South Korean company seeks to reduce Morupule A scope

Although the Minister of Minerals, Energy and Water Resources, Kitso Mokaila, has sought to portray an offer by Doosan Heavy Industries & Construction as the most attractive for the refurbishment of the Morupule A Power Station, problems have begun to surface.
In parliament earlier this year, Mokaila justified the parachuting of Doosan into the tendering process by stating that engaging the South Korean company would be considered if it met the Botswana Power Corporation’s technical specifications and came within the budget. Initially, four companies bid for the job but all tenders were nullified, leading to a second round of tendering in which only two companies (SK Engineering & Construction and Mitsubishi Hitachi Power Systems Europe Service) responded. SK quoted a total net tender price of US$338.69 million and Mitsubishi $374.08 million. Following clarification meetings between BPC officials and representatives of both companies, the prices were adjusted to $339.45 million for SK and $379.18 for Mitsubishi. A BPC letter penned by its CEO, Jacob Raleru, reveals that the government had budgeted no more than P2.06 billion for the refurbishment and adds that this plan was not supported by the market price-wise. Speaking in parliament, Mokaila said that “reducing an offer by about P1 billion is unrealistic hence the need to explore other options.” By “other options” he precisely meant considering Doosan for the job.
Doosan offered to refurbish Morupule A for $110.09 million (off-shore portion) as the first proposal and $28.26 million (on-shore portion) as the second proposal. Subsequently, it reconfigured its proposal and the result has been that if the project goes ahead, BPC will shell out P2 billion – P576 million more than was quoted in Doosan’s original proposal. Raleru’s said letter deems this figure “reasonable” because of scope change that includes additional features (flue gas desulfurization for sulphur oxide emission control, low nitrogen oxide burners, continuous emissions monitoring system, ash disposal to Morupule B site and wastewater treatment facility) that were not part of the original proposal.
However, revelations by sources indicate that the attractiveness of Doosan’s offer may have fallen away. For six weeks now and following the signing of a P110 million feasibility study contract, Doosan engineers have been disassembling the Morupule A plant. In terms of a limited notice to proceed (LNTP) signed between the two parties, BPC got Doosan to agree that no matter what it found during this inspection, it wouldn’t vary the price. (An LNTP is a letter from a client to a contractor stating the date the contractor can begin work subject to the conditions of the contract.)
The inspection got underway under such terms and to its horror, Doosan found that the main contract price it has quoted for the refurbishment proper is far too low for the job it would have to do. The result, sources say, is that the company now wants to reduce the scope, something that BPC has a problem with. For all of last week, the two parties were locked in talks to find common ground on this issue.
The relationship between BPC and Doosan is strictly commercial. Doosan wants to both make profit and a good first impression from the Morupule A job while BPC wants the company to deliver a durable quality product. Therein lies the problem. An expert frets that having to undertake a non-commercially viable project may compel Doosan to cut costs on equipment and personnel which would compromise quality.
While Mokaila has stated that knocking off P1 billion from the tender was “unrealistic”, a Ministry of Minerals, Energy and Water Resources (MMEWR) source uses the same word to describe the government’s expectation that the refurbishment could be done with P2.06 billion. As Mokaila told parliament in August, the origin of the project was in 2008 when MMEWR and BPC entered into an agreement with the Japan International Cooperation Agency (JICA) to “undertake a study to bring the emissions in a refurbished Morupule A Power Station within the Statutory Limits and improve plant availability to over 80 percent and increase the life of the plant to not less than 15 years.” JICA submitted a report three years later.
“The JICA report gave detailed estimates of the rehabilitation costs that were later used as the reference price by BPC in the evaluation of the bids. The JICA’s estimate was thus used as a hurdle rate for assessing the bids,” said Mokaila in parliament, adding in another part that the government “put in a lot of fat” on the price.  
The fat may not have been enough. A source familiar with large-scale engineering projects says that the sum that BPC budgeted for Morupule A was four years out of date. He adds that on such basis, tender prices quoted by SK and Mitsubishi figures “made a lot of sense” while Doosan’s never did. Morupule B itself suffered the same fate because the cost increased drastically from the time the project was conceived to when it actually started.
It turns out that the Japanese would themselves have refurbished Morupule A had they agreed with BPC on how such commercial relationship was to be conducted. Our information is that they (Japanese) wanted to run plant on an operations and management (O&M) contract for a certain period of time after they had refurbished it. This was in order that they could recover their costs. The two parties couldn’t agree and so the plant remained idle for five years. 
The wear and tear of the plant, which has driven refurbishment costs up, could have been avoided. Rightly, the plant should have been refurbished after 15 years of service to extend its life but that never happened. The result, the expert source says, is that it “deteriorated.” However, the deterioration is of such nature that the plant can still be reactivated, which is the reason why Doosan workmen are currently stripping it apart to diagnose its condition.
In bolstering the claim that Doosan is being unduly favoured for the Morupule A job, it has been reported that the companies that bid were allowed access to only one turbine while Doosan was given unfettered access. In parliament, Mokaila countered such claim by asserting that “there were no restrictions on which parts of the plant to access.” Conversely, industry sources maintain access was limited. One other piece of information that has emerged with regard to this particular aspect is that the turbine that was inspected wasn’t actually opened by BPC but had been left open by JICA engineers.
On account of Doosan’s centrality to the process and the manner in which all other bidders have been offloaded, BPC may have put itself on the back foot. With Mokaila having stressed that time is of the essence, starting the process over doesn’t seem to be an option the government is considering. In other words, BPC is stuck with Doosan, a fact that, for purposes of pushing a hard bargain, wouldn’t be lost on the latter. A source says that already BPC is “at the mercy of Doosan which is the one calling the shots.”
The owner’s engineer is an international engineering company called Lahmeyer International. On evaluating the formal re-tender (SK and Mitsubishi’s), Lahmeyer expressed confidence about “a commercially viable project outcome” and recommended that BPC should “consider only these two tenderers.”
“Limiting the process to these two bidders only without starting a completely new tendering process would allow implementing the project within the shortest possible time frame,” Lahmeyer says in its final re-tender evaluation report which, in another part, recommends that SK and Mitsubishi should be invited to submit alternative bids.
 
This advice was disregarded and Lahmeyer moved on to evaluating the Doosan proposal. With regard to the latter, Lahmeyer is said to have warned BPC that one of the dangers of using the services of the South Korean company was that “it would be too difficult to control because it has no competition.”
A Morupule B-like danger may be looming. Those with intimate knowledge of how Morupule B failed say that the contractor developed too close a relationship with the client (BPC) and would routinely bypass the owner’s engineer. While it continues to bill the government every month and as the stated case clearly shows, Lahmeyer is said to be powerless in the decision-making process.
“I foresee the same thing that happened with Morupule B happening with Morupule A,” predicts an expert source citing the diminished role of Lahmeyer as the reason.