Nuclear New Build Programme contracted investigations

Meeting report

The Chairperson explained that the Committee had called in the Department of Energy to present the various contracts that they had signed for investigation into nuclear procurement. He suggested that DOE and NECSA be called in at a later date to have a discussion on how exactly they planned to conduct the procurement of the nuclear build programme.

Nuclear New Build programme: Department of Energy briefing
Mr Zizamele Mbambo, DDG: Nuclear Energy, DOE, presented the various contracts that the DOE had entered into over the past five years in rolling out the Nuclear New Build programme. Cabinet had approved the Nuclear Energy New Build Policy (NNBP) of 2008 and it provided guidance to the government’s vision of becoming self sufficient in all aspects of the NNBP. The National Development Plan had directed that South Africa needed to conduct a thorough investigation into the implications of nuclear. To fulfill this mandate, the DOE in conjunction with other organs of the state had over the past five years procured various service providers to conduct the investigations.

He highlighted the 16 contract investigations that had been conducted, detailing purpose, output, cost and duration:

1. KPMG: Study on Comparative Analysis of Shale Gas Versus Nuclear Power in South Africa.

This study aimed to assess shale gas as an alternative to nuclear energy. The output of the study was that shale gas was a potential game changer although at present it was not sufficiently developed. The economically minable reserves were unproven; however it was to be considered as a feasible contender in the planning process. The study was submitted to National Planning Commission and used internally to reaffirm the decision to pursue nuclear power

The two-week study was completed in March 2012 at a cost of R341 002.

2. KPMG: Benchmark of Procurement Framework

This study was undertaken to provide the DOE with a broad view of the possible contracting approaches based on those pursued by other countries in their NNBP. This was used to inform the incorporated approach that South Africa would adopt in its NNBP.

The output of the study was that it was vital to consider the “end game” of sector aspirations and broader national imperatives. The objectives and roles of the key stakeholders and how these could be balanced were also to be considered.

The End-in-Mind procurement approach was adopted by the National Nuclear Energy Executive Co-ordination Committee (NNEECC) in October 2013. To action this, the DOE designated the Procurement Agency for the nuclear programme. The DOE also undertook study tours to nuclear vendor countries and vendor parades.

The 4-week study was completed in May 2013 at a cost of R907 708.

3. Ingerop: Cost of Nuclear Power

This study was undertaken to update the DOE on the cost of nuclear power since the release of the IRP 2010-2030. The study provided a comparison of the main source of data for Integrated Resource Plan (IRP) inputs which used the Electric Power Research Institute (EPRI) data which was a Western view only.

The study found that the average capital cost was around 4918 US$/KWe. It also suggested that the fleet approach had a positive cost effect reduction of up to 30% and higher efficiency.

As a way forward, it was recommended that the cost data be used for the IRP update input data (which previously used the EPRI study which was limited). Values from the cost study were used as a basis for Financial Modeling, Options and Solution study and an Economic Impact of Localisation study. It also informed the need to procure a fleet of 9.6 GWe to benefit from the cost reduction and economic benefit.

The 4-week study was completed in October 2013 at a cost of R1 005 460.

4. Ingerop: Owner Operator and Financing Structures

This study was carried out to allow DOE to identify and establish the appropriate owner-operator and financing structure to source the required capital at both a project and programme level for nuclear power plant projects.

The output of the study was that:
• Eskom business-as-usual (BAU) could be associated with close partnership arrangements, from technology and skills transfer to localization, which may be further enhanced by a minority ownership stake to a strategic partner.
• The South African Nuclear Joint Venture (SANJV) scenario, although more attractive than the traditional BOOT JV scenarios, is also more risky, since the carve-out of Koeberg might be quite complex both from a political and financing point of view
• Financial details for the option of a Koeberg transfer required a more in-depth study (including financial modelling) as well as access to Eskom financials for assessment was also required, for which the Nuclear Energy Technical Committee gave approval – known as Nuclear Finance Models, Options and Solutions.  

The 6-week study was completed in April 2013 at a cost of R3 601 933

5. Deloitte Nuclear Finance Options Models and Solutions Study

This study was carried out to establish the optimum financing structure scenario for the Nuclear New Build programme. It identified three financing structures:
• the business as usual in which Eskom would be a 100% equity financer, with a South African investment of R4.3 billion at a gearing of 99%;
• the joint venture option were Eskom would have 51% ownership, a South African investment of R316 billion would be inputted at a gearing of 53%;
• a special purpose vehicle with Koeberg where Eskom would have 51% ownership with a South African investment of R183 billion at a gearing of 63%.

As a way forward a joint recommendation report was drafted by National Treasury and DOE and submitted to Cabinet. Cabinet resolved to test the market for finance costs through a competitive procurement process.

The 3-month study was completed in September 2014 at a cost of R4 250 000

6. Deloitte: Deferred Return on Government Investor Approach Study

This study was undertaken to assist DOE to identify and establish the impact of deferring the short-term government strategic investor return on the tariff and the overall return to the investor over the lifetime of the power plants.

The study found that the deferral of government dividends during the power purchase agreement periods (PPA) may be an effective way to reduce the impact of new nuclear build on the country’s electricity tariff. A lower government rate (such as 3.5% real / 8.2% nominal) would allow the post-PPA tariff to be more in line with the PPA tariff.

This study would be used going forward to assist justifying the need to reduce the government return on investment in order to reduce the tariff if necessary.

The 4-week study was completed in February 2015 at a cost of R995 334

7. Ingerop: Economic Impact of Localisation of Nuclear New Build programme

This study was to assess the economic impact of localising the Nuclear New Build programme. On completion, the DOE would be in a position to identify and establish the role of nuclear localization as a socio-economic development driver among others.

The study found that new manufacturing capacity should also consider non-nuclear markets and also specific market analysis was to be done with a manufacturer if heavy equipment localisation was decided on. There was need to get agreements with the vendor so that the local manufacturers were immersed in the value chain. Localisation would need to achieve at least an 80% target with partnerships with foreign suppliers being vital.

The way forward was to be determined by the Energy Security Cabinet Sub-Committee.

The 6-month project was completed in March 2015 at a cost of R6 137 820.

8. Nathan Gift Nhlapho Inc: Feasibility Study on Effective Independence of National Nuclear Regulator

The purpose of the study was to address the independence of the NNR based on the IAEA integrated nuclear infrastructure review (INIR) mission recommendations.

This study found that the funding cost recovery model should be adopted and enforcement via a civil monetary fines system should be adopted.

The study was still under consideration and the way forward was to be determined by the Energy Security Cabinet Sub-Committee.

The month long project was completed in October 2013 at a cost of R496 960

9. Nathan Gift Nhlapho Inc: Accession to One of IAEA Liability Conventions

This study was conducted to perform a risk assessment associated with the premiums payable by each of contracting parties for the Convention on Supplementary Compensation (CSC) and the Vienna Convention.

The study outcomes were that national legislation had to align with the elected convention and a compensation scheme (for nuclear damage) was needed in the national legislation.

Consultation with the necessary stakeholder was underway in order to choose the most appropriate convention with due consideration of the risks.

10. African Radiation Consultations: Development of Training Programme of First Responders Study

This study developed a training programme for first responders for nuclear and radiological emergencies in order to address recommendations of the IAEA EPREV report.

The study found that there was a need to legislate a requirement for training nuclear and radiological emergencies and preparedness. A national training programme was needed as well as a training centre. As a way forward a review of the NNR Act was needed as well as amendment of the standard operating procedures.

The 8-week study was completed in March 2015 at a cost of R700 416.

11. Zimkile Consulting: Development of Training Material of First Responders for Nuclear and Radiological Emergencies

The outputs of the study were training material for nuclear and radiological emergency first responders and training for nuclear and radiological emergency responders was conducted for 5 days as a pilot programme.

The 5-week study was completed in October 2016 at a cost of R469 114.56

12. Nathan Gift Nhlapho Inc: Mechanism to Enforce Implementation of Corrective Actions By Municipalities on Nuclear Emergency

This study was meant to develop a mechanism that would allow for enforcement of implementation of corrective actions on nuclear emergency and preparedness and response.

The output of the study was to amend relevant sections of the NNR Act to provide legislative authority for the NNR to exercise direct authority over national, provincial and municipal authorities.

The 4-week study ended in September 2016 and cost R 469 752.

13. University of Pretoria: Detailed Financing Model for Radioactive Waste Management Fund Bill

The study was undertaken to develop a financial model that would assist DOE to more accurately estimate the tariffs from nuclear waste generators for nuclear waste disposal.

The outcome of the study was the proposal of the Radioactive Waste Management (RWM) Fund that was to be structured as a separate independent fund within the national waste management system.

This study was analysed internally and would be submitted to the Director General for approval and consultation with relevant stakeholders as input into finalisation of Radioactive Waste Management Fund Bill.

The 3-month project was completed in October 2016 at a cost of R1 324 680

14. Mzanzi Energy Solutions: Feasibility of Withdrawal of Safeguards Function From NECSA

This study was carried out to determine the appropriate allocation of the national safeguards function with the objective of ensuring independence of the function and the maintaining of its integrity and confidence in terms of compliance with international obligations.

The project was finalised in October 2016 and was still undergoing review. The way forward would be determined upon the completion of the study which cost R499 780.

15. Mhlako-A-Phala Investments: Pre Procurement Readiness Assessment

This study was conducted to provide an independent state of readiness for the procurement for the Nuclear New Build programme of the Republic of South Africa. It was to bring requisite technical expertise to DOE.

The service provider conducted pre procurement readiness assessments which included reviews on procurement strategy, pre procurement activities and request for proposals (RFP).

The output for the procurement strategy found gaps in the activities to be undertaken before issuance of the RFP and post issuance activities. The request for proposals should be structured in a manner to ensure a prompt and seamless procurement process which complies with constitutional imperatives of fairness, equitability, transparency, competitiveness and cost efficiency. The legislative exemptions required were identified plus an urgent need for the development of the economic development policy.

The 3-month study was completed in August 2016 at a cost of R20 174 423.82

16. Central Lake Trading t/a Empire Technology: Programme Management System

This study was carried out to provide DOE with the ability to effectively and efficiently administer programme management including the procurement, project tracking, governance, compliance and information management for the Nuclear New Build programme. The system would also provide DOE with a secured environment for NNBP information management. The system offers: e-Procurement & Invoice Tracking, Annual Performance Plan Management, File & Content Management, Contract Management, Business Intelligence & real-time reporting, Support Services.

The 2-year project is anticipated to end on December 2017 with a financial cost of R 171 000 000

Discussion
The Chairperson requested that Mr Mbambo update the Committee on what had happened to the financing options report that the Committee had requested. Public hearings based on the report had been previously delayed.

Mr Mbambo responded that the report had been drafted and submitted to the relevant Energy subcommittee to assist in Cabinet decisions and was available.

Mr G Mackay (DA) thanked DOE for the presentation and requested that it provide a broader understanding of the procurement process followed. He asked for insight on what procurement processes had been followed and if these had been conducted internally. He asked if minutes were available for the internal bid committee for the allocation of these contracts

He raised concerns with three of the contracts stating that Zimkile Consulting did not even have a functional website which made it impossible to assess whether the firm had the requisite skills to undertake the work it was given by DOE.

He noted that that Nathan Gift Nhlapho, although very highly regarded in his field, was the in house counsel of the National Nuclear Regulator and therefore allocating him projects to assess the NNR could potentially be a conflict of interest. This raised red flags.

Mr Mackay asked why DOE spent the largest tender of R171 million given to Central Lake. He questioned why DOE had not issued its own tender and instead piggy backed on a tender issued by the Free State. He questioned why the Free State government was issuing the procurement notice.

In their comments to media, DOE had explained that the procurement process they had followed was a deviation from the normal procedure and he requested an explanation for this.

He asked for clarification of the distinct roles of NECSA, Eskom and the DOE in the procurement process.

He found it strange that a procurement of such an insurmountable amount was only made as late as August. He asked for confirmation of whether the DG and all the DDGs had made their declarations to the Public Service Commission and asked that these be made available to the Committee considering that there were rumours that some of the some of the procurement could have been related to shareholding and directorships in some of the companies.

Mr Mackay stated that the assessment of shale had been done in 2012 and since then the size of the reserves had not been established. There was no clear understanding of how much gas was available and yet DOE had shelved this and started pushing for nuclear energy according to the KPMG Report. A study done my McKinsey suggested that gas reserves might be a viable option for the base line yet nuclear energy was being pushed for without fully considering the potential of gas.

There had not been a single other study in the world that verified the Ingerop study that suggested the average capital cost of energy would be 4918 US$/KWe. However DOE stating that the Electrical Power Research Institute study was a Western view, was not sufficient. He found it suspect that DOE would disregard an international standard and consider only the local view of Ingerop. He asked for more information on how this figure had been obtained as this was not reflective of the high cost of nuclear new build programmes.

Mr Mackay asked for more details on the financial models and what DOE had provided was not sufficient or useful. He stated that Treasury had different finding from DOE and he requested that Treasury’s findings be presented. Not a single expert put the price of electricity at less than 1.10R/KwH so the figure of 0.90R/KwH seemed incorrect. These figures did not match globally accepted standards and DOE seemed to be messaging figures in order to support nuclear.

The Chairperson stated that the Committee still had to deal with the outstanding matter of conducting a public hearing where National Treasury would be called in and a discussion held where those who were for and against nuclear energy could debate the issue of nuclear.

Mr J Esterhuizen (IFP) said he was happy that the government had finally come to its senses and realised that shale gas was an expensive project. He supported the claims made by another member that the nuclear cost figures that DOE was providing did not make sense. He stated that cost comparisons of energy could not to be made with Koeberg that had been built many years prior.

He pointed out that Eskom’s balance sheet would not sustain borrowing funds as suggested by DOE especially after its recent downgrade.

The Chairperson stated that questions about Eskom would be dealt with later in a separate meeting where Eskom would be called in.

Mr Matlala (ANC) asked DOE if they had checked that the appointed companies complied with policy in particular regard to the previously disadvantaged. He asked if the companies awarded the contracts had employed young people.

He asked why in DOE’s report some of the studies had been found to be limited.

He asked if the contracted companies were locally based or outsourced internationally.

Mr Mavhunda (ANC) asked if the data provided by DOE was solely based on the Western school of thought.

He asked for clarification of what the nuclear build project was really meant to achieve if not to provide nuclear energy as the DDG had stated that it was meant to cause industrialisation in the energy sector.

He asked if all the contracted service providers had been paid on time according to government policy and if they had all completed the tasks required of them.

Ms T Mahambehlala (ANC) welcomed the presentation and acknowledged that DOE had followed all the directives of the NDP except the one on providing employment. She asked how the project would benefit South Africans, as she was interested in what the project would do for the people, and not the markets.

She asked DOE to unpack who the designated agencies for the Nuclear New Build programme were as this was vague in the report.

She stated that the presentations of reputable companies such as KPMG were not to be shot down only because they were not aligning to what Members expected.

Ms Mahambehlala asked if DOE had involved Treasury in appointing the programme management systems. She asked if it was necessary for DOE to have had such comprehensive programme management systems for the Nuclear New Build programme and how these systems would assist.

She asked if the contracted companies had been paid within the 30 day payment period according to the PFMA and if any company has not yet been paid within this preset window.

She applauded South Africa for being a democratic republic as nowhere else in the world were issues of a nuclear energy project discussed in parliament.

Ms Mahambehlala asked what the implications were for DOE to present the contract information in the presence of the public. She asked how this would affect the markets and how it would affect the interests of vendor countries.

Mr Mbambo responded that providing such confidential information to the public impacted on the government’s bargaining position. It gave competitive advantage to prospective bidders who now had information on the studies that government had carried out and the recommendations that had been given. If government then proceeded to use these recommendations in its policy framework the bargaining power would not be confidential. DOE would have wished to discuss this in a more confidential setup however had been called in to present for reasons of transparency.

Mr Mbambo replied that the Nuclear New Build programme had several benefits to the South African public as teams commissioned by DOE had discovered that the programme would provide up to 200 000 jobs. The jobs within the nuclear field were to be highly professional jobs with a multiplier effect to create other jobs. The industries created would provide full value chains for the peaceful use of nuclear energy. Several industries including research, power generation, management, radiological waste management, education, small business as well as construction would benefit from this programme. In order to stimulate the economy at least 80% of these projects would have to be localised.

Mr Ndaba Ngwane, DOE Senior Procurement Specialist, replied that DOE intended to use available skills in every section of the value chain in the procurement process. The skills were available however they were not sufficient. Young and old South Africans within South Africa as well as in China, Korea and Russia were being trained to be involved in nuclear.

On manufacturing, NECSA had prepared itself to lead the manufacturing in terms of enterprise development. The programme would identify small and medium enterprises to do the supply of components and services which would be monitored by the bid committee that will be identified.

Ms Yvonne Chetty, DOE CFO, responded that the BEE status of the companies had been considered and that every effort had been made to pay the bidders within the 30 day period. However there was an allowance for prudence, DOE would pay the contracted firms when it was sufficiently satisfied with the deliverables provided. She assured the Committee that any delays in the payment were communicated.

Mr Ngwane replied that the need for the programme management systems had been identified by DOE in 2015 in order to effectively coordinate and administrate the nuclear build project. The system was needed to provide a singular information depository for the information obtained from the various institutions involved in the Nuclear New Build project.

He replied that the role of NECSA was to be procurer and operator of the fuel cycle facilities and the multipurpose reactor; the role of Eskom was to be the procurer and operator of the power plants and DOE would be the policy and programme coordinator, in line with Cabinet.

DOE also needed to do preparatory work for the programme and since there were a number of stakeholders in the programme there was the need to create a system to coordinate the various stakeholders. The procurement process was pre-scripted and regulated by policy evaluation. DOE tries to ensure that there was automation in the procurement process and that it was secure.

DOE was to be involved in the procurement process coordination but not in the bid committee. It would provide an advisory role, ensuring compliance with legal regulation and also ensure that an independent review would be conducted at every stage of the procurement process.

There was a level of empowerment within the system and DOE had called on Treasury to obtain exemptions from certain legislative provision. It had drawn up a draft economic development policy to allow monitoring of the submissions and time frames of the various parties that would be contracted.

Mr Ngwane stated that there were also two forms of reporting within the programme management: reporting necessary for internal management as well as statutory reporting, which involved consistently reporting to the Energy Portfolio Committee.

Mr Jeetesh Keshaw, DOE Nuclear Technologist Specialist, replied that the cost of nuclear prices that DOE had come up with were not too low contrary to what Members were suggesting. He defended the work done by DOE stating that as civil servants DOE ensured that they did their best to have the optimum outcome for the benefit of the country.

He replied that the Western-based EPRI study only focused on two reactors while the Ingerop study was much broader and focused on 30 reactors worldwide. Therefore the report that DOE provided was a statistical report with research from other reports, including the EPRI report.

Ms Chetty replied that the declarations were done once a year through HR and to the best of her knowledge all DDGs had submitted their declarations.

Dr Kelvin Kemm, Necsa board chairperson, appealed to the Committee and members of the public that they assume good faith in the abilities of South African nuclear specialists. They were not intentionally trying to provide inaccurate information as it was also a matter of professional pride to give accurate information. The statement by a Member of Parliament that 98% of all nuclear projects have cost twice as much, was not true

He replied that South Africa built Koeberg 40 years prior, on time and using a South African labour force and was therefore equally capable of also completing the Nuclear New Build project. He stated that over long periods of time, nuclear energy had a low fuel price and was cheap and stable.

Dr Kemm replied that it was incorrect to state that Koeberg had to be discounted from the decision of engaging in the Nuclear New Build project. South Africa was currently benefitting from a decision that was made 40 years prior to build Koeberg. The nuclear decision was a 60-year power decision and although the front-end cost of nuclear was there, there were more real benefits from using nuclear versus other forms of energy.

He replied that the benefits of nuclear were firstly the provision of electricity where with nuclear 90% of the time the power from reactors was usable compared to other sources such as wind.

Over and above electricity production, nuclear could be used for desalination. There is a need to double the water supply in South Africa and in order to pump large scale volumes of water, nuclear energy could be used.

Nuclear also provided job creation opportunities as individuals trained in nuclear energy would be competent enough to move across to other sectors.

He replied that the figure of 4918 US$/KWe was accurate and could definitely be worked with.

The Chairperson stated that Dr Kemm and other nuclear specialists would be recalled to have a debate about nuclear. He commended Mr Keshew for his commitment to produce a high standard of work as a civil servant.

Mr Mbambo responded that all the companies did comply with South African BEE requirements and also employed young people. There were some international companies however these were locally based.

He replied that SANJV was one of the scenarios was considered for the financing. It was to consider if South Africa could form a joint venture to execute the Nuclear New Build programme and bring in Koeberg as the South African equity. One of the risks of this was it would take a longer time to process and form this joint venture because of Eskom’s financials. All options discussed were still open for further work as procurement has not been started. The optimum ways to finance the Nuclear New Build was either the business as usual option where 100% equity would come from Eskom or the joint venture with Eskom having majority equity and also private investors. The studies were more strategic in revealing the options the government was thinking of in executing the programme.

Mr Mackay stated that he found it offensive that officials were whining that the Committee did not take what they said at face value and that they should be able to handle skepticism.

The Chairperson responded that that it was unfair to treat the officials in this manner as they were not politicians and could not defend themselves. He stated that this could be more appropriately stated in the presence of the Minister.

Mr Mackay stated that he was not making independent statements but was quoting a 2014 study where 150 reactors were investigated. According to the study there was a 98% chance that cost escalation for nuclear was over 117%.

He stated that for the financial scenarios neither the Eskom balance sheet nor the South African sovereign balance sheet could withstand a gearing of 99%. Eskom had already suffered downgrades and it was implausible to fund nuclear with its balance sheet as this could lead to further downgrades for Eskom and South Africa.

He asked what would be used as the export credit agency (ECA), who would be the vendor and what type of costs would be incurred.

Mr Mackay stated that the financial scenarios presented by DOE did not provide any assumptions and therefore showed that the job done by DOE was ad hoc. There was therefore a valid need to question the credibility of the information presented by DOE. As an example, he pointed out that the levellised costs were equal across all three scenarios which could not be so.

He asked who had issued the provincial tender and why had DOE piggybacked on a tender issued by a provincial government.

Mr Mackay asked why RFPs were being issued if DOE had just released the IRP which stated that the Nuclear Build programme was to be delayed.

The Chair said that contracts were being discussed now. The next meeting would discuss that.

Ms Mahambehlala stated that there had been political footballing in the meeting and you cannot have government in charge of this. The Committee needed to facilitate a panel discussion with constructive discussion and constructive criticism with people who are experts to avoid baseless lies and flimsy arguments. The Committee is not empowered on this issue and it needs to be.  

Ms Mahambehlala stated that the CEO of Nesca could not refer to himself as young as the youth consisted of ages 14 to 35. There was failure by officials to transfer skills to the younger generation before they retired.

The Chairperson agreed that a panel discussion was needed where a panel of experts would argue from both sides of the nuclear debate. He assured everyone that the current ANC government would not proceed with the nuclear programme if there was moral evidence that it had no benefit to SA. He stated that to close such a parliamentary committee meeting to the public, contrary to popular belief, was in fact a measure to protect the interests of South Africa. Exposing such sensitive information is a disadvantage to the Republic.

The meeting was adjourned.