Former Eskom CEO André de Ruyter revealed how middlemen and tenderpreneurs cost the power utility billions per year without adding any value.
In his book, Truth to Power: My Three Years Inside Eskom, De Ruyter provided details about how middlemen got very rich at Eskom’s expense.
In one case, Eskom’s five-year budget for fuel oil was increased from R14 billion to R18 billion. One company accounted for R9 billion of this budget.
What stood out was that this company did not have back-to-back agreements with the sub-suppliers. It was merely a middleman.
“This company did not add value to the product they were selling. Aside from their own profit margin, of course,” De Ruyter said.
It made far more sense to buy the fuel oil directly from refineries, such as Total, Engen and Sasol, and save billions.
Instead of being applauded for wanting to save Eskom money, De Ruyter faced severe resistance from two powerful board members.
It encouraged him to delve deeper, and he soon discovered that the company was overcharging Eskom – in addition to the reseller margin that they were already pocketing.
From 2012 to 2016, the company overcharged Eskom an eye-popping R1.2 billion — and that is only what Eskom’s expert could verify.
It also emerged that a senior Eskom procurement official was linked to the company and interfered in the bidding process to ensure it received the contract.
The Eskom official was suspended but was never formally charged with misconduct. “Instead, she was allowed to retire quietly,” he said.
Only the tip of the iceberg
The questionable fuel oil contract was only the tip of the iceberg. De Ruyter highlighted numerous other examples of how tenderpreneurs milked Eskom.
The former Eskom CEO described it as the hidden tenderpreneur tax, which significantly increases the cost of doing business.
“If Eskom wants to build a transmission line, we pay a whopping two and a half times more per kilometre than NamPower does in neighbouring Namibia,” he said.
Apart from general black empowerment rules, Eskom also had to deal with the burdens of the Preferential Procurement Policy Framework Act (PPPFA).
This Act requires that tenders be awarded according to a points system to ensure that various interest groups benefit from each contract awarded.
At Eskom, this led to the creation of a whole ecosystem of middlemen who were adding little or no value to the organisation.
“Goods and services ended up being bought at wildly inflated prices,” De Ruyter said, giving a few examples.
- Bearings worth R110,000 was purchased for more than R400,000.
- Eskom was billed R370,000 for a compressor refurbishing which should have cost R40,000.
- A hydraulic oil pump costing R295,000 was bought for R650,000.
- Eskom paid R80,000 for a pair of knee guards that cost R320 at Builders Warehouse.
- Eskom was charged R200,000 for a wooden-handled mop which costs less than R100 at most stores.
- An oil storage container that could have been bought for R80,000 cost Eskom R940,000.
- Eskom paid a company R600,000 to fix 12 grass trimmers. The power utility could have bought 12 new grass trimmers for R114,000.
- Eskom paid R26 per single one-ply toilet paper roll, which costs R3.99 at Checkers.
- A buyer at Kendal Power Station placed an order to refurbish two compressors for R368,550. The price of two new compressors would have been R112,000.
“Sham companies founded by tenderpreneurs would spring up overnight, primed to exploit the well-meaning but ultimately naive policy of localisation,” he said.
“We crunched the numbers and found that, on average, these middlemen were pocketing around 30% of every tender.”
“They never make anything and never risk anything for their spectacular rewards,” De Ruyter said.