How a VAT ‘error’ swung two Eskom contracts worth R341-million

One of just two local manufacturers of electrical transformers says it faces liquidation after a procurement team at Eskom handed two contracts worth R341-million to the more expensive bidder, which it says should have rightfully have gone to it.

That much is not in dispute. Eskom’s own lawyers have admitted that three contracts for the supply of electrical transformers were awarded to Actom, even though it was more expensive on two of the bids. How did that happen?

Eskom’s lawyers, Cheadle Thompson & Haysom, in a letter to Instrument Transformer Technologies (ITT) dated 10 February 2021, explain that the record of the tender compiled by Eskom’s procurement team made the most elementary of “errors”: The prices recorded for ITT included VAT, but excluded them for Actom.

That was a R341-million (exclusive of VAT) error in favour of Actom on two of the contracts. It was enough to swing two of the contracts from the cheapest to the more expensive bidder.

“Our client (Eskom) does need to reconsider the tenders, and it is the process that is paramount, not the anticipated result. In the circumstances, we ask that your client reconsiders the proposal made to ITT, in particular the proposal that the orders of invalidity be suspended while our client reconsiders the tenders and that your client continues to perform its obligations during that interregnum,” wrote Eskom’s lawyers to both the winning and losing bidders.

Clock run down

The wrongdoing has been admitted, but it seems no serious effort has been made to fix it. The contracts incorrectly awarded to Actom have not been suspended. ITT CEO Avi Bhatt believes the reason for this appears to be to let the clock run down on the contracts so that, by the time the matter gets to court, the judges will be presented with a fait accompli.

Some background here is needed to understand the sequence of events: When it comes to supplying heavy-duty instrument transformers that keep the country’s lights on, there are only two homegrown manufacturers: ITT and Actom. Both are majority BEE-owned. Actom counts Old Mutual, Actis, Kagiso Tiso Trust and FirstRand among its shareholders. ITT was purchased in 2017 by Bhatt and his business partner Brian van Wyk.

Both ITT and Actom count Eskom as a major client. The electricity utility accounts for 80% of ITT’s revenue, the balance coming from transformers and equipment supplied to mines, farms, renewable energy producers and others. Being one of only two original equipment manufacturer (OEM) suppliers in the country, ITT fully expected to count on Eskom tenders to keep it going, provided these tenders met Eskom’s technical, financial and other standards.

It’s not just Eskom that has an interest in supporting local manufacturers of instrument transformers. Both the department of trade, industry & competition and national treasury require this type of heavy-duty electrical transformer to have 90% local content, which means in effect that they must be produced in South Africa. Only ITT and Actom are capable of meeting this local content standard. Eskom itself required successful tenderers for this type of product to meet the 90% local content requirement or face disqualification.

So, when Eskom put out a request for three quotes for instrument transformers in October 2019, this was essentially a two-horse race between Actom and ITT. The combined value of these three contracts came in at about R500-million.

Tenders were to be awarded points on the 90/10 principle: pricing (inclusive of VAT) earning the most points on values above R50-million and, all else being equal, the company with the best black empowerment score winning the tender.

ITT submitted a tender to Eskom, and also provided pricing to various black-owned entities. It was immediately disqualified by Eskom’s procurement team, ostensibly because it provided pricing to multiple suppliers, who in turn submitted their own quotes on the same tenders.

Bhatt explains as an OEM, it is normal business practice to supply prices to companies that may be competing against you for the same tenders.

“In any event, this is allowed under Eskom tender rules provided we don’t have a shareholding or JV agreement with the competitor.”

Legal review

When ITT was notified that it had been disqualified for sharing information with other suppliers, it immediately informed Eskom that it would apply for a legal review of the tender process.

ITT filed a notice of motion in the high court in Johannesburg citing the Eskom bid evaluation committee and procurement team members Yurisha Pillay Reddy and Lerato Morife as respondents. Eskom’s lawyers admitted that ITT was prejudiced and was erroneously disqualified, and was the cheaper bid on two tenders.

“You don’t make an error of this magnitude where the loser is irregularly deprived of contracts to the value of R341-million,” says Bhatt.

A further oddity in the case is that Eskom’s lawyers offered to have the matter settled by agreeing to evaluate the ITT commercial offer, but that settlement was subject to the approval of Actom. Bhatt says it is extraordinary to seek the approval of the company that is the recipient of irregularly awarded contracts.

“We’re not saying that Actom acted unlawfully, but we are saying that they should not be consulted in rectifying the harm that has been done to us in this case. Why is Eskom asking Actom’s approval when it comes to seeking a settlement with ITT? Eskom has already admitted the prices submitted by ITT were lower and based on Eskom’s own 90/10 rule contracts should have been awarded to ITT. There’s nothing more to discuss.”

Yet, when ITT asked for a full record of the tender process, Eskom supplied some – but not all of it. Actom itself has asked for a full record to establish what went on in the award of the tenders.

“To let the clock run down, so the contracts are completed before justice can run its course,” says Bhatt. “We are facing liquidation, which in itself should be a serious concern for Eskom, the department of trade & industry and national treasury. That would leave just one manufacturer of instrument transformers in the country.”

Eskom didn’t respond to e-mailed questions.

  • This article was originally published on Moneyweb and is used here with permission