Background
The Optimum coal mine is both an underground and surface coal mine in South Africa. It has been in operation since 2002. The annual capacity was 13.1 million tonnes. The mine endured multiple changes in ownership and as of 2020 has been in maintenance and according to sources is now mothballed.
By the mid 2010s the Optimum mine had been struggling financially. It was then bought by Tegeta Exploration & Resources. The acquirer company is owned by President Jacob Zuma's son and the Gupta family, after a restructuring.
Relevant to the mistake in this story, as part of an upgrade in 2010, a new coal crusher was installed. This affects how the coal is sampled and the measurement of the coal quality. Eskom's former CFO Anoj Singh explained the situation in the following way:
The change meant it was different from the original sampling equipment. The new design had a crusher, which increased the reject coal put in the plant. It gave a false positive of quantity of reject coal. This was the outcome of investigations over three to four years.
Incident
The change in the coal quality combined with the incorrect measurement of the quality, lead to a fine being levied on the mine. In March of 2017, as part of an arbitration hearing, Eskom struck a deal with Tegeta on the fine. Singh had this to say:
Eskom went into this process with legal opinion saying it should settle this claim ... We realised [sic] the contract was punitive and poor quality coal was being delivered. That is why the amount ramped up so quickly. When we realised [sic] the crusher was the problem, we understood that we had sufficient information that the crusher was causing this.
The original fine was set to be R2.2 Billion. That caused the mine to go into rescue proceedings. However, during latter analysis, it was discovered that the fine should be of a lower amount. Eskom head of legal Suzanne Daniels said the following:
I was shocked at the answer. There was an error in the spreadsheet. At that point, I was beyond furious. We have gone out in the media to say it was R2.2bn ... The final analysis of the claim showed the fine should have been R722m. I was quite pleased to hear Mr Marsden (Optimum business rescue practitioner) estimated it to be around R700m ... I was quite perturbed as there was reputational issue and risks for Eskom.
Initially Suzanne said Eskom’s board tender committee recommended she settle about R200 Million lower than what the calculations showed regarding the Optimum fine. When Daniels met with a committee to discuss this, they discovered there had been an error in the spreadsheet. She took this new information to the tender board committee. Here, board member Pat Naidoo said she should settle at no less than R500 Million, according to Daniels. It was eventually settled with Optimum and their new owners at Tegeta with the amount of R577 Million.
Spreadsheet Error
Unfortunately we do not have any information about the specific spreadsheet error. It is worth pointing out that there were multiple factors at play when deciding the amount of the fine. The fact that the initial fine amount was determined without the impact of the coal crusher full impact on the quality measurement could not have helped. It is worth noting that the initially calculated amount of the fine, about 4 times as large as the eventual payment amount, was the reason for the decision to begin restructuring.
Timeline of events
2010
The coal crusher is upgraded which affects the measured quality of coal.
~ 2016
Dissatisfaction with the (perceived) coal quality leads to levying a fine on the mine. A spreadsheet, containing an error, is used to calculate the amount of the fine. A decision to restructure the mine is taken.
Mar, 2017
During an arbitration hearing the amount of the fine is assumed to be R2.2B.
Jul, 2017
The error in the spreadsheet is discovered and the fine is reduced by R1.5B.