Dear Corruption Watch,
I see that the performance bonus contract Eskom signed with Alstom for certain work on the Medupi power station has been cancelled, but not with Hitachi in which the ANC's Chancellor House investment arm owns shares. Can Alstom contest this on the basis that it is unfair? What legal options do interested third parties observing a conflict of interest have?
Tilting Scales of Justice
Hitachi Power Africa is a consortium led by Japan’s Hitachi. Chancellor House, the ANC investment arm, has a 25% interest in Hitachi Power Africa. In 2007 Hitachi Power Africa won a R20-billion tender to provide boilers for the Medupi power station. A French company, Alstom, was awarded a R13-billion contract to supply the turbines for the Medupi plant.
Eskom’s decision to award Hitachi the contract was widely criticised. The chairperson of Eskom’s board – which made the decision to grant the contract – also happened to be a member of the ANC’s national executive committee and a trustee of Chancellor House Trust.
The ANC, through its interest in Chancellor House, stood to benefit significantly from the deal. The Public Protector investigated the tender. He found that the chairperson had failed to manage a conflict of interest arising from his involvement in the ANC’s fundraising committee. He recommended that the Minister of Public Enterprises develop legislation to regulate the conduct of business between government entities and political parties.
The Medupi plant was scheduled to be up and running by the end of this year. This is unlikely given reports about defective welding in the boilers manufactured by Hitachi and failed software trials by Alstom.
Both the Hitachi and Alstom contracts contain penalty clauses calculated of between 10 – 15% of the total value of the contract. It remains to be seen whether or not Eskom will invoke the penalty clauses. That decision depends on the terms of the individual contracts between Eskom and their service providers.
If Eskom penalises Alstom and not Hitachi, Alstom is entitled to ask Eskom to provide reasons for its decision. Eskom is a public entity. It is required to act in the public interest. If Hitachi defaults on its contractual obligations and the delays cause Eskom loss, the Eskom board and chief executive are legally bound to act to mitigate the loss. If they fail to do so without a valid reason simply because the ANC has an interest in Hitachi, they will be acting contrary to the Public Finance Management Act and the Treasury regulations. Having said that, if Alstom defaults on the contract, it will not be able to escape its liability for penalties simply because Eskom acts unfairly. It will be interesting to see whether or not a court would be prepared to go as far as compelling Eskom to penalise Hitachi.
The relationship between party and state and individuals with ties to the ruling party lies at the heart of your question and your concerns. Political commentators caution that Chancellor House has become a symbol of the precariously close relationship between the state and the ruling party. Of particular concern is the fact that profits generated as a result of these deals benefit individual members of the ruling elite and the ruling party.
Political parties rely on donations to fund their activities – many of these from business. It is unrealistic to insist that individuals with ties to the ruling party refrain from doing business with the state. What is needed is legislation to regulate this relationship. Without it, contracts like the Hitachi/Eskom one will always be susceptible to allegations of undue political interference.