost increases. He decided against extending the Exxaro contract at Arnot Coal Mine, which was being trucked in at a cost to Eskom of R1 135 per ton. Then he locked the Guptas into a price of R160 per ton, a ridiculously low price that did not even cover the mine’s production costs. Eskom’s coal cost escalation dropped from 17% in 2015 to 3.5% in 2016, the first time in eight years that it had achieved a below-inflation escalation. The prepayment of R658 million was the carrot used to lock in this low price.

This was great for Eskom, but surely Koko knew this could end up bankrupting Optimum?

“My job was to look after the interests of Eskom, and this is what I did. I knew this would hurt Optimum, but I also know coal prices are cyclical. Eskom uplifts lower quality coal from our suppliers, who also export their higher quality product. They need to sell lower quality coal to Eskom to expose the higher quality coal that goes to the export markets. We didn’t share in the good times when they were getting more than US$100 a ton on export markets, so why should we cover their costs when times are hard?”

‘All sorts of vested interests’

Koko also refused to sign renewable energy bid window 4 contracts at the time when the cost of renewable energy was 215c per kilowatt hour (kWh) and coal could produce the same electricity for 32c (currently 45c) on the grounds that it would bankrupt Eskom. “I was under pressure from all sorts of vested interests to sign these renewable energy contracts, but I knew I would be scapegoated later if I signed these. I refused, and I was right to do so. The cost of renewable energy to Eskom is R10 billion and by 2021 the total cost will be R100 billion, which it cannot afford.”

There is no doubt that Eskom has been steeped in corruption and irregular expenditure, and we have several official reports that tell us that. Most recently, the Special Investigating Unit (SIU) brought a case before the Pretoria High Court in December last year seeking to cancel Tegeta coal contracts with Brakfontein coal mine on the grounds that they violated the Constitution, the Promotion of Administrative Justice Act and Eskom’s own internal procurement procedures.

Koko points out that the contracts under question in this case date between 2013 and 2015, before his tenure as acting CEO.

The Tegeta coal contract was not put to open tender. The SIU argues that a minimum of three bids from qualifying suppliers should have been solicited. Instead, the contract was concluded on the basis of a closed tendering process, comprising just one bidder – Tegeta. Closed tendering may only be applied in specific circumstances, for example where only one or two companies can provide a specific product. Nor did the Tegeta contract meet the requirements for emergency tendering (such as when power outages are likely to result if coal is not immediately supplied).

The SIU case details some of the background to the Eskom crisis. In January 2008 Eskom was forced to declare an emergency when coal stocks at some power stations dropped below the acceptable minimum of 20 days. Stocks dropped to as low as five days at some power stations. That emergency resulted in contracts being concluded for the delivery of 491 million tons of coal at a rate of R335 per ton and an average coal quality of 18.4 megajoules per kilogram.

The Public Protector’s 2016 report into state capture found that six of Eskom’s eight board members appointed by the then public enterprises minister had Gupta ties.

In 2014, Tegeta made approaches to supply Eskom with coal from its Brakfontein mine, notwithstanding its lack of adequate BEE shareholding and an outstanding fine for environmental violations. Eskom indicated that it would only be able to purchase coal from Brakfontein from April 2015. Tegeta secured an agreement for the supply of 65 000 tons a month, later increased to 100 000. Four months after the appointment of the ‘Gupta-aligned board’ in March 2015, Eskom signed a R3.7 billion contract with Tegeta for the supply of coal from Brakfontein, despite its lack of BEE compliance and a water licence. Some of the coal was also sourced from a part of the mine that failed to meet Eskom’s compliance requirements.

A National Treasury report showed that by August 2015, 34% of Tegeta’s coal stockpiles were rejected by Eskom for not meeting its specifications.

The Guptas may have pulled a fast one on Eskom over the Brakfontein coal contract, but the evidence suggests Koko got one over the Guptas at Optimum, which is currently in the process of being sold. Even allowing for the fact that different managers will point the finger of blame elsewhere, a long-standing practice at Eskom, Koko has some right to feel aggrieved over his treatment as head of the utility. It’s small consolation, but the labour court found little good to say about the way Eskom treated Koko. Judge Moshoana found that Eskom and new CEO Hadebe had acted unlawfully in demanding Koko resign or be fired in January 2018.

Koko now works as an energy consultant with 1 200MW of projects currently under development. None of these projects is based in SA.

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.