Statement by Minister Gigaba on NMPP Review

29/11/2012

During 2005, the Moerane Commission Report on fuel shortages noted that additional pipeline capacity was "urgently required to supply the inland markets" and that Petronet should expedite the development of a new pipeline from Durban to Gauteng to ensure the security of supply of fuel. A number of projections were made on the size and capacity of a new pipeline infrastructure that will meet the growth trajectories of the inland economy of South Africa over a minimum 30-year period. The decision to construct a new pipeline was based on:

1. The limited capacity of the existing Durban Johannesburg Pipeline (DJP).

2. Inspections and analyses that showed that the useful life of the DJP would terminate around 2010.

3. The consequences for the SA economy if fuel supply to inland activity hubs was inadequate or interrupted would have been disastrous. This is the ‘Security of Supply' imperative which, as indicated later, was the key driver of critical decisions on the new multi-product pipeline (NMPP).

Transnet commenced with the construction of the pipeline during 2008. The initial estimated cost of the NMPP was R9.5 bn. However as the project progressed, the estimated costs increased progressively from R9.5bn to the current R23.4bn and the project completion date was pushed out from 2010 to 2013. These cost increases and time delays raised concerns for the Shareholder.

During December 2010, the Minister of Public Enterprises announced an investigation into the cost overruns and time delays on the New Multi-Product Pipeline (NMPP). A team comprising individuals with pipelines, project management, construction, economics, regulatory, compliance, financial and legal expertise was put together to review these deviations. The team was given full access to Transnet's documentation, past and present, Transnet employees and contractors and other consultants involved with the construction of the NMPP. The review team undertook site visits and conducted interviews with relevant persons.

The findings of the Review

Overall, the Review Team found that there were systemic failings that compromised the intended outcomes. These failings occurred within all levels of key role players including failings within Transnet as client and failings at Engineering, Procurement and Construction Management (EPCM), main contractor levels and at the shareholder level.

The project management setup within Transnet Capital Projects lacked sufficient capacity and depth of experience for the client overview of a megaproject of this complexity. There was an inadequate analysis of risks and an over-reliance on the Engineering, Procurement and Construction Management (EPCM) contractor.

The overall management of the project fell short of the required standards in certain areas. The implementation of Transnet's obligations on the project such as securing authorisations (Environmental Impact Assessments, land acquisition for right of way, water and wetland permits) were not pursued with sufficient foresight and vigour and outcomes were not adequately integrated into the forward planning of the project. At certain stages the appropriate governance structure and system of controls were inadequate and the timing of the appointment of the main contractors was far too early in the life cycle of the project.

The decision to change the first appointed EPCM contractor after 18 months of working on the Front End Engineering Design (FEED) introduced risks that were not quantified and were detrimental to fast tracking the completion schedule. The initial response of the second appointed EPCM contractor was inadequate. Key roles should have been filled rapidly in line with proposal commitments. Furthermore tried and tested cost and project management systems expected of an experienced EPCM contractor were not implemented promptly or rigorously.

Transnet should have imposed a design freeze at the earliest possible stages to limit the costs escalations associated with major design changes. The timing of the decision to relocate the Durban terminal to Island View subsequent to the initial Front End Engineering Design (FEED) was disruptive to project delivery and compromised the speed of design definition, causing further delays.

The Review Team however pointed out that the State's security of supply imperative was a dominant driver of decision making on the NMPP. This was based on a concern that should there be a breakdown of the existing Durban Johannesburg pipeline whilst the NMPP was not completed, this would have a significant negative impact on the South African economy.

Lessons learnt

Key lessons learnt included the need to institutionalise a project delivery structure that reflects the four basic principles of accountability, namely: transparency, performance specifications, explicit formulation of the regulatory regime with a clear identification of project risks before decisions are taken, and consideration be given to the possibility of involving risk capital. The gateway system for successful management of infrastructure projects developed by the Construction Industry Development Board of South Africa should be implemented on all infrastructure projects.

Other lessons include the inter-governmental co-ordination of national infrastructure projects at a national level, greater emphasis being placed on equipping the owner's teams of public entities with strong in-house intellectual capacity to manage mega projects particularly those under EPCM arrangements. Attention should be given to the tendency with regard to capital projects to reflect the initial cost estimates over-optimistically in order to get the necessary ‘green light' approval whilst these initial estimates may be in fact be understated.

Corrective action taken

The Department has also taken cognisance of the recommendations and implemented some of the key lessons learnt from the Review.

1. DPE Project Management Office

In line with the shareholder activist approach adopted by the Department, a Project Management Office is in the process of being established within the Department. This Office will possess the required intellectual capacity in order to exercise a more ‘hands on' oversight function over major projects.

2. Greater Inter-Departmental Co-ordination

Greater Inter-Departmental Co-ordination now exists as a result of the Presidential Infrastructure Co-ordinating Committee oversight of major capital projects. PICC will allow the State to improve its control and militate against any potential cost overruns.

The measures implemented by Transnet include the following:

• Transnet has established the NMPP Governance Steering Committee as a sub-committee of Exco chaired by the Group Chief Executive.
• The Committee has oversight responsibilities relating to the NMPP project focusing on operational; financial, legal and regulatory aspects relating to the project execution and to enhance accountability through regular reporting to the Board of Directors and Shareholder.
• Transnet has commissioned a prudency review undertaken by a reputable auditing firm to identify possible areas of improvement
• Transnet has strengthened its reporting to the Shareholder, Department of Energy, Nersa, National Treasury and its customers.
• The Group Chief Executive has subsequently appointed Mr Charl Moller, an experienced pipelines and civil engineer as Group Executive in charge of Transnet Capital Projects. He has a specific mandate to deliver the project within Board approved timelines and budget
• Transnet Capital Project has already restructured the project execution, flattened the project management structures to enhance accountability and delivery.

The Department is satisfied that the current Board and the new Executive management team led by Brian Molefe are fully appreciative of the need to exercise prudency in implementation of major projects particularly as they embark on their R300bn Market Demand Strategy. The Department will continue to monitor the SOC rollout of Capital Projects vigilantly.

Statement issued by Minister of Public Enterprises, Malusi Gigaba, November 29 2012

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