21 April 2010

South Africa: Hitachi 'Unaware' of ANC Connection

Johannesburg — HITACHI Power Africa yesterday denied knowing that Chancellor House was an African National Congress (ANC) front company when it entered into an empowerment deal with it in 2005.

After years of murkiness, the company moved to clarify its relationship with Chancellor House, but questions linger over the identity of the eventual beneficiaries of its deals.

Chancellor House's 25% interest in Hitachi Power Africa, a company that has received contracts worth R38,5bn from Eskom, has been the subject of controversy because of its links to the ANC.

In a media briefing "to set the record straight" yesterday, Hitachi denied ever knowing that Chancellor House was an ANC front company when it concluded the controversial empowerment deal. Hitachi's due diligence did not pick up Chancellor House's connections to the ANC.

Chief financial officer Robin Duff said yesterday he was personally involved in due diligence on Chancellor House.

"At the time, we did not know that it was an ANC front company," he said.

In spite of that, Hitachi Power Africa CEO Johannes Musel responded yesterday with an emphatic "No" when asked if Chancellor House had misled Hitachi or misrepresented itself.

In light of the revelations of Chancellor House's ties to the ANC, Hitachi said it had taken steps to ensure that no funding as a result of the deal it won to build boilers for Eskom's power stations would flow to the ANC.

"We really want to put the record right. We have done what we can to ensure that there is no funding going to political parties," Duff said.

The Medupi and Kusile boiler contracts were concluded in October and December 2007.

Hitachi has stipulated that beneficiaries be "natural persons" but the Chancellor House Trust, through which the ANC has a stake in Chancellor House, would determine who the beneficiaries would be.

Hitachi said any distribution made by the trust to beneficiaries would go to "natural persons" such as women, youth, the disabled and the aged. "This excludes benefits paid to political parties," Duff said. But Hitachi did not say how it would ensure the "natural persons" would have no links to the ANC.

"If you want to know the beneficiaries, speak to Chancellor House," Musel said.

Musel said Chancellor House was yet to receive dividends from the deal. When it did, it would get about R50m in the next eight years in after- tax dividends, "assuming a profit margin typical for the boiler business". Musel said the profit margins on the Eskom boiler contracts were between 1% and 3%, so the flow- through to shareholders was "in the millions and not billions".

"Contract value, in this case R38,5bn for both Medupi and Kusile boiler contracts, does not equal profit. Profit margins in the boiler business are typically low, and after-tax dividends will be much smaller than figures reported in recent weeks."

He said Chancellor House would share only in the profit of the local scope of the contract. "We are looking at about R50m over a period of eight years. That is the magnitude," Musel said.

Chancellor House paid "more than R1m" for its stake", Duff said.

ANC treasurer-general Mathews Phosa said last week the ANC would divest itself of its interests in Hitachi Power Africa and promised to do this in the next few weeks.

But Musel was unable to confirm this. "We have not been approached. It is a shareholder issue." Musel said if Chancellor House wanted to walk away from the deal, "provisions of the shareholder agreement will apply".

Hitachi defended its Eskom contracts. It said an independent audit report by Deloitte and Touche had found that the tender evaluation had followed "due process" and that the award of the contract was fair.

Former public protector Lawrence Mushwana reported that former Eskom chairman Valli Moosa acted improperly in awarding the contract. Moosa was a member of the ANC's national executive at the time. Mushwana, however, said the contract itself was "not unlawful". Duff said that "from our experience" it was not for one man to sway Eskom's tender processes. "It is a collective decision," he said.

Musel said Hitachi's priority was to execute the boiler contracts "and the fulfilment of the AsgiSA (Accelerated and Shared Growth Initiative SA) contract obligations". These included 60% local content, preferential procurement, skills development and investment in SA. He said local industry would benefit through " skills enhancement".

When Hitachi entered the South African market, it looked for partners "with knowledge of the local conditions", Duff said. Three companies were in the running for a 30% stake and it chose Chancellor House (25%) and little-known Makotulo Investment and Services (5%).

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