Copyright UCT A case study of the Pebble Bed Modular Reactor (PBMR) project: Lessons on management practices, policies and principles and their effect on the project’s failure A Research Report presented to The Graduate School of Business University of Cape Town In partial fulfilment of the requirements for the Masters of Business Administration Degree by Johannes Henri Holtzhausen December 2011 Supervised by: Prof. Eric Wood
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Copyright UCT
A case study of the Pebble Bed Modular Reactor (PBMR) project: Lessons on
management practices, policies and principles and their effect on the project’s failure
A Research Report
presented to
The Graduate School of Business
University of Cape Town
In partial fulfilment
of the requirements for the
Masters of Business Administration Degree
by
Johannes Henri Holtzhausen
December 2011
Supervised by: Prof. Eric Wood
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Management Practises at PBMR December 2011
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PLAGIARISM DECLARATION
I know that plagiarism is wrong. Plagiarism is to use another’s work and pretend that it is
one’s own.
I have used a recognised convention for citation and referencing. Each significant
contribution and quotation from the works of other people has been attributed, cited and
referenced.
I certify that this submission is my own work.
I have not allowed and will not allow anyone to copy this essay with the intention of passing
it off as his or her own work
Johannes Henri Holtzhausen
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Management Practises at PBMR December 2011
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A case study of the Pebble Bed Modular Reactor (PBMR) project: Lessons on
management practices, policies and principles and their effect on the project’s failure
ABSTRACT
This case study examines the management practices employed throughout the life of the
South African Pebble Bed Modular Reactor (PBMR) project from its inception in 1999
through to government pulling the plug on the project in 2010. The PBMR project is a
technologically innovative nuclear mega-project, based on an original German technology
transferred to South Africa in the 1990s. The project did not manage to achieve its goal of
being ‘the first Company to successfully commercialize the pebble bed technology’. In total,
R9.244 billion was invested in the project, and today, there is little left to show for it.
This case study offers a collection of insights into the vast complexities, risks and
uncertainties that go hand in hand with the management of mega-projects. Specifically, the
case explores factors such as decision making and the effect thereof on the manageability of
the project as a whole; the importance of stakeholder management, support and expectations;
and lastly the case explores some of the dynamics of senior management accountability and
the unpredictable and precarious circumstances in which these senior managers often have to
2001). For this particular case study, a predominantly qualitative research strategy was used,
and thus tends to be inductive in nature with regard to the relationship between the theory and
research (Bryman & Bell, 2007).
Teaching case studies allow students to understand the complexities inherent to situations and
decisions in the ‘real world’ and are used in class rooms as metaphors for more general
business problems (Roberts, 2001). In order to achieve this, the case study has to be written
with sufficient background and contextual information for the student to be able to gain a
sufficient grasp of the problem, situation or decision at hand, to be able to draw conclusions
with regard to the topic on which the case focuses and to determine the extent to which the
finding can be generalised to the broader business environment (Leedy & Ormrod, 2005;
Roberts, 2001). Teaching case studies also typically make use of a protagonist who is a
central character in the case and with whom the student can relate (Roberts, 2001).
According to Bryman and Bell (2007) the common association of case studies as being a
qualitative research methodology is in fact incorrect. They argue that case studies can in fact
employ several qualitative and quantitative research methods such as participant observation,
semi-structured interviews or documentary data reviews to name but a few. They argue that
case studies are distinguished rather by the fact that the particular case is the subject of
interest in and of itself and that the researcher is concerned with elucidating the unique
features of that case – as opposed to generating statements indicative regardless of time and
place. Therefore a case study is defined as an ideographic research approach in that the object
of the case is an individual entity rather than a member of a larger population (Bryman &
Bell, 2007; Lindegger, 2006).
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Although the case study approach to research has its limitations (see section 3.2 for details of
these) it does have the advantage of often being useful in allowing new ideas and hypotheses
to emerge from the findings that may then be more rigorously tested by other research
methods in the future (Lindegger, 2006). In addition, because they allow for several
qualitative and quantitative research methods to be used together, they avoid the potential
drawback of being too reliant on one single approach (Bryman & Bell, 2007).
3.2 Limitations of this type of research
Literature seems to suggest that there are three main limitations of the case study approach to
research. The first potential limitation of this method which seems to be most widely
emphasized is that of its external validity – or generalizability (Bryman & Bell, 2007; Cooper
et al., 2002; Lindegger, 2006; Rogers, 2011). In other words, can the findings from one case,
with its own unique contextual and background influences, be transferred or applied more
generally to other cases? This is somewhat mitigated by - as Bryman and Bell (2007, p. 64)
point out, the fact that “it is not the purpose of this research design to generalise to other
cases or to populations beyond this case”.
The second potential drawback of this type of research design regards the ability to extract
and test the causal links from the myriad of contextual and situational influences at play
within the particular case (Cooper et al., 2002; Lindegger, 2006). Even if these links could be
accurately extracted there is still the risk that some important and causal factors might fall
outside the boundaries of the case (a case study is often limited to a certain duration or series
of events) and may therefore be missed during the analysis of the case.
Lastly, the recollections of interviewees are often the only source of some data, the validity of
some of the information itself may be called into question (Lindegger, 2006). Practically, this
type of research can also have its limitations in that access to the necessary organization,
information and/or people might be limited for proprietary, geographic or time reasons, which
often results in this type of research being very time consuming (Bryman & Bell, 2007).
3.3 Data sources, reliability, collection and analysis
The data used in this case falls broadly into two categories. The first is contextual information
related to the management of innovation, mega-projects and nuclear projects in general. The
second category relates to the information pertaining particularly to the PBMR project, its
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setting, its stakeholders, the decisions that were made, the management practices that were
implemented and the resulting outcome of, and interplay between these.
According to Bryman and Bell, (2007) there are four main data collection methods associated
with qualitative research, namely, participant observation, focus groups, language-based
approaches, qualitative interviewing, and the collection and qualitative analysis of texts and
documents. This research predominantly used the latter two of these methods, focusing on
both primary and secondary sources.
Primary sources include email correspondence and unstructured interviews with the
protagonist, Jaco Kriek, the CEO of the project between June 2004 and March 2010. The
unstructured style of interview allowed for exploratory research, without presupposition or
expectations being imposed by the interviewer on the respondent. Jaco Kriek pledged his full
support and willingness to participate in this research. In addition, Jaco Kriek compiled a
lessons learned document detailing some of his thoughts and lessons with regard to the
management of the PBMR project, which he made available to the author for the purposes of
this case study and which also formed part of the primary data analysed.
Where ever possible, Jaco’s views were corroborated or countered using publically available,
secondary sources data – such as television interviews, news reports, etc. This has been done
to remove respondent bias from the research as far as possible.
Finally, desktop analysis was also performed on secondary sources and included, where
appropriate data from both other researchers – where available, and organizations - including
publically available information such as the PBMR website, annual reports and publications,
news and magazine articles, governmental reports or any other relevant sources. This data
was used to ensure – at least as far as possible, that bias – both from the respondent and the
author, were removed from the case. This is particularly important given the authors prior
involvement with the PBMR Company.
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4 THE CASE STUDY
Jaco Kriek was sitting in his favourite coffee shop, Doppio Zero in Centurion, enjoying a
relaxing lunch. It had been a little over six months since he had resigned as CEO of PBMR
(Pty) Ltd, and his sabbatical had done him well. The date was the 17th of September 2010, and
he pulled out a copy of the local business newspaper - the Business Day. The headline read
“Hogan ends Pebble Bed Reactor Project”1.
The article read ... “Public Enterprises Minister Barbara Hogan drew the final curtain
yesterday on SA’s bid to be a leader in nuclear technology when she announced the closure of
the pebble bed modular reactor (PBMR)...” and already the thoughts started racing through
his head. He couldn’t help but wonder what explanation Barbara Hogan was going to provide
for government’s withdrawal? Would he be the convenient scapegoat? What would people
think?
Jaco read on ... “Other reasons cited by Ms Hogan for the Cabinet’s decision were that the
PBMR had not been able to secure an anchor customer or another investment partner...” The
irony in Ms Hogan’s reasoning brought a wry smile to his face.
PBMR (Pty) Ltd. History and Development
After starting off as a research project within the legal structures of Eskom2, South Africa’s
state owned electricity utility, the Pebble Bed Modular Reactor (Pty) Limited, was established
in 1999 as a small nuclear engineering company with barely 100 employees. The first
chairman of the Board, the Chief Executive Officer (CEO), the Chief Financial Officer (CFO)
and most managerial staff were seconded from Eskom. By 2008, PBMR had grown into “one
of the largest nuclear reactor design and engineering companies in the world”3 employing
some 800 people at its head-office in Centurion.
The IDC was the first to invest in the PBMR Company when it was establishment as a
subsidiary of Eskom in July 1999. Then in 2000 British Nuclear Fuels Limited (BNFL) also
1 Ensor, L. (2010). Hogan ends pebble bed reactor project. Business Day Online. Retrieved December 4, 2011, from http://www.businessday.co.za/articles/Content.aspx?id=121307. 2 Eskom is also the 5th largest utility in the world. Kadak, A.C. (2005) ‘A future for nuclear energy: pebble bed reactors’, Int. J. Critical Infrastructures, Vol. 1, No. 4, pp.330–345. 3sourced from the PBMR website (http://www.pbmr.com/index.asp?Content=129)
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became an investor, followed by the US energy utility PECO. However, following the merger
of PECO and Unicom, PECO’s share was transferred to the newly formed Exelon. Exelon
agreed to pilot the PBMR through the safety regulatory process in the USA but in April 2002
pulled out of the project, stating changes in their strategic focus4 as the reason. Later, in
March 2006, Westinghouse became shareholders in the PBMR project, taking over the
BNFL5 share.
A co-operation agreement6 entered into by the founding investors provided the legal
framework between the investors and PBMR and outlined each party’s rights and obligations.
No shareholders agreement ever became effective. Although a shareholders’ agreement was
signed in August 2005 the agreement never came into effect as a result of certain conditions
not being satisfied – largely due to delays7 from the Department of Public Enterprises (DPE),
and eventually lapsed on the 30th of June 2006.
The company’s goal was to be “the first organisation that successfully commercialises pebble
bed technology for the world’s energy market.”8 If it had been successful it would have been
the first time that South Africa had designed, licensed and built its own nuclear reactor.
The PBMR technology
The PBMR technology forms part of the family of helium-cooled, High Temperature
Reactors (HTR). The technology is based on a German concept9 developed between the early
1950s and 1989 when the Germans eventually decided to pull the plug on the programme10.
4 According to an article in the Nuclear Monitor (Kraft, D. (2002). Exelon Pulls out of Pebble-Bed Project. Nuclear Monitor, 1-8.), company officials Exelon did not see reactor development as part of its core business strategy, and would instead focus more on power marketing, production and distribution. However, an article in the Nuclear Engineering International online magazine (Thomas, S. (2009, April 1). PBMR: Hot or Not. Nuclear Engineering International. Retrieved from http://www.neimagazine.com/story.asp?storyCode=2052590.), seems to suggest that this withdrawal had something to do with questions raised by the US National Regulatory Commission (the US nuclear regulator) regarding safety issues with the PBMR technology. 5 Westinghouse was a wholly-owned subsidiary of BNFL at the time and was later sold to Toshiba along with the PBMR share. 6 This agreement is not available in the public domain 7 It has been suggested that Alec Erwin had plans for restructuring all the South African state owned enterprises and wanted the PBMR project to fit into this framework before signing off on the agreement. 8 Quoted from the Directors Report in the PBMR 2008 Annual Report (PBMR. (2008). PBMR (pty) Ltd. Annual Report 2008 (pp. 1-90). Retrieved from http://www.pbmr.co.za/index.asp?Content=236.) 9 Refer to Exhibit A for a detailed history of the early technology development in Germany 10 This decision seems to be mostly attributable to the changing political support in Germany at the time. As Regis Matzie, the former Senior Vice-President of Westinghouse explained: “You have to appreciate the
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Other than being an HTR, the PBMR is mostly characterised by its unique fuel pebbles -
of 60 mm diameter. The PBMR Company was one of only three institutions at the time,
including the Massachusetts Institute of Technology (MIT) in America and the Tsinghau
University in China, working on the development of pebble bed technology.
Unlike most nuclear reactor designs11 in use today that generate between 600MWe (Mega-
Watt electric) and 1600MWe, the PBMR configuration was designed to generate between
80MWe and 165MWe depending on the specific configuration chosen, and was modular by
design enabling plants to be built with multiple units. The PBMR technology’s smaller,
modular configuration and higher temperature ranges makes it suitable for a host of markets
and application for which larger reactors are not suitable. In addition the technology is
claimed to be both intrinsically safe and more thermally efficient than that of conventional
Pressurized Water Reactors (PWRs). Yet despite this and other potential benefits12, the
PBMR technology was still in its infancy and needed to overcome some serious technical
challenges – particularly those relating to material considerations13, in order for it to be
licensable.
Although the general consensus from the nuclear industry was that the technology was viable,
there were some detractors. Among them, Steve Thomas, professor of energy policy at
Greenwich University, and Dr Rainer Moorman, of the German Jülich Research Centre, who
claimed that the Pebble Bed technology was not safe at the high temperatures for which it was
being designed14. These claims were refuted by the international nuclear community as being
based on nothing other than opinion, conjecture and some other strangely racists arguments15.
political environment at the time. Chernobyl had just happened, and the German public and government had become very anti-nuclear.” – Quoted from McKune, C. (2010). Pebble bed modular reactor demonstration plant is funded but not constructed. South African Journal of Science, 106(5/6), 5-7. doi: 10.4102/sajs.v106i5/6.287. 11 These consist mostly of Pressurized Water Reactors (PWR) although many other families of reactors also exist. 12 Refer to Exhibit B for a list of these benefits as well potential target markets for the technology 13 Ion, S. (2010). The worldʼs nuclear future – built on material success. Contemporary Physics, 51(4), 349-364. doi: 10.1080/00107514.2010.487326. 14 Koster, A. (2009, May). Pebble Bed Reactor - Safety in Perspective. Nuclear Engineering International, 22-24. 15 Gregory Murphy as cited in Hecht, M. (2008, November). The Nuclear Power Revolution: Modular High-Temperature Reactors Can Change the World. EIR Science & Technology, 46-53.
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Mega-Projects – A mega-challenge
Mega-projects – sometimes referred to as Large-scale Engineering Projects (LEP), are
distinguished from traditional projects in that they are generally colossal in size and scope,
captivating because of physical proportions, engineering achievement and aesthetic design,
costly, controversial, technically and socially complex, all of which can lead to increased risk
and uncertainty. Mega-projects are often technological tour de force with an innovative and
not infrequently, experimental character16 and usually involve multiple partners and issues of
control between key stakeholders. In addition to the technical complexities that come with
such cutting edge technology, mega-projects are often also faced with the social complexity
that comes with potentially wavering public support and political decision processes.
The complexity and scale of mega-projects has been increasing over the last few decades17, to
the extent that in 1999 more than 1500 large engineering projects - each worth over US$1
billion, were at some stage of financing or construction in the world18. Projects of this
magnitude are always done with government support of some kind and require the necessary
political intent, regulatory framework and support to succeed. This growth in mega-project
development is occurring despite the fact that mega-projects seem to have a dismal track
record when it comes to staying within schedule and budget, something which brings the
adequacy of public policy related to these expensive projects into serious question.
Mega-projects experience frequent delays and cost overruns, and are very susceptible to
failure. Examples of such projects are not difficult to come by and include the Channel
Tunnel connecting Great Britain and France - approximately US$10 billion over budget and
two years late, Boston Central Artery Project - approximately US$10 billion over budget and
seven years late, the U.S. Department of Energy’s National Ignition Facility - approximately
US$1 billion and six years late and Europe’s first European Pressurized Reactor (EPR)
nuclear power plant, the Olkiluoto 3 in Finland – currently approximately US$2 billion over
budget and 3 years behind schedule.
16 Priemus, H, Flyvbjerg, B, & Wee, B van. (2008). Decision-Making on Mega-Projects: Cost-Benefit Analysis, Planning and Innovation. (K. Button, Ed.). Cheltenham, UK: Edward Elgar Publishing, Inc. 17 Baccarini, D. (1996). The concept of project complexity - a review. International Journal of Project Management, 14(4), 201-204. 18 Conway Data, 1999 as cited in Miller, R., & Lessard, D. R. (2001). The Strategic Management of Large Engineering Projects: Shaping Institutions, Risks and Governance (1st ed., p. 259). Massachusetts: The Massachusetts Institute of Technology Press.
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Nuclear mega-projects face an additional challenge in that they also have to be developed
under the most strenuous regulatory requirements of any industry and typically contribute
extensively to project costs and scheduling delays. Nuclear Regulators play a fundamental
and central role in exercising regulatory control over the safety of all nuclear technology
developments and operation.
The Nuclear Renaissance
Nuclear electricity generation technology harnesses energy – in the form of heat, generated
from the splitting of certain elements such as Uranium or Plutonium. The technology was
developed in the 1940s with the first commercial nuclear power reactor starting operation in
the early 1950s. By 2008 there were over 400 commercial reactors operating in 30 countries
with a total capacity of 376,511 MWe. Nuclear power contributes 14% of the world’s base-
load power. In addition, 140 ships and submarines worldwide are powered by nuclear reactors
and 56 countries operate a total of about 250 research reactors19.
Nuclear power has been at the forefront of public debate on energy for decades, often on a
knife’s edge between public acceptance and disapproval. Since the beginning of the 21st
century, nuclear power has seen a ‘renaissance’ of sort, driven by a recognised need for a
more carbon conscious future, volatile fossil fuel prices, concerns over energy security, major
expansion of per capita use of electricity in developing countries, and a general consensus that
nuclear power might just be the only sustainable option in terms of base-load electricity for
the future. Even environmentalists such as Patrick Moore20 started pushing nuclear power as a
ready solution. None the less, nuclear incidents such as the Chernobyl and Three Mile Island
accidents serves as a sobering reminder of some of the safety issues facing nuclear projects.
South Africa has a rich, albeit somewhat controversial nuclear history21. Other than operating
Koeberg - the only nuclear power plant on the African continent as well as the Safari research
reactor in Pretoria, it also had its days of experimenting with weapons and enrichment
programmes. South Africa, was however, also the first country in the world to voluntarily
give up all its weapon and enrichment facilities as part of the non-proliferation treaties, and
19 All figures obtained from the World Nuclear Association website (www.world-nuclear.org) 20 Patrick Moore was once an avid anti-nuclear activist with Greenpeace, but now goes around the world advocating for Nuclear power as a potential solution to the global worming crisis. 21 See Exhibit E for a more detailed account of South Africa’s nuclear history.
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today enjoys the position as the world leader in radio-nuclide isotopes production used in
cancer treatment across the globe22. However, at the time the PBMR project was started,
South Africa had not undertaken a large nuclear program of any kind for over 15 years.
South Africa’s ability to bring pebble bed technology into commercial use had been called
into question:
“Against a background of failed attempts in Germany, the US and Britain to
commercialise HTR technology, Eskom, a newcomer to nuclear plant design, may
have difficulties in succeeding”23
While the technology was deemed feasible the advisability of pursuing the project was
questioned even within government, “the economic feasibility is questionable for a start-up
venture, if no cognisance is taken of the socio- and macroeconomic benefits”24
South Africa - Socio Economic conditions and Political History
South Africa regained democracy in 1994 with the fall of the apartheid government. Although
this was a peaceful transition, it none-the-less resulted in large scale changes in leadership
across both government and state owned structures. Besides vast levels of inequality, the
apartheid government had also left behind an economy focused on the needs of a small
portion of the population and very dependent on the exploitation of natural resources and a
strong military sector.
The new leadership, besides being ill equipped and experienced for the task, also hadn’t
appreciated the importance of capital investment in infrastructure development for the local
economy. As a result much of the funds available to the government since 1994 were spent on
housing development, education and social relief. Competition for capital expenditure was
fierce during this time. Projects had to compete for funding against many other strategic
22 Campbell, K. (2011). SA marks twentieth anniversary of move from nuclear weapons to nonproliferation. Engineering News Online. Retrieved August 21, 2011, from http://www.engineeringnews.co.za/article/sa-marks-twentieth-anniversary-of-move-from-nuclear-weapons-to-non-proliferation-2011-07-08. 23 Thomas and Auf der Heyde, 2002 as cited McKune, C. (2010). Pebble bed modular reactor demonstration plant is funded but not constructed. South African Journal of Science, 106(5/6), 5-7. doi: 10.4102/sajs.v106i5/6.287. 24 According to the National Treasury Budget Report Vote 9: Public Enterprises, 2006 Estimate of National Expenditure. (2006). Corporate Finance (pp. 165-188). Retrieved from http://www.treasury.gov.za/documents/national budget/2006/ene/Vote 9 Public Enterprises.pdf.
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national objectives such as housing, healthcare, transportation infrastructure projects such as
road and rail and even the 2010 FIFA world cup stadium build program.
Eskom, South Africa’s state owned and only electricity utility faced significant challenges
during this post 1994, transitional period. By the turn of the 21st century, no new electricity
generation infrastructure had been created for 20 years despite escalating electricity demand.
South Africa was faced by an electricity demand bursting at the seams of Eskom’s supply
capabilities.25 In addition, much of the expertise required to build new power stations having
been lost in the interim.
Political support
Given its high level of uncertainty, the scale, costs and duration the PBMR programme
required clear and strong political, strategic and financial support from key players. It was
only in the end of 2003 when the project came close to being cancelled26 altogether that the
government got fully involved in the project. Former president Thabo Mbeki personally
stepped in and decided that the project should proceed and should become “fully funded”
with the help of the government. Mr Mbeki asked Alec Erwin, then Minister of Trade and
Industry27, to get involved in the project and in February 2004 Jaco Kriek was requested by
Minister Alec Erwin, to participate in a government task team to review the options for the
PBMR. In May 2004 Jaco was asked by Alec Erwin to take over as the CEO of PBMR28.
While Thabo Mbeki and Alec Erwin were in office, the project seemed to enjoy strong
political support. As Regis Matzie29 explained, “...we had strong support from Thabo Mbeki
and Alec Erwin, who had a vision that this could place SA on the map and allow them to build
25 South Africa found itself in the middle of an electricity crisis which eventually lead to rolling national blackouts in 2005 and 2008. Refer to Patel, S. (2008). Whistling in the dark: Inside South Africa’s power crisis. Power Magazine Online. Retrieved December 1, 2011, from http://www.powermag.com/business/Whistling-in-the-dark-Inside-South-Africas-power-crisis_1488.html. 26 This was due to Eskom wanting to withdraw from the PBMR project, refer to the next section – The PBMR’s only client, for further details 27 Alec Erwin later became Minister of Department of Public Enterprises (DPE) 28 Jaco Kriek was initially seconded from IDC until December 2005 when he was appointed in a full time capacity. 29 Regis Matzie is a former Senior Vice-President and Chief Technology Officer of Westinghouse and represented Westinghouse on the PBMR board and Chairman of the technology and project delivery committee.
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capacity here [in South Africa]”30. Ms Phumzile Mlambo-Ngcuka, former Deputy President
of South Africa corroborated this support stating that President Thabo Mbeki took a very
active interest in the project and that South Africa is treating the “very ambitious, but very
important Pebble Bed Modular reactor project with a great deal of seriousness”31.
Thabo Mbeki’s motivation for supporting the PBMR project appears to have been his dream
of an ‘African Renaissance’32. The PBMR appears to have been viewed as a ‘Presidential
Project’ by anti-nuclear activist, Dominique Gilbert, Executive member of the Coalition
Against Nuclear Energy (South Africa):
“The country's [South Africa’s] nuclear agenda is now widely touted as a Presidential
Project of Thabo Mbeki and a handful of powerful and all the more autocratic
Ministers facing the end of their term of office amidst growing dissent from their own
ranks and hell-bent on establishing what they see as scientific prestige to the black-
ruled tip of Africa.” 33
However, even though Government took over responsibility for the project, doubts were
expressed by various cabinet members, trade union organisations and environmental groups
about the advisability of the project within the other priorities of the government and the
general antipathy towards nuclear technology at the time. Jaco reflected on the state of
political support for the project within the ruling party:
“What we didn’t realize was that there were only a few people within the ANC that
supported the project. People were forced into supporting the project, and this created
some resentment towards us. We should have done more to get broader political
leadership on board,”34
30 McKune, C. (2010). Pebble bed modular reactor demonstration plant is funded but not constructed. South African Journal of Science, 106(5/6), 5-7. doi: 10.4102/sajs.v106i5/6.287. 31 Quoted from Ferreira, T. (2005). Planning Reactors for Africa. Information System on Occupational Exposure. Retrieved December 1, 2011, from www.isoe-network.net/index.php/component/.../224-isoenews8.html. 32 According to Terry Wynn, member of the European Parliament from 1989 to 2006 and chair of the Forum for the Future of Nuclear Energy as expressed on his website (http://www.terrywynn.com/Nuclear/South%20Africa.htm) 33 Gilbert, D. (2008). Nuclear Expansion From South Africa into the Rest of Africa. Nuclear Monitor, (No. 673), 4-6. 34 Jaco Kriek, ex-CEO of PBMR, interviewed on Thursday 03 November 2011
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This situation was exacerbated by government’s relative inexperience in dealing with projects
of this nature. Jaco suggested that:
“Government really didn’t know what they were getting themselves into when they took
over the PBMR Company in 2004... there was a lack of understanding of the required
support for a new nuclear technology development ... In retrospect, if the government is
not ready, in terms of the support and understanding of what is required, then don’t
even try something like this. You need strong government support, and you need a
government that understands what they are getting themselves into. No reactor in the
world is designed without government funding, not even the new Westinghouse AP1000
or the Areva EPR.”35
The PBMR’s only Client
Eskom initiated the PBMR Project, and brought the PBMR technology to South Africa. They
attracted investors like the IDC and BNFL to the project. “It was originally envisaged that
Eskom would be the PBMR's anchor customer, with a possible purchase of up to 24 reactors
as part of the country's expansion of its electricity generation capacity”36. The first
demonstration plant would also have been located on Eskom’s Koeberg nuclear site.
Despite the seemingly reassuring early acts of support, Eskom became reluctant to be
involved in the project. The major change seemed to come in 2002 when Exelon withdrew as
an investor. As a result, a concerned Eskom board asked independent auditors to assess the
project's financial viability and - as confidential documents reveal, the auditors advised the
utility to ditch the PBMR project37. Jan de Beer, then Eskom CEO, wanted to pull out of the
PBMR project, and in December 2003 the Eskom board voted to do just that38. However, in
February 2004, in a meeting between Eskom, the IDC, and Government, Eskom were
35 Jaco Kriek, ex-CEO of PBMR, interviewed on Thursday 03 November 2011 36 Hogan, B. (2010a). Address by the Minister of Public Enterprises, Barbara Hogan, To the Nation Assembly, on the Pebble Bed Modular Reactor. Pretoria. Retrieved from http://www.dpe.gov.za/news-971 37 According to a Carte Blanche programme aired on 8 June 2008 - Fasher, B. (2008). Carte Blanche - Pebble Bed. M-net. Retrieved from http://beta.mnet.co.za/carteblanche/Article.aspx?Id=3516&ShowId=1. 38 According to Steve Lennon - the Eskom Managing Director for Corporate Services at the time, this decision was related to a similar (to the reason for Exelon’s withdrawal) shift in strategic focus: “it’s no longer part of our business model to develop new technologies” – McKune, C. (2010). Pebble bed modular reactor demonstration plant is funded but not constructed. South African Journal of Science, 106(5/6), 5-7. doi: 10.4102/sajs.v106i5/6.287
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pressured by President Mbeki to remain involved in the PBMR project as the eventual client
with government taking over as project sponsor. Even though Eskom agreed, their support for
the project never seems to have recovered39. Jaco explained the predicament:
“Eskom had a total lack of interest in supporting PBMR after December 2003, yet they
still had to be the customer and nuclear license applicant for the PBMR demonstration
plant... the project was doomed with no sponsor... It was only later during 2008 that it
became clear how much Eskom top management resisted the participation in PBMR.”40
Strategic Decisions
Due to the reluctance of Eskom to be a committed customer as well as their own funding
constraints, the decision was made to fund the entire development, construction and delivery
of the first Demonstration Power Plant (DPP) on its own balance sheet41. This decision was
contrary to the norm for nuclear technology development and plant construction adopted by
existing nuclear vendors around the world where the client funds the construction and
commissioning costs42.
This decision had two major effects on the project as a whole. Firstly, it resulted in the PBMR
Company having to carry the enormous cost of the capital expenditure required to construct
the DPP on its balance sheet – making it harder to motivate for additional funding as a result
of the much larger amount of funding required.
Finally, because of the need for large procurement, finance and human resource departments
as well as the Engineering Procurement and Construction Management (EPCM) contractors
required to construct a nuclear power plant, the PBMR Company became a large and
cumbersome organization that was expensive and time consuming to organize and manage.
39 (Thomas, S. (2009, April 1). PBMR: Hot or Not. Nuclear Engineering International. Retrieved from http://www.neimagazine.com/story.asp?storyCode=2052590.) 40 Jaco Kriek, ex-CEO of PBMR, interviewed on Thursday 03 November 2011 41 This decision seems to have been made as a result of pressure from government to handle the financial risk of the project. According to Alec Erwin “...it was a financial risk for Eskom and that's why we moved it off the Eskom balance sheet ... for government it has all the risks of any large scale development project. Those risks mitigate over time as partners come in...” – As quoted from Carte Blanche programme aired on 8 June 2008, Fasher, B. (2008). Carte Blanche - Pebble Bed. M-net. Retrieved from http://beta.mnet.co.za/carteblanche/Article.aspx?Id=3516&ShowId=1. 42 Examples include the development of the new Westinghouse AP1000, Areva EPR nuclear plants or the US Department of Energy (DoE) Next Generation Nuclear Project (NGNP) – all innovative nuclear technology development projects.
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Technical Scope Creep
As a result of commercial requirements requested by Eskom and other stakeholders, the
decision43 was made that the DPP – initially intended as a ‘proof of concept’, would become
the ‘first of a fleet’ and would be commercially operated from the beginning. This placed
tremendous upward pressure on the reactor size44 as well as the power conversion
technology45 used.
The original concept as of February 1998 was for a 268MWt configuration. Then in October
2001 this was ramped up to 310MWt and eventually the technical team conceived a plant that
could deliver the maximum possible power output of 400MWt. The output was determined
by the maximum reactor size that could be manufactured by the most advanced international
nuclear manufacturers. This design, dubbed the DDP400, would also make use of a direct
cycle46 power conversion technology – something that no one in the world had successfully
licensed or operated at this scale.
The decision to go with the DPP400 design was approved by the PBMR Board on 27 May
2004 – the very last board meeting before Jaco Kriek joined as CEO. On arrival as CEO, Jaco
was assured by Johan Slabber47 that they would be licensed and ready for construction by
2007. Jaco Kriek elaborated:
“A lot of People [like Dave Nicholls48 and Johan Slabber] were so passionate about
it, they underestimated the risks involved, the challenges of building any nuclear
plant, never mind a first-of-a-kind ... I think there was both ignorance and passion...
they were either misleading us or dreaming... They were pushing the envelope of
43 Jaco Kriek: “the decision to go with the direct cycle was made based on the wishes of Eskom and the other shareholders.” – Interview, November 03 2011 44 The reactor size determines the amount of electric power that can be generated by the plant. 45 The power conversion technology is used to transfer heat generated in the reactor to electricity. The major commercial concern with the choice of this technology comes down to the differences in conversion efficiency with which the heat can be converted to electricity. Especially since this is the source of major losses in thermal energy. 46 This power conversion technology is also referred to as the Brayton Cycle and uses the helium gas that runs through the reactor to drive the turbine directly. The major advantage of this technology is that is gains efficiency by eliminating the steam cycle of indirect power conversion cycles. It can operate at efficiencies of up to 48%, more than double that of an indirect cycle. 47 Johan Slabber was one of the original founders of the PBMR project and was Chief Technology Officer at PBMR. 48 Dave Nicholls was CEO of the PBMR Company until 2004
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technological boundaries – lots of them, and we were trying to do everything at the
same time... they thought it’s not good enough if it’s not a challenge... so they took on
possibly the most difficult challenge of any. They wanted to build the best thing on this
planet. They ended up having loads of fun [trying to solve these challenges], but with
hindsight it was probably just impossible in the timeframe allowed and the available
funding.”49
This decision – particularly regarding the direct cycle technology, which was largely driven
by Dieter Matzner50, Dave Nicholls and Johan Slabber was not unanimously supported by all
within the PBMR Company. Jaco explained:
“Back then Dave Nicholls and Dieter Matzner had the real weight in the technology
decision making ... we did not have the right technical leaders for when decisions had
to be made ... However, there were a lot of conflicting arguments about the choice of
the power conversion cycle ... The continuous argument about the choice of
configuration always created a divide within PBMR technical staff and with the
Eskom Client Office”51
The decision also caused many technical, licensing and manufacturing challenges in addition
to the challenges already faced on the German design52. Although the PBMR DPP400 design
allegedly53 fixed many of these problems, it created many more technical (and licensing)
challenges, including (but not limited to) the stability of the central column, material
49 Jaco Kriek, ex-CEO of PBMR, interviewed on Thursday 03 November 2011 50 Dieter Matzner was Managing Director: Plant Engineering of the PBMR until 2008. 51 Jaco Kriek, ex-CEO of PBMR, interviewed on Thursday 03 November 2011 52 According to Steve Thomas, the original German design had some technical challenges of its own: “Clearly there were technical problems, in the five years from going critical to being closed, it generated next to no electricity and had numerous problems” - McKune, C. (2010). Pebble bed modular reactor demonstration plant is funded but not constructed. South African Journal of Science, 106(5/6), 5-7. doi: 10.4102/sajs.v106i5/6.287. 53 As an example, one such issue was the fact that some of the pebbles had broken in the German reactor. However, according to Jaco Kriek “we have changed the design so that in our reactor you don’t have any components ... moving components ... that can break the pebbles” – As quoted from Carte Blanche programme aired on 8 June 2008, Fasher, B. (2008). Carte Blanche - Pebble Bed. M-net. Retrieved from http://beta.mnet.co.za/carteblanche/Article.aspx?Id=3516&ShowId=1.
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characteristics at the high operating temperatures54, as well as the effect and characteristics of
dust generated within the system.
However, not all key stakeholders seem to have been aware of or fully appreciated the level
of technological innovation, novelty and risks that were involved in the DPP400 design. As
Alec Erwin stressed on Carte Blanche on 8th of June 2008 when defending his confidence in
the project:
"I mean look, this has been assessed by international scientists and all sorts of other
people. The risks are understood and known... it's not experimental. The technology
has been operated in Germany for a number of years. It is not experimental".
South Africa’s heavy engineering sector was also relatively weak and had no experience in
manufacturing the type of systems required for the PBMR designs – particularly within the
nuclear regulatory environment. This resulted in lots of systems having to be manufactured
overseas and imported, resulting in higher costs, as well as difficulties in meeting
government’s localization objectives. Even experienced international manufacturers - such as
ENSA and Mitsubishi Heavy Industries that were awarded contracts for the design and
manufacturing of some of the more difficult parts, ran into severe technical difficulties.
Many of these challenges seemed to have been known at the time when these decisions were
made yet there appears to have been a reluctance to talk about them.
“I think there was a fear to share some of the technical challenges ... people were
withholding information ... there were gaps in the design, but no one came forward
with it. People were too protective of the technology.... You always got the feeling that
they would never bring a technical issue to EXCO in fear of scaring people away from
supporting their technology... Gideon Greyvenstein55 had a much more transparent
approach... Maybe if Gideon had been there earlier it would have made a difference
in the end – but it was too late.”56
54 The 400MWt design operated at temperatures of around 950 degrees Celsius as opposed to 750 degrees typical of a 200MWt configuration. 55 Gideon Greyvenstein was appointed General Manager: Engineering in 2008 56 Jaco Kriek, ex-CEO of PBMR, interviewed on Thursday 03 November 2011
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Even Regis Matzie, the Westinghouse representative and chairman of the board’s technical
committee remained silent about the risks and technical difficulties that they would face with
this configuration. When PBMR did a full review of the technology configuration in 2008,
Jaco was shown a 30 year old report by an ex-Westinghouse employee - on the original
German design that highlighted all of the technical issues that they would face. Yet
Westinghouse had sat on the report without disclosing any of its details. Westinghouse may
also have had another agenda. It was competing with the leading French nuclear company
Areva for lucrative contracts to supply South Africa with light water reactors as part of South
Africa’s so called new build programme57 and stood to receive the rights to the PBMR
Intellectual Property (IP) in the event that South Africa stopped developing it. Jaco explained:
“with Westinghouse as a shareholder and the chairman of the board’s technical
committee, we had heavily relied on them as technical nuclear experts.... you would
have thought that that would be our fall-back [against being deceived]... yes, maybe
we got lulled into a false sense of security ... The role of Westinghouse was in
retrospect, very disappointing ... Westinghouse contributed little to assist with the
strategic and technology decisions of PBMR ...many questions could be asked about
Westinghouse’s motives... They were not committed financially to the project, so they
were just too happy to sit back and watch as everything unfolded. They had no
exposure to the risk”58.
Australian Nuclear Science and Technology Organisation CEO, Adi Paterson59 said he
believed the programme “should have had a more conservative design baseline” 60. Paterson
further stated:
“With the benefit of hindsight the Chinese approach61 seems more conservative and
achievable. I do believe that the SA design62 could have been achieved but that would
have required a committed client and funding for the lifecycle of the project.”
57 This forms part of Eskom’s bigger new build programme with plans to build up to 20GW new nuclear generation capacity in the next 20 years. 58 Jaco Kriek, ex-CEO of PBMR, interviewed on Thursday 03 November 2011 59 He was previously a Deputy Director General at the Department of Science and Technology and a PBMR board member from May 2007 to December 2008 60 Quoted from the McKune, C. (2010). Pebble bed modular reactor demonstration plant is funded but not constructed. South African Journal of Science, 106(5/6), 5-7. doi: 10.4102/sajs.v106i5/6.287.
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The Growth Phase - Building a new Organization
Jaco’s first order of business after taking over the CEO was to secure more stable funding for
the project. This, he managed to achieve by November 2005, with the approval of a R6 billion
funding grant63 from the South African government as part of the government’s medium term
expenditure framework which secured funds for three years64. The funds were approved under
two conditions, namely, that PBMR needed to attract additional private investment and find
an international client to which they could supply plants once the technology had been
developed.
In addition to having to design the PBMR technology, develop a viable business model for
long term sustainability, facilitate the negotiations between Eskom, Government, IDC and
Westinghouse, finalise the shareholder's agreement and maintaining stakeholder relations at
senior level, locally and internationally, Jaco was also responsible for building the company
and putting proper structures and systems in place at PBMR.
The policies and procedures in place at the time were entirely modelled on the legacy Eskom
systems that were designed for a massive, state owned utility, and were excessively
cumbersome and resource intensive to implement. In 2004, the PBMR organization was still a
small research project with around 100 people working on it – all on monthly contracts with
no surety of where the next month’s pay was going to come from. As Jaco recalls;
“The corporate structures and systems, and lack of corporate governance were not
adequate for a stand-alone nuclear company... we had to fix up and build an
61 The Chinese approach involved designing and building a much smaller 10MWt indirect cycle demonstration reactor as a test bed for validation of fundamentals of reactor performance and safety. Construction on the HTR-10 as it is called started in 2000 with operation and testing in 2003. Based on this reactor a larger plant called the HTR-PM consisting of two 200MWe pebble bed reactor has been approved with construction started in September 2008 Yuliang, S. (2011). HTR-PM Project Status and Test Program. Fuel. INET/ Tsinghua University. Retrieved from http://cleantechnica.com/2008/07/03/chinas-second-pebble-bed-reactor-steam-plant-worlds-third-commercial-htgr/. 62 Regis Matzie provided a possible explanation for the more ambitious approach: “South Africans have had an attitude of innovation, developed over the apartheid years – a confidence that they could develop technology like this and take it to the market” - McKune, C. (2010). Pebble bed modular reactor demonstration plant is funded but not constructed. South African Journal of Science, 106(5/6), 5-7. doi: 10.4102/sajs.v106i5/6.287. 63 Intended to cover 30% of the R18 billion estimated at the time for delivering the DPP400 64 According to Shadow Minister of Public Enterprises, Manie van Dyk these allocations should have been reviewed annually pending satisfactory progress. Yet despite the fact that there was no evidence of progress these funds kept being transferred. - McKune, C. (2010). Pebble bed modular reactor demonstration plant is funded but not constructed. South African Journal of Science, 106(5/6), 5-7. doi: 10.4102/sajs.v106i5/6.287.
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organization with sufficient systems, processes and procedures within a nuclear safety
culture while at the same time designing, licensing, marketing, manufacturing
components and ultimately constructing the PBMR demonstration plant”65
In September 2005, the first full time employee contracts were issued. This would signal the
start of tremendous growth within the organization. From a company of around 100
temporary employees in 2005, the company reached a peak in 2008 of over 1000 full time and
contract employees. The PBMR Company became a “nuclear vendor company” with the
purpose of designing and delivering a nuclear power plant. The establishment of the
corporate infrastructure within the legal, regulatory and practical requirements of a “nuclear
vendor” became a very large undertaking in its own right and far outstripped the effort and
cost conceived by the initial project team.
Organizational Structures
As a result of the chosen strategic offering of a full turnkey project for the delivery of the
PBMR DPP400 to Eskom as well as promised start of construction to be as early as 2007, the
organization was forced to grow very big, very quickly in order to gear up for going to site.
This included placing orders for and funding items with long lead times66; appointing
engineering, procurement, construction and management (EPCM) contractors67, and carrying
the full cost and risk of these appointments and contracts. In addition they hired large
numbers of people for the procurement, finance and human resource departments in order to
be able to deal with all the requirement of buying supplies, hiring workers etc. Jaco
commented:
“Lots of effort went into building the organization that would have perhaps been better
spent on designing the reactor, finding willing clients, and building support within key
65 Quoted from an interview with Jaco Kriek on 3rd of November 2011 66 These items included the reactor pressure vessel manufactured in Spain (cost of R268-million), the helium turbine manufactured by Japan's Mitsubishi Heavy Industries (cost of R503-million) and the carbon reflector blocks from Germany’s SGL Carbon (cost of R256.8-million). 67 A major EPCM contract was placed with Murray & Roberts SNC-Lavalin Nuclear (Pty) Ltd. (MRSLN) to the value of approximately R1.9 billion.
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stakeholder groups. The growth in the size of PBMR Company was too fast and the
scale and complexity of the project became unsustainable”68
Fixing the culture
Jaco and his management team also expended a lot of effort trying to develop a healthy
culture within the organization. At the time there were many silos – particularly between the
old and the new staff, management and technical staff, as well as within the technical
departments. Jaco explained on particular issue faced:
“...There were very strong personalities, almost dictator-like guys in the Company,
many of whom were seen as key technical people - they were almost seen as
irreplaceable, until they messed with the regulator... [In addition] The organization
became very diverse, with people from across the world and from all sorts of
backgrounds in one organization... We needed to create one, unique culture. A PBMR
culture with an improved safety culture, communication, tolerance, and transparency
regarding ones abilities to raise concerns – especially where they influenced the
design”
A culture of blame and non-delivery had plagued the organization. This culture was so
evident that even people outside the organization noticed it. As Dr James Larkin69
commented, “There is not a culture of accountability. There weren't people being kicked in
the ass, there weren't people who were... you know: they missed a deadline - no
consequence.”
Many initiatives were put in place to try and eradicate these negative cultural traits and build
a unified, proactive culture. These included safety and diversity training, cultural workshops,
visual management and even performance workshops presented by the international firm
Senn Delaney at a cost R10 million.
68 Quoted from an interview with Jaco Kriek on 3rd of November 2011 69 Director: Radiation & Health Physics Units, Wits University interviewed on 31 October 2010 by Carte Blanche
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Developing the necessary skills
The PBMR organization also had to develop and attract the necessary skills to design, analyse
and build the PBMR technology. They hired experts from all over the world, both as
permanent employees and on contracts. PBMR also launched a significant training and
development programme through many universities to educate a cadre of young professionals
who could become nuclear scientists, engineers, technicians and operators. Jaco reflected on
some of the successes and failures in this regard:
“...the lack of skills was only a temporary problem. Over the years we had become
experts. Not only were we teamed up with just about every major university in the
country, but our employees were speaking at major conferences around the world ... In
the end I think we had the skills ... we were very sophisticated in analysis, our
fundamental mistakes came in the design, the process of licensing and the relationship
with Eskom.”70
Troubles with the Regulator – Stop-Work Order
In South Africa, the National Nuclear Regulator (NNR)71 was “...a newly-founded regulatory
body with no experience of licensing a reactor, much less a first-of-a-kind design”72, “the
regulator wasn’t ready”73 to license such a new technology.
With the regulatory procedures in place at the time Eskom - as the eventual client of the first
PBMR plant, was appointed as the Nuclear License applicant rather than the PBMR
Company. This licensing framework was again contradictory to most international licensing
frameworks used74. As a result, PBMR had to relay all licensing related documentation and
70 Quoted from an interview with Jaco Kriek on 3rd of November 2011 71 The NNR is established and governed in terms of the National Nuclear Regulator Act, Act 47 of 1999. For more information refer to the NNR website (www.nnr.co.za). Despite South Africa’s nuclear history, the NNR had not been involved in the licensing of the construction of the Koeberg nuclear power station located in Cape Town, and now only maintains the operation and maintenance licenses of the reactor - a Pressurized Water Reactor (PWR) design which is extensively licensed and used worldwide. 72 Steve Thoma, Professor of Energy Policy, PSIRU, Business School, University of Greenwich as quoted from Thomas, S. (2009, April 1). PBMR: Hot or Not. Nuclear Engineering International. Retrieved from http://www.neimagazine.com/story.asp?storyCode=2052590. 73 Regis Matzie as quoted in the McKune, C. (2010). Pebble bed modular reactor demonstration plant is funded but not constructed. South African Journal of Science, 106(5/6), 5-7. doi: 10.4102/sajs.v106i5/6.287. 74 In general, the design is licensed separately from the construction and operation license. An engineering design company functioning as a design authority will usually directly license the design with the client or
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communication through Eskom which would first review and approve everything before
submitting it to the NNR. In fact, PBMR staff were not allowed to communicate directly with
the regulator – not even for clarification on licensing issues. This resulted in a breakdown in
communication and added significantly to the uncertainty of the licensing process causing
severe delays and many issues. Jaco explained, the situation:
“we couldn’t speak directly with the regulator and Eskom didn’t always realize how
far we were ... It was never going to work with Eskom as the middle man ... they were
reluctant to be involved and it became apparent during the course of the project that
both Eskom and the NNR were also seriously under-staffed and under-funded. ... this
led to serious frustrations and delays within the PBMR design team”75
Besides the resulting uncertainties and communication difficulties there also seemed to have
been a lack of respect from certain PBMR personnel for the licensing process. At the same
time the PBMR personnel on the whole - with some notable exceptions, had no previous
experience in dealing with a nuclear regulator and the stringent requirements that are
imposed. The design engineers that had formerly operated in the Armscor environment in
particular were unaccustomed to these procedures. Jaco explained:
“They thought they could just build it and then test it later. But nuclear doesn’t work
like that, it’s not like the military industry, the regulator would never allow it ... our
guys felt they could just carry on... I also think there was not enough respect for the
regulator... our guys were in a hurry, they wanted to push things... ”
Due to the very long lead times for the manufacture of the large nuclear components and the
limited available manufacturing capacity internationally as a result of the ‘nuclear
renaissance’, PBMR decided to commence with the early manufacture of some of the
components despite the fact that a nuclear licence had not been awarded by the NNR. Part of
the regulatory requirements state that the NNR shall be given the opportunity for inspection
during manufacturing of nuclear safety related equipment.
operator of the actual nuclear plant then applying for a construction and operating license based on the already licensed design. 75 Quoted from an interview with Jaco Kriek on 3rd of November 2011
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However, PBMR never afforded the regulator this opportunity which led to a breach of
procedures and resulted in a Stop-Work Order (SWO) from the NNR being issued in October
200676. It would not be till January 2008, after extensive improvement of PBMR and Eskom
Client Office processes to ensure compliance to regulatory guidelines that the SWO would be
lifted. The long delay was mostly due to the fact that despite the October 2006 SWO, Dieter
ordered the continuation of manufacturing - again without following due procedure resulting
in a second SWO77. This second breach, in the end cost Dieter his job. Jaco reflected on this
period:
“The first stop-work order can partly be attributed to the bad communication... there
were no proper guidelines from the regulator regarding when and where they wanted to
be involved in the process ...Manufacturing of nuclear components started too soon ...
the design was not sufficiently mature and we didn’t yet have the full support of the
NNR or the design and manufacturing code...with hindsight, it was a good thing for all
of us. It’s to be expected to make mistakes, and everyone made mistakes and learned
from them, especially regarding where we stood with the regulator ... it helped us
mature a lot... The second work stop order however looked intentional. I’m not sure of
it, but it looked that way. And this time all hell broke loose... they didn’t realize that the
regulator actually sat just below God.”78
Missing deadlines and a dwindling public support
There is a tendency for mega-projects to be ‘over-sold’ in an attempt to garner support and
obtain project approval. The PBMR project was no exception. As Jaco Kriek explained, “the
management team and specifically [Dave Nicholls] the PBMR CEO from 1999 to 2004,
created huge expectations within Government”79 regarding the PBMR technology, the state
76 Neither Eskom as the license applicant, nor the NNR disclosed the SWO. News of the SWO seemed to have been leaked out with the first reference emerging from a Nucleonics Week article published on June 7th 2007. Neither Eskom nor PBMR wanted to comment, each refereeing questions to the other – Gosling, M. (2007). Safety snag hits nuke reactor plans. IOL.co.za. Retrieved December 1, 2011, from http://www.iol.co.za/news/south-africa/safety-snag-hits-nuke-reactor-plans-1.358065?ot=inmsa.ArticlePrintPageLayout.ot. 77 No reports seem to be available in the media on this second SWO. 78 Quoted from an interview with Jaco Kriek on 3rd of November 2011 79 Jaco Kriek as quoted for the November 2011 interview
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of maturity and progress of the design and licensing efforts as well as the schedule and cost
requirements. Regis Matzie commented on the early schedule estimations:
“This was an unrealistic schedule for a new technology in a country that had never
developed and licensed a nuclear plant from the start. The technology wasn't ready;
the regulator [NNR] wasn't ready, and PBMR was still in the process of building a
company.”
In 1998, estimates were put forward that it would take five years to build the first
demonstration plant at R2 billion – that would mean the first reactor would be ready by 2003.
In 2004 when Jaco came on, that had shifted to 2007, and by 2008 estimates were for
completion by 2015 at a cost of R21.9 billion. Jaco maintains that the problem was not really
that they were that far over budget or schedule, but that the original forecasts were just so far
from realistic. Jaco explained:
"In the early years, it was a bit of thumb sucking I guess, because as a company and
as a country we didn't necessarily know what awaited us, in terms of licensing the new
technology - a first of a kind technology... the complexity of the project, both
technically and in terms of licensing, was underestimated and not at all appreciated
"80
This inability to meet the milestones and expectations created by the project would result in
many problems as many stakeholders, particularly the South African public; government and
potential shareholders started to lose confidence in the projects, and called in to question the
company’s integrity81 and ability to deliver anything at all. This also created a general
reluctance to invest in the project and made it very difficult to build pride and trust amongst
the South African people, and this was vital, particularly in the already fickle public
perception of nuclear energy. Jaco explained:
80 Quoted from an interview with Jaco Kriek on 3rd of November 2011 81 Martin Welz, editor of Noseweek Magazine: "The initial information we get suggests really large scale dishonesty in terms of communication with the public. And that immediately in our field of business raises the question: Why?' Why are they attempting to mislead the public? And then again, who is profiting?” – As quoted from Carte Blanche programme aired on 8 June 2008, Fasher, B. (2008). Carte Blanche - Pebble Bed. M-net. Retrieved from http://beta.mnet.co.za/carteblanche/Article.aspx?Id=3516&ShowId=1.
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“You can only get public pride with progress. If we could put down a reactor, then it
would give South Africans something to be proud of... we tried to influence public
perception... we used high profile people on radio and TV, we worked through
universities. I even had the idea of bringing Patrick Moore to South Africa to build the
image of Nuclear. But even with that, we were always hitting our head against the
whole nuclear thing. Lots of people are sceptical, and especially so given South Africa’s
nuclear past.”82
The beginning of the end
By 2008, PBMR had not yet been able to secure any further investment from either
government or shareholders. They were also not yet even close to ready to start construction
as they had still not been able to obtain the necessary nuclear license from the NNR. 2008
also saw the onslaught of the greatest economic recession in generations as well as major
change in the political leadership of South Africa.
On the 22nd of September of that year, Thabo Mbeki, and all his supporters – including Alec
Erwin, were ousted from government. Now, not only did PBMR have to compete for funding
in the midst of a major economic crisis but they had also lost both of their main supporters in
government. It very quickly became clear from Government and Eskom, that Eskom was now
unwilling to be a customer for PBMR. This placed a huge question mark over the future of
the commercialisation of the PBMR project.
The possibility of a new beginning
It was clear that the company needed to change its offering and strategy. With Eskom no
longer a customer, and the Next Generation Nuclear Project (NGNP)83 being the only source
of potential funding, they decided in May 2009 to go after the process heat market instead. In
order to meet the requirements and needs of the process heat market, as well as reducing the
technical and licensing risk, they decided to go back to a 200 MWt indirect cycle technology
82 Quoted from an interview with Jaco Kriek on 3rd of November 2011 83 The NGNP is an American government (DoE) programme called the Next Generation Nuclear Plant. PBMR, together with a consortium consisting of Shaw and Westinghouse won a contract worth US$20 million in March 2010.
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configuration84. The new strategy would also involve changing the company structures and
offering into that of only a nuclear engineering design company. In order to achieve this they
entered into negotiations with the NNR to change the licensing framework and enable them to
act as design authority and directly apply for the nuclear design license.
Apart from the product offering, PBMR also had to downsize the company. With the new
strategy, they did not need all the people and overheads, and they were also faced with a
serious lack of funds from investors. The restructuring - which required almost 750 people to
be laid off, attracted serious resistance from several trade unions and needed approval from
the DPE. Various presentations starting in June 2009 were made to Minister Hogan, then
Minister of Public Enterprises, to propose the new strategy, including downsizing the
company and attracting new investors.
Additionally the PMBR Company was on a serious drive to attract new investors in the
project. As it became more and more likely that government would pull the plug finding new
investors became even more important. Many investors – both existing and new, had
indicated their interest in the project and willingness to invest further, but were hesitating to
get involved with no signed shareholders agreement. Jaco reflected on some of the
frustrations in trying to get the shareholders agreement past the DPE:
“Barbara Hogan seemed unwilling to make any decisions ...but then maybe she also
did not have the necessary clout within government. In the end, 5 years went by
without managing to get the DPE to sign the shareholders agreement... without a
shareholder’s agreement, no existing or new investors wanted to put a cent into the
project....”85
Unfortunately the shareholders agreement was never signed and the decision to accept the
new strategy was eventually only made by the DPE in September 2010 - 15 months after the
new strategy was put forward for approval, when it was too late to implement. By then the
84 This is also referred to as a Rankine Cycle and makes use of the heat generated in the reactor to create steam which in turn in turn drives the turbine. It is a widely used power conversion technology. 85 Quoted from an interview with Jaco Kriek on 3rd of November 2011
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PBMR company had effectively run out of funds86, and even the NGNP contract that had
been awarded in March 2010, was withdrawn as a result.
Although Barbara Hogan had claimed that “Government is not in a position to further fund
[the project] on the scale it was done before” as early as the 15th of April 201087, it was only
on the 16th of September 2010 that she officially announced88 in parliament that
“Government, after careful deliberation, analysis and review, and mindful of the fiscal
constraints in these hard economic times, has had to make a decision to no longer invest in
this [PBMR] project”.
The reasons for this decision were made “against the following sobering realities:
The PBMR has not been able to secure an anchor customer, or another investment
partner
Further investment in the project could well be in excess of an additional ZAR30
billion
The project has been consistently missing deadlines, with the construction of the first
demonstration model delayed further and further into the future.
The opportunity afforded to PBMR to participate in the USA’s Next Generation
Nuclear Plant (NGNP) programme as part of the Westinghouse consortium was lost
in May this year when Westinghouse withdrew from the programme.
Should South Africa embark on a nuclear build programme in the near future, it will
not be using Pebble Bed Technology, which is a Generation IV Nuclear Technology
(i.e. technologies that are still primarily in the Research and Design Phase) but would
have to consider options in Generations II and III.
Finally, the severity of the current economic downturn, and the strains that it has
placed on the fiscus, as well as the nature and scale of Government’s current
developmental priorities, has forced Government to reprioritise its spending
86 This 15 month delay resulted in the PMBR Company having to pay labour costs for all 900 employees for a year while only around 200 were needed to implement the new strategy effectively shaving 3 years of the time that the funds could have lasted the required staff compliment. 87 Hogan, B. (2010b). Minister for Public Enterprises Media Briefing before Budget Speech. Parliamentary Monitoring Group. Retrieved from http://www.pmg.org.za/briefing/20100415-minister-public-enterprises-media-briefing-budget-speech. 88 Hogan, B. (2010a). Address by the Minister of Public Enterprises, Barbara Hogan, To the Nation Assembly, on the Pebble Bed Modular Reactor. Pretoria. Retrieved from http://www.dpe.gov.za/news-971
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obligations and therefore, of necessity, to make certain tough decisions. This being
one of them.”
This resulted in the PBMR project being “placed in a ‘care and maintenance mode' to protect
the intellectual property (IP) and the assets in PBMR”89. In the end, the project was reduced
to its current form with only nine staff members remaining on the project.
What if?
Jaco’s wry smile lingered. Perhaps it was not surprising that Barbara Hogan had failed to
mention the DPE’s dithering. He couldn’t help speculating, as he had done so many times
before, what could have been achieved if the DPE had not kept them on a string for so long,
effectively blocking any chance they had of getting new investors or pursuing the new
strategy so necessary to keep the NGNP contract and get new customers on board. If they had
signed the shareholders agreement and approved the new strategy sooner...
89 Quoted from Barbara Hogan’s speech to parliament.
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Exhibits
Exhibit A The PBMR technology’s early History
The following presents a chronological account of the early history90 of the PBMR
technology:
Late 1950s: The late Prof Robert Schulten started the development of the pebble bed reactor.
Schulten is recognized as the “father” of pebble bed technology. Spent a number of years
with BB Company (today ABB).
Early 1960s: Schulten and his team started the design of the AVR experimental reactor.
Schulten appointed as Head of FZJ (Forschungzentrum Jülich), a major research centre in
Jülich.
1963 – 1965: Construction and commissioning of AVR in Jülich. The AVR runs very
successfully for 22 years until 1989.
Early 1970s: Schulten and team start work on development of a 300MWe commercial
reactor, the THTR, based on research and operational results of AVR. A consortium known
as Hochtemperatur Reaktorbau (HRB) was formed between several of German utilities, to
build the THTR. The THTR was a first-of-its-kind production plant intended to demonstrate
the viability a different subsystem hardware designs, with specific emphasis on plant
availability and maintainability
1978: Start construction of THTR.
Later 70s: KWU (Siemens) starts design and development of Module reactor as a
commercial reactor, also based on pebble bed technology.
1985/1986: German Government orders ABB and Siemens to co-operate on pebble bed
technology. The company HTR (Hochtemperatur Reaktoren) is established with 50/50
shareholding between ABB and Siemens. All German pebble bed IP (intellectual property)
vests in HTR.
90 According to the PBMR website (http://www.pbmr.co.za/index.asp?Content=184)
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1986: THTR commissioned, starts generation of electrical power into German grid. The
Chernobyl disaster strikes in Russia, and the green movements in Germany demand closure of
all nuclear power stations in Germany.
1989: After only 3 years of operation, THTR is shut down. The AVR is also shut down.
Siemens Modul research development abandoned. This also signalled the end of
development work on pebble bed reactors in Germany.
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Exhibit B Benefits and Potential Markets for the PBMR technology.
The design was claimed to have several distinct advantages over conventional Pressurized
Water Reactors (PWRs) widely in use today – namely:
Smaller Modular design - The PBMRs smaller size reduces the burden on small and/or
developing countries - even opening up the market to large private companies, in that its
upfront capital costs would be more affordable and it would not require the large
sophisticated electrical grid networks required to handle the larger conventional reactors91. In
addition, its modular design allows for large parts of the plant to be pre-fabricated and
transported either by rail or barge, and for additional units to be added onto an existing plant
as demand increases.
Less water - The PBMR design requires much less water than larger plants making it suitable
for certain inland locations that would otherwise not have been viable for conventional
reactors92.
More applications - The PBMR would operate at higher temperatures and thermal
efficiencies resulting in more attractive economics as well as allowing the PBMR to find use
in other industrial process heat applications such as hydrogen production, water desalination,
petro-chemical applications, coal liquefaction, or oil-sands recovery93. The technology
allowed for a duel-configuration where one plant can be used for either electricity, process
heat or both, resulting in many commercial applications such as mines, aluminium smelters
and even refineries being able to address both their electricity and heat requirements from a
single plant.
Passive Safety - Due to the physics and design of the PBMR it is inherently safe – it shuts
down on its own with no human intervention. The reactor makes use predominantly of
passive safety systems rather than the add-on, active systems that have to be engineered onto
91 Macfarlane, A. (2010). Nuclear power: a panacea for future energy needs. Environment Magazine, 34-46.
And Hecht, M. (2008, November). The Nuclear Power Revolution: Modular High-Temperature Reactors Can Change the World. EIR Science & Technology, 46-53. 92 Because of the large amount of water required in conventional reactors, they generally have to be located at the coast. 93 Conventional nuclear designs do not operate at sufficient temperatures to allow its use for these applications.
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conventional reactors. Its smaller size also reduces the total quantity of radionuclide material
that could be released in the event of an accident.
Proliferation resistant - Because of the unique fuel pebbles and the low levels of enrichment
required, the PBMR design is also much more resistant to proliferation.
Potential target markets for the PBMR technology
The target markets between PBMR and conventional reactors differ. Conventional nuclear
reactors are only used to generate electricity whereas HTRs can be used forthe following
potential applications as well:
To generate electricity. The higher temperature output will lead to more efficient electrical
plants. Due to the fact that the electrical output of a PBMR reactor is smaller than
conventional reactors PBMRs would not compete with the large reactors but address different
markets and applications. Furthermore the size and modular design of the PBMR is an
affordable option for countries with smaller load demands or smaller electricity transmission
grids where decentralized power generation is required with the flexibility to expand as the
load demand grows.
To provide “process heat” – It is a non-polluting heat source for many industries (especially
chemical and petro-chemical industries) that require heat as part of their process. For
example it can replace the portion of the coal that is burnt by Sasol to generate heat and steam
in its process with non-polluting nuclear heat.
To provide high temperature steam for specialist applications such as “Enhanced Oil
Extraction” (EOE) employed in the oil sands of Alberta, Canada. Currently gas is burnt to
generate the steam which utilises one fossil fuel to extract another fossil fuel resulting in a
significant amount of carbon dioxide release into the atmosphere.
To generate hydrogen - as the technology develops and higher temperatures become feasible,
additional applications such as water-splitting to create oxygen and hydrogen become
possible. This is currently the only technology available that can provide future clean (CO2
free) transportation fuel.
Water desalination - PBMR had entered into discussions with the Department of Water
Affairs on this subject.
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Exhibit C Funding and Expenditure94
The following graph presents the total funding income and breakdown per investor on the
PBMR project.
The graph below indicates how the total funds allocated to the project were used.
94 These figures were obtained from the 2009/2010 PBMR annual report. To get a copy of the report go to the following link http://www.pbmr.com/index.asp?Content=250
South African Government, 7 423, 80%
Industrial Development Corporation, 457, 5%
Westinghouse Electric
Company LLC, 450, 5%
Eskom Holdings Limited, 817,
9%
Exelon, 102, 1%
Investment Source to Date (R'million)
Employees Compensation, 3,581 , 38%
Goods and Services, 1,243 ,
13%
Financial Costs, 190 , 2%
Deponstration Power Plant, 2 758 , 29%
Pilot Feul Plant, 980 , 11%
Other Transfers, 645 , 7%
Spending to Date (R'million)
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Exhibit D PBMR Timeline and Major Milestones
Sep 1998PBMR is established as a project in Centurion, funded by Eskom.
Jul 1999PBMR company is
stablished with Eskom and the IDC as shareholders.
Jun 2000BNFL becomes a
shareholder in the PBMR project
Aug 2000The US electricity utility PECO Energy becomes a
shareholder.
Oct 2001The design configuration is changed from 268MWt to
310Mwt
Apr 2002The US company Exelon withdraws as shareholder.
Dec 2003Eskom board vote to
withdraw from the project
Feb 2004SA Government take over responsibility for the PBMR
from Eskom
May 2004The design configuration is changed a second time to
400MWt
Aug 2004Mr Jaco Kriek is seconded to PBMR (Pty) Ltd to take
over as CEO.
Aug 2005First draft of the
shareholders’ agreement is signed ‐ not effective
pending certain conditions
Sep 2005PBMR introduces
permanent employment contracts for employees.
Nov 2005The South African
government approves R7.4 billion in funding
Mar 2006Westinghouse becomes an
investor in PBMR, previously held by BNFL.
Jun 2006Shareholders agreement lapses ‐ conditions not met
in time
Oct 2006The NNR places a Work Stop Order on the PBMR project for a breach in
procedures
Oct 2006The PBMR consortium lead by Westinghouse wins
contract for the first phase of the NGNP
Aug 2008PBMR signs an EPCM contract to Murray &
Roberts SNCLavalin Nuclear (Pty) Ltd (MRSLN).
Sep 2008Thabo Mbeki and his
supporters are ousted from the Government
Nov 2009SA Governmnet announces it is going to stop funding
the project
Mar 2010The PBMR consortium win the contract for the Phase 2
of the NGNP contract
Mar 2010Jaco Kriek resigns as CEO
May 2010Board accepts new strategy in an attempt to ensure
survival
Sep 2010Government approved decision to downscale
operations
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Exhibit E Jaco Kriek’s Background and Experience
Jaco Kriek, a finance Master form the University of Johannesburg joined the Industrial
Development Corporation (IDC) in February 1992 after having spent the first 5 years of his
career at KPMG. In 2000, Jaco was appointed Executive Vice President of the IDC and
played a key role in initiating Projects, business development and the re-engineering of the
IDC approach on projects, specifically related to project finance. In the position of Executive
Vice President, Jaco was responsible for all large Agricultural, Mining & Minerals,
Infrastructure, Chemicals, Oil and Gas projects.
During his time at the IDC, Jaco completed the Advanced Management Programme at
INSEAD, and was involved in several IDC projects such as the French AFIS criminal
fingerprint system for the South African Police Service, the Mozal Aluminium Smelter95,
Mossgas96, Iscor and Kumba. Jaco even assisted Prof. Ben Esty in writing the Mozal case
study for the Harvard Business School97.
95 Total Mozal smelter Project Investment totaledUS$2 billion 96 This was the proposed name given to a potential merger with Sasol and Engen 97 Jaco also lectured the Mozal Case Study at Harvard Business School to MBA students on an annual basis for 5 years from 2000 to 2004
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Exhibit F An overview of the nuclear industry in South Africa
South Africa has enjoyed a long and industrious history of nuclear development. Admittedly,
this history is marred by an era of nuclear weaponry development, however, South Africa was
also the first country in the world to voluntarily dismantle its nuclear weapons program as
part of the Non-proliferation Treaty (NPT), a move that has greatly restored trust in South
Africa as a peaceful nuclear development country. South Africa currently operates the only
nuclear power plant in Africa, the 1800MWe Koeberg reactor located in Cape Town, is also
the global market leader in the supply of radioisotopes for medical applications produced in
the Safari 1 research reactor in Pelindaba.
South Africa’s Nuclear History98
South Africa’s nuclear industry can be traced back to 1945 with the setup of the Uranium
Committee in response to requests from London and Washington regarding the supply of
uranium for their nuclear weapon programs. In 1961 South Africa established its first nuclear
research centre in Pelindaba that would also later house the countries first nuclear reactor –
the 20 Mega Watt Safari 1 reactor (the original design employed 93% highly enriched
uranium but was recently modified to use fuel enriched to only 19.5% - under the
internationally regarded safe enrichment level of 20%, below which its application is useless
for weaponry).
South Africa also designed and operated its own enrichment facility on the Pelindaba campus,
using enrichment techniques locally developed towards the end of the 1960s. At a time South
Africa actually operated two enrichment facilities, one low enrichment plant used to provide
fuel for the Koeberg nuclear reactor and the other producing highly enriched fuel to sustain
the Safari 1 and weaponry programs. The first highly enriched uranium was produced in
January 1987. However, South Africa subsequently closed the enrichment facility in 1990 as
part of the NPT.
98 Source: Campbell, K. (2011). SA marks twentieth anniversary of move from nuclear weapons to nonproliferation. Engineering News Online. Retrieved August 21, 2011, from http://www.engineeringnews.co.za/article/sa-marks-twentieth-anniversary-of-move-from-nuclear-weapons-to-non-proliferation-2011-07-08.
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South Africa started research in nuclear explosives in 1971 with a program that examined the
possibility of using Peaceful Nuclear Explosives (PNEs) in mining and construction projects.
At the time, the US and then Soviet Union were also exploring similar programmes with
Soviet Union actually using these PNEs on several industrial projects. The 1970s saw South
Africa under increasing isolation and international pressure as a result of its apartheid policies
and being faced with an increasing dangerous strategic situation. This resulting in 1976
highlighting the first full-scale nuclear device tests – although without any enriched uranium,
and the adoption of a formal nuclear weaponry program in 1977. 1977 also saw South Africa
develop an underground nuclear weapons test chamber at Vastrap in the Kalahari which was
eventually abandoned after intense international pressure. South Africa was however not
deterred and continued with the program resulting in the first nuclear weapon being produced
in 1982. In total the country produced six fully functional nuclear weapons before the
program was terminated and the weapons eventually dismantled by June 1991 under the
instruction of then president FW de Klerk, and South Africa officially joining the NPT in July
of the same year.
Koeberg, the only commercial nuclear power reactor currently in South Africa, started
operation in 1984 and runs to this day. The 1800MWe Pressurised Water Reactor (PWR) was
built be Framastome (now Areva) and is owned and operated by Eskom, the South African
state owned Utility. The decision to build the reactor, over conventional coal fired power
plants popular at the time was largely due to the inefficiencies of transporting coal the long
distances from the coal mines of Mapumalanga in the north east of the country.
South Africa’s nuclear energy future
According to the Carbon Monitoring for Action (CARMA) database, a part of the
Confronting Climate Change Initiative at the Washington-based Center for Global
Development, as cited in Grant (2007), Eskom was the second-highest carbon dioxide-
emitting power company in the world in 2007 emitting 214-million tons of carbon dioxide per
year. South Africa ranks eighth on the list of countries for the emissions produced by their
power sectors and is home to seven of the world’s top-30 carbon emitters. And this was
before the commissioning of two of the world’s largest coal fired power plants due to come
online in Limpopo and Mpumalanga in the near future. Currently nuclear power provides
around only 5% of the 40.5GWe total electricity production in South Africa, yet is one of the
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only viable sources of ‘clean’ base load energy with renewable such as wind and solar
currently only appropriate for supplementary electricity generation. However several plans
have been announced over the last five years to extend this as much as 25% by 2025. This is
in line with the general move of the South African government to curb carbon dioxide
emissions and break its current over reliance on coal as a form of energy. According to Dr
Rob Adams, president of the Nuclear Industry Association of South Africa (Niasa)
“investment in nuclear power would not only ease South Africa’s energy shortage, but would
also allow for significant job creation”99, another item high on the South African governments
current social agenda.
In 2006 the Environmental Impact Assessment (EIAs) was initiated for the Thyspunt,
Bantamsklip, and Duynefontein sites. In early 2007 Eskom announced its initial plan for what
it called the Nuclear-1 programme. The plan was to construct 20GWe (Giga-Watt electric) of
new nuclear capacity on five sites. This would contribute half of total new generation capacity
planned for 2025. However, in the end of 2008, Eskom announced that it would be
withdrawing from the tendering process for the first new plant citing a lack of finances as the
eventual reason.
The South African government revived the drive for nuclear energy as part of the country’s
energy mix through its Integrated Resource Plan (IRP) that caters for the production of
9600MWe in new nuclear capacity by 2030. And despite the recent nuclear crisis at the
Fukishma nuclear reactor in Japan, Energy Minister Dipuo Peters recently confirmed South
Africa’s committed to integrating nuclear power into the electricity generation portfolio,
albeit a cautious one.
99 McKenzie, J. (2011). Nuclear could ease energy shortage, create jobs – Adam. Engineering News Online. Retrieved August 21, 2011, from http://www.engineeringnews.co.za/article/nuclear-programme-could-ease-energy-shortage-create-jobs-adams-2011-06-01
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5 THE INSTRUCTORS GUIDE
Case Summary
The Pebble Bed Modular Reactor (PBMR) project is a technologically innovative mega-
nuclear project, based on an original German technology and transferred to South Africa in
the 1990s. In total, R9.244 billion had been invested in the projects of which R7.4 billion had
effectively been paid by the South African tax payers1. The project has since been stopped by
the South African government and much debate now surrounds the question of whether this
was a long overdue decision with the PBMR being nothing more than the pet project, or
whether the South African government has in fact done the people of south Africa a
disservice, and squandered a potentially attractive and lucrative opportunity.
The case is centred around the protagonist, Jaco Kriek – CEO of the PBMR Company from
2004 to 2010 and explores the life of the project, from its inception in 1999 to the care-and-
maintenance mode which it entered in 2010. The case looks at various individuals, events,
decisions, stakeholder interactions and other factors that led to the project being severely over
budget and behind schedule, and the management team being unable to attract any additional
investors or customers for the project.
The PBMR case study attempts to add to the material currently available on the PBMR
nuclear project in South Africa and to try to disseminate management lessons that can
hopefully be applied for the benefit of future mega-projects in general. The case is focused
entirely on the management processes, practices and principles applied by senior management
and executives in the execution of the PBMR project taking cognisance of the important
stakeholder interactions, decisions and context in which these were carried out. The aim is to
explore and deepen our understanding of the management practises that were applied in the
project and how they influenced the eventual outcome of the project.
1 Hogan, B. (2010b). Address by the Minister of Public Enterprises, Barbara Hogan, To the Nation Assembly, on the Pebble Bed Modular Reactor. Pretoria. Retrieved from http://www.dpe.gov.za/news-971
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Learning (pedagogical) Objectives
The case focuses on three major learning objectives, namely decision making and the effect
thereof on the manageability of the project as a whole; the importance of stakeholder
management; and lastly the case explores some of the dynamics of senior management
accountability and the precarious circumstances under which these senior managers often
have to manage these projects.
Decision making within mega-projects - To illustrate the impact of decision making in
mega-projects, how an information gap, often faced by decision makers in technically
innovative mega-project, can lead to the wrong decisions made at the wrong time, and
contribute to the significant complexity, cost, risk and uncertainty of mega-projects. And how
this ultimately effects the degree of manageability of these project, often creating
organizational inertia and leading to severe budget and schedule over runs or even failure.
Stakeholder Support & Capability - To explore the importance of stakeholder management,
support and expectations and on ensuring that the political, social and economic environment
within which mega-projects are attempted are ready and capable of supporting such an
undertaking.
Managerial complexity and accountability - To explore the nature of accountability of
senior managers and illustrate how management of mega-projects are often accountable to
other parties that effectively limits the autonomy of these managers. In addition this case
attempts to explore complexities and uncertainties in which these managers operate, and
questions the skills and experience needed by senior management in order to deal with them
effectively.
Suggested Assignment Questions
1 If you were managing this project, which decisions would you have made differently, and
why?
2 Who are the different stakeholders in the PBMR project? How well informed are they
regarding the critical elements of the project and what implications does this have for
effective management of the project?
3 Is Jaco Kriek ultimately accountable for the failure of the project, and why?
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Suggested Discussion Questions
The following notes are intended to guide the instructor through the teaching of the case and
are intended for a single two hour class. The assignment questions need to have been made
available to the students prior to the lecture for review and assessment.
The teaching session should begin with the focal point of the case, recapping the situation in
which Jaco Kriek finds himself. Particularly, it should be emphasised that he resigned as CEO
six months prior to the case kickoff. And that he is now in a position to think back and reflect
on the case with more objectivity. But that he is still worried about how the outcome of the
project might have tarnished his name and what affect that might have on his career going
forward.
To start the case discussion off, the instructor needs to bring to the students attention to some
of the critical points/events in the case, as well as start painting the picture of the effect that
the various complexities and uncertainties at play have on decision making. The following
question should guide the students through this process.
1 What are the major, critical decisions that were made in this project, and what
impact did they have on its outcome? What factors contributed to these decisions
and what could have been done differently in each instance? (30 – 45 minutes)
The instructor should begin this discussion by getting the students to list some of the critical
decisions in the case and direct the students to explain the reasoning behind their choices –
i.e. why was this particular decision so critical. It may help listing these on the board as they
may come up in discussion later on during the session. Although one can argue for the
importance of many decisions within the case, the most pertinent should centre on the
technical configuration chosen (increments in size of the reactor, choice of direct versus
indirect power conversion etc), the decision to both design and build the first reactor and the
early manufacturing of components and EPCM contracting.
For each of these decisions the instructor should guide the class through discussing the
reasoning/situation that led to that particular decision, as well as the impact of the particular
decision on the eventual outcome of the project. The following may be some typical
responses:
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Technical configuration chosen - There are two decisions that are pertinent here. Both are
equally relevant, but can be grouped together for the sake of this discussion. The two
decisions are the continual increment in reactor size up to the eventual maximum of 400MWt,
and the second is the decision to use the direct cycle power conversion technology. (10 – 15
minutes)
Both of these decisions had several impacts on the project as a whole, and the instructor
should get the students to list these. They may include:
It severely increased the risk and complexity of the design. This not only complicated the
design process, but also the licensing process.
It resulted in the components required to build the reactor being so large and complicated
that even the world’s leading nuclear component manufacturers ran into difficulties during
design and manufacturing.
The continual changing and shifting of the scope resulted in several iterations of the
project plan having to be re-drafted, and many of the technical designs having to be re-
done.
It increased the time and capital required, adding to the perception that the project was
missing deadlines and severely over budget, as well as making it harder to find suitable
investors and clients.
It caused a divide within the organization, particularly within the technical departments.
There were several factors that led to, or influenced, these decisions being made and the
instructor should direct the students to listing and discussing some of them. They may
include:
Commercial pressure exerted from the client and other stakeholders to change the design2
and the initial demonstration power plant from a ‘proof of concept’ to a ‘first of fleet’.
An information gap - defined as a disconnect between the decision makers and the
required technical information required to make those decisions, existed within the
project. Information gaps result either from a lack of the required information all together,
from the technical staff having the information but it not being available to the decision
2 Commercially, the direct cycle is more efficient than an indirect cycle power conversion configuration and the larger reactor size result in a greater electric power output.
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makers, or the decision makers having access to the information but not having the
necessary skills or experience to know what decision to make with it. In this particular
case, arguments can be made for all three.
Technical staff wanting to challenge the boundaries of the technology and create
something new. This resulted in the technical staff continually pushing for the greatest
possible challenge, and not being forthcoming with information that might have resulted
in a less risky (and challenging) technological configuration.
Key players and decision makers all came from environments where they were not used to
the strenuous regulatory requirements and control. They were also used to operating in the
old apartheid era where the government was willing to support projects no matter what, or
for how long it was required.
Design and build the first reactor – This refers to the decision for PBMR to both design and
build the first demonstration power plant. This is contrary to most nuclear development
models worldwide where the nuclear engineering company – with the support of government,
designs and licenses the technology, and a different company then constructs and operates the
eventual nuclear plant. (10 – 15 minutes)
This decision had several impacts on the project as a whole, and the instructor should get the
students to list these. They may include:
It resulted in the PBMR Company having to carry the enormous cost of the capital
expenditure required to construct the DPP on its balance sheet – making it harder to
motivate for additional funding as a result of the much larger amount of funding required.
As a result of this decision, Eskom became the middle man in the licensing process.
However, with Eskom’s reluctance to be involved in the project as a whole, it created
many communication difficulties and frustrations. Also, an argument can be made that
Eskom was also not suitably qualified to undertake such a complex licensing process.
Because of the need for large procurement, finance and human resource departments as
well as the Engineering Procurement and Construction Management (EPCM) contractors
required to construct a nuclear power plant, the PBMR Company became a large and
cumbersome organization that was expensive and time consuming to organize and
manage.
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There seems to be one major factor that led to or influenced this decision being made and the
instructor should direct the students to discuss it in a little more detail. There may be other
factors, however the case only point to this one, namely:
Pressure was exerted from the DPE to take the construction costs of the reactor off the
Eskom balance sheet to reduce Eskom’s financial risks. This factor should prompt the
question of whether the PBMR company was actually better suited to carry such financial
risks on its balance sheet, particularly given the fact that it is a new start-up company as
opposed to Eskom which at the time was the world’s fifth largest electricity utility
company and was also a public enterprise enjoying essentially the same government
support.
Early manufacturing components and EPCM contracting – Again there are two decisions
that are pertinent here. Both are equally relevant, but can be grouped together for the sake of
this discussion. The first decision is the early manufacturing of large long-lead components,
including the reactor pressure vessel manufactured in Spain (cost of R268-million), the
helium turbine manufactured by Japan's Mitsubishi Heavy Industries (cost of R503-million)
and the carbon reflector blocks from Germany’s SGL Carbon (cost of R256.8-million). The
second is the decision to appoint Murray & Roberts SNC-Lavalin Nuclear (Pty) Ltd.
(MRSLN) as EPCM contractors to the value of approximately R1.9 billion. (10 – 15 minutes)
Both of these decisions had several impacts on the project as a whole, and the instructor
should get the students to list these. They may include:
In total, R2 758 million was spent on the DPP in its various configurations (See Exhibit 3,
Figure 2), without anything to show for it. This amounts to close to a third of the total
allocated project funds, and could have significantly extended the life of the project.
The decision to commence with early manufacturing eventually led to the placement of
the Stop-Work Order (SWO) by the NNR. This SWO could have been prevented if due
process had been followed; however the designs were in retrospect not mature enough to
continue with manufacturing.
These decisions committed the project financially to the design configuration and made it
very complex and costly to change the design later on.
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Again there were several factors that lead to, or influenced, these decisions being made and
the instructor should direct the students to listing and discussing some of them. They may
include:
There are very few manufacturers word wide that can manufacture the components
required for the PBMR design, and due to the international nuclear ‘renaissance’ these
manufacturers were in high demand.
Decision makers either underestimated or were misinformed of the actual maturity of the
PBMR design, as well as significant underestimation of the licensing process.
Decision makers were led to believe that the reactor would be ready for construction
much sooner than was actually the case. The long lead times for most of these
components as well as the need for the EPCM contractors to familiarize themselves with
the designs, both contributed to these contracts being placed early on.
Once the major decision have been discussed and understood, the instructor should spend a
little time prompting student to answer the question “Within the complexities and
uncertainties present at the time of making these decisions, do you think that the decision
makers acted rationally and within reason?” This discussion should focus on the fact that it is
often easy to criticize management’s decisions, particularly with the benefit of hindsight, but
that within the situation, the correct choice is it is not always that clear. (5 – 10 minutes)
If time permits, the instructor may want to ask the student what they would have done
differently and why. With each response, the instructor should provide counter arguments,
drawing the students to the circumstances and availability of information at the time, as well
as the likelihood of such a decision resulting in a different outcome for the project. (5 – 10
minutes)
2 Who are the different stakeholders in this project? What is the nature and extent of
their respective interests in the project, and which are most influential and why?
What implications might those have for the pressure they exert on it? (25 – 30
minutes)
The instructor should ask the class to list the different stakeholders in the project, and write
the list on the board as they are called out by the class. This list should include at least the
following stakeholders, South African Government (including the presidency), Department of
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Public Enterprises (DPE), Eskom, other Shareholders – list these individually (Westinghouse,
IDC), National Nuclear Regulator (NNR), PBMR staff and the public, Environmental and
Anti-nuclear activists and groups. One stakeholder which the class may not mention, but
which is of importance is the international nuclear industry at large.
As each stakeholder is mentioned and written down, the student should be directed to explain
the nature and extent of the interest and influence the particular stakeholder has in the project.
The following table presents a list of the various stakeholders together with an overview of
the nature and extent of their interest and influence in the project. (10-15 minutes)
Stakeholder Nature and extent of Interest and Influence
Government This includes Government at large, the ANC ruling party as well as
Thabo Mbeki himself. Government is ultimately responsible for this
project and for allocating tax revenue amongst this and other competing
projects. They are incredibly influential.
Department of Public
Enterprises (DOE)
This includes the department as large, Minister Alec Erwin, and
Minister Barbara Hogan. The DPE is responsible for the management
all public enterprises in South Africa. Again they are very influential,
but ultimately answer to government.
ESKOM Eskom initiated the project and contributed funds early on. However
since 2003 they have been reluctant to be involved in the project and
were pressured by the DPE and Government to stay on as a client. They
were also the license applicant for the PBMR technology. They are very
influential, but ultimately answer to the DPE.
Westinghouse Westinghouse were both shareholders and technical experts in the area
of nuclear design. They held the position of chair of the technical
committee on board level and were relied on to provide strategic and
technical guidance. They also blocked any competing nuclear vendor
from investing in the project due to potential conflict of interest. They
thus had significant influence over the project.
Industrial Development
Corporation (IDC)
The IDC are supporting shareholders in the PBMR project. Their
influence was limited.
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National Nuclear Regulator
(NNR)
The NNR are an independent body, mandated by law to license and
ensure the safe design an operation of nuclear plants in South Africa.
They would ultimately need to approve the nuclear license and are thus
very influential (as was shown by the SWO).
PBMR staff PBMR staff depends on the project for both their livelihood and
reputation. Although they are not very influential in decision making,
they have a large interest and impact on the project.
Public The Public would have been the eventual users of the electricity
produced, and are also the taxpayers footing the bill. The public would
also suffer any consequence of a nuclear accident (both directly, and
environmentally). They exert little influence on the project, particularly
within the socio-economic environment in South Africa, but are
significantly more influential in other countries where nuclear policy
play a larger part in political elections.
Environmental and Anti-
nuclear activists and groups
These groups are typically very interested in the project, but are
generally more ant-nuclear than anti-PBMR per se. They have moderate
influence in terms of swaying public and government opinion, as well as
delaying the Environmental Impact Assessments.
International Nuclear
Industry at large
This stakeholder has a particularly high interest in any nuclear projects.
This was particularly evident in the recent Japanese Fukushima Daiichi
nuclear incident of 11 March 2011. This incident not only affected
Japan, but it resulted in severe ripple effects in the nuclear industry
across the globe with many countries putting their nuclear plans on hold
as a result. Any incident on the PBMR plant would have caused the
same effects. This also includes Potential suppliers, and future clients
and operators of the technology. Although they have little direct
influence on the project, they do wield significant influence through
international bodies and government which in turn have influence on the
PBMR project.
Table 1: Stakeholder Interest and Influence
Once the instructor has discussed all of the stakeholders, as well as the nature and the extent
of their interest and influence he/she should get the class to decide on the three most
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important stakeholders in terms of impact that these stakeholders or individuals had over the
project and its eventual outcome. Although any may be chosen, there are four stakeholders
that had a particular impact in this case and the instructor should guide the discussion to
conclude on at least three of them. For each of the important stakeholders, the instructor
should get the students to discuss why this stakeholder is important and explore the nature of
their influence on the project through referring to specific examples in the case. (15-20
minutes)
The four most important stakeholders in terms of eventual impact on the project outcome are
as follows:
Thabo Mbeki (Government) – Students should reflect at least on; the link between the
PBMR project and Thabo Mbeki’s dream for an ‘African renaissance’; his role in getting
Alec Erwin involved in the project as well as getting the necessary government support
and funding; and, potentially the effect that his “personal support” had on alienating
others within government, particularly those opposed to Mbeki within the ANC political
party.
Alec Erwin (DPE) – Students should at least reflect on; his role of managing the project
within a wider portfolio; his ambition for revamping the entire power industry within
South Africa and the effect this had on the shareholders agreement not being signed; the
department’s influence on the project in taking 15 months to sign off on the company’s
new strategy in 2009/2011; the level of influence Barbara Hogan had over decision
making regarding the project; Barbara Hogan’s level of influence within government to
make decisions; as well as the departments power to eventually pull the plug on the
project.
Eskom – Students should at least reflect on; Eskom’s role in initiating the project and
bringing the PBMR technology to South Africa; their role as eventual customer –
particularly the impact that having a viable customer, and thus real source of future return
on investment would have had on attracting viable investors; that due to Eskom enjoying
a monopoly in South Africa with regard to electricity generation and supply, there would
be no local market for electricity generation if Eskom are not onboard; Eskom’s role in
exerting commercial pressure on the PBMR design and the eventual consequences
thereof; Eskom’s role as license applicant; or the fact that the DPP would have been
located on the Eskom owned Koeberg nuclear site.
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Westinghouse – Students should at least reflect on; Westinghouse’s role as shareholders
and members of the board; the reliance by PBMR on their technical and nuclear expertise;
their withholding of crucial technical information regarding the German design;
Westinghouse’s potential role in blocking other investors such as Areva; and the fact that
Westinghouse stand to gain the PBMR IP should South Africa no longer develop the
technology.
Throughout the discussions regarding the stakeholders of the project, the instructor should
focus the conversation on the complexity that the large array of stakeholders, and the
interplay between these stakeholders have on the PBMR project, and mega-projects in
general.
3 To what extent do you think stakeholder expectations were effectively managed on
the PBMR project? (15-20 minutes)
The instructor should start by asking who believes that the expectations were effectively
managed, and why. The instructor should counter these responses with valid counter
arguments to stir the debate within the class around this topic. The instructor should also give
opportunity to students who believe that the expectations were not adequately managed to
express their views and reasons for saying so. Where ever possible, the instructor should
direct the students to use specific consequences and examples from the case to support their
answers.
The instructor should guide the discussion around this question to explore the trade-off
between “over-selling” a project in terms of cost and schedule in order to get initial buy-in for
the project, and the eventual consequences of not delivering on these estimates. In this case
there are no right or wrong answers, but rather the intension is for the students to come to
grips with this dilemma and to grapple with some of the trade-offs that form part of this case.
Finally, the instructor should ask the students how they believe the stakeholder’s expectations
could have been better managed. For each response the student should be directed to explain
how their suggestion might have affected the particular stakeholder’s expectations and how
this may have changed the eventual outcome of the project. The instructor should provide
valid counter arguments where appropriate.
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4 Was Jaco Kriek ultimately to blame for the failure of the project, what could he have
done differently to prevent its failure, if anything and who is Jaco ultimately
accountable to? (35 – 45 minutes)
The instructor should pose the following three questions (or combinations thereof) to the class
for discussion before concluding the sessions.
Was Jaco ultimately responsible for the project’s failure? (15-25 minutes)
The instructor should start by asking for a show of hands of which students believe, “Yes, he
is to blame”, “No, the outcome of the project was a foregone conclusion when he took over
the reins in 2004” or “No, the project could still have been saved, but he is not to blame” The
instructor should then prompt the different students to provide the reasoning behind their
particular choice. Responses may typically include:
Yes, he is to blame - The instructor should prompt those student who voted for this answer to
give a reason for this response, and reflect on particular decisions, actions or event where
Jaco’s action (or non-action) either directly caused the failure of the project, or could have
contributed to its success. The instructor should ensure the student links the particular actions
referred to with the eventual impact of these actions and how they influenced the eventual
project outcome. The Lecturer should follow up by asking what the student believes Jaco
should have done differently. Again this should be explained by the student. For each
response, either the lecturer should propose valid counter arguments, or give the rest of the
class a chance to rebut the particular response, or accept the response and further discuss the
link between cause and effect. (5 – 10 minutes)
No, the outcome of the project was a foregone conclusion when he took over the reins in
2004 - The student should be directed to explain his/her answer and particularly point to
specific instances/event prior to Jaco’s arrival that shaped the eventual outcome. This should
be countered by questions to the class asking for suggestion of a possible course of action
Jaco could have taken to rectify the situation that was in place when he arrived, if any. The
instructor might at this point ask the students why they believe Jaco did not follow the
suggested course of action. (5 - 10 minutes)
No, the project could still have been saved, but he is not to blame - Again the student should
be directed to explain his/her answer and particularly point to specific instances/event prior to
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Jaco’s arrival that shaped the eventual outcome. The immediate follow up question should
then be, “If Jaco is not responsible, then who is?”. To this there may again be a few
responses, particularly, “the Minister of the DPE”, “Thabo Mbeki”, “the technical staff of the
PBMR project”, or even “the entire PBMR board”. The student should be prompted to give a
reason for any of these (or other) responses. The instructor should ensure the student links the
particular actions referred to with the eventual outcomes of these actions and how they
influenced the eventual project outcome. (5 – 10 minutes)
Was Jaco Adequately qualified and experienced for the job? (10 – 15 minutes)
During the above discussion, question or comments may arise regarding Jaco’s suitability for
the position as CEO of the project. If so, it would be worth following up with a short
discussion regarding his suitability by addressing this question.
The instructor should refer the students to Exhibit E containing details of Jaco’s experience
and background. The following arguments may be presented by the students:
Arguments against his suitability for the job - Here, students will typically call his
background into question. A valid reason may be that “his only experience has been in getting
funding for and structuring new projects, but that he has never managed any large project
through to delivery”, “none of the projects on which he was previously involved were as
technologically innovative”, “he had no experience in the regulatory and highly complex
environment of nuclear development”. In each even the instructor should direct the students
explain how this detracted from his ability to run the project. (5 – 10 minutes)
Arguments in support of his suitability for the job - Here students may give reasons such as
“he has been involved in several mega-projects in the past, so he understands the risks and
complexities of such projects”, “he has been involved in garnering buy-in for large projects in
the past, and should know what investors are looking for and how to setup deals and get
clients on board” or “He would have had to deal with stakeholder management in the past,
and as such, he was well suited to deal with the myriad of stakeholder issues in this case” For
each response, either the lecturer should propose valid counter arguments, or give the rest of
the class a chance to rebut the particular response.
Throughout the discussion, the instructor should direct the discussion to the importance of
having suitably qualified (both experience and skills) personnel within the executive
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management structures, on the ability to deal with and manage a technologically innovative
mega-project. The instructor should also get the students to reflect on who (type of skills and
experience) might have been an ideal candidate for the job. (5 – 10 minutes)
Who is Jaco ultimately accountable to? (10 – 15 minutes)
The instructor should end the case with a discussion around who Jaco was ultimately
accountable to. Who was Jaco’s master? Potential responses from the students may typically
include: ‘Thabo Mbeki’, the ‘Minister of the DPE’, the ‘PBMR shareholders’, the ‘PBMR
board’, the ‘PBMR Company and employees’, or the ‘South African tax payers’. Response to
this question should be justified by the students and the instructor should provide valid
counter arguments where possible.
The instructor should ensure that this discussion links all of the above questions together and
reflects on how this affected the decision made, stakeholder relations and Jaco’s ability to
make any meaningful difference in the project.
Concluding the Session
The case discussion should be finalised by bringing the class back full circle to Jaco Kriek
and his role in the project. The instructor should conclude the session by making sure that the
students have an understanding for the complexities and uncertainties that go with managing
mega-projects of this nature. Emphasis should be placed on the importance of decision
making and difficulty of rectifying decisions made, on the importance of shareholder
management and expectations, and of the potentially precarious role that managers of such
mega-projects have to operate in. The instructor should then pose the following question to
the students, “Does Jaco’s situation and who he is ultimately accountable to change any of the
stand point made earlier during this discussion, and if so why?”
This should bring the session back to crux of the case. The instructor should then leave the
students with the following questions without addressing them in class; Will people blame
him for the eventual outcome? Will the project’s failure tarnish his reputation and his career?
The idea is that the student, based on a better understanding of the case and of some of the
key issues at play, should be able to form their own opinion and leave the class pondering
over these questions, potentially even leaving seeds for post session discussions amongst the
students.
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6 BIBLIOGRAPHY
6.1 Books, Journals, Articles and Webpages
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Bahl, R., Bennett, A., & Mangalorkar, R. (2003). The Keys to Managing mega-projects.
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