Medupi’s trouble just cost Japanese construction company Hitachi another R15 billion – but the money won’t be going to Eskom
- Japanese construction company Hitachi has agreed to pay fellow Japanese company Mitsubishi Heavy Industries more than R15 billion in a settlement around Eskom's Medupi and Kusile power stations.
- That's a lot less than the R90 billion Mitsubishi Heavy had initially claimed, but both companies expressed relief at being able to move on from the mess that was their South African partnership.
- Hitachi has previously paid R276 million – to the USA – for what regulators alleged was its improper relationship with the ANC, and which they said landed it the (toxic, as it turned out), deal to help build those power stations.
- For more stories go to www.BusinessInsider.co.za.
Trouble at the Medupi and Kusile power stations has cost Japanese construction company Hitachi again, more than R15 billion this time.
Hitachi has agreed to pay its rival – and later partner – Japanese company Mitsubishi Heavy Industries 130 billion yen, the equivalent of around R15.24 billion, to settle a dispute between the two around joint work in South Africa.
That is a long way from the around R90 billion Mitsubishi Heavy had initially claimed, but statements this week from both companies expressed pleasure that they had finally reached agreement, bringing to an end convoluted arbitration processes.
On top of that cash payment Hitachi has also agreed to hand over all its shares in the joint venture Mitsubishi Hitachi Power Systems, of which it owned 35%, which carries a book value of another 70 billion yen.
See also: A BEE company that helped build Medupi and Kusile has turned a R20 million loan into R250 million – after a 5-year fight with its American partners
Hitachi won the contracts to build boilers for Medupi and Kusile in the first place after selling a quarter of a local subsidiary, Hitachi Power Africa, to Chancellor House, apparently in part on "recommendation by Escom [sic]", judging by a handwritten note late uncovered.
Hitachi at one point claimed it did not know that Chancellor House was a front for the ANC, and the ANC at one point claimed an arms-length relationship with Chancellor House.
Yet in 2015 Hitachi agreed to pay $19 million (currently equivalent to around R276 million) to settle charges by the American Securities and Exchange Commission (SEC) that it had encouraged Chancellor House to use political pressure to land it contracts.
The ANC was not party to that settlement; it had by then already sold the Chancellor House stake for a 5,000% profit.
See also: Eskom now says it will take at least 8 more years to build Medupi air scrubbers – and it never wants to comply with air pollution limits
This week's mega settlement deals not with the political genesis of the contracts, but the financial black hole they have become for the boiler makers.
In 2014 Hitachi and Mitsubishi Heavy merged thermal-coal activities into the jointly-owned Mitsubishi Hitachi Power Systems – which became the holder of the contract to build six boilers for Medupi and six for Kusile.
Those boilers turned out to be a nightmare. The joint venture blamed local welders, and Eskom blamed the joint venture, but everyone agreed that there had been trouble with some of the 53,000 welds per boiler. Worse still, the boilers may have been fundamentally poorly designed to burn South African coal.
In 2016, according to documents around later arbitration in Japan, Mitsubish Heavy realised that the "business transfer pricing" by Hitachi, effectively the price assigned to Hitachi in the merger, had been way off because of huge cost overruns in South Africa, and in mid 2017 it claimed more than R90 billion from Hitachi as a result.
That demand is now due to be formally dropped in March, as soon as Hitachi parts with the R15 billion in settlement cash.
Dealing with the boilers at Medupi and Kusile will become entirely Mitsubish Heavy's legal responsibility, though Hitachi said it "will continue to work with MHI on maintenance services of existing thermal power generation plants", while focussing on renewable energy and nuclear energy rather than coal.
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