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Energy

Hitachi to pay over $4bn in Africa dispute with Mitsubishi Heavy

Industrial groups settle clash over costs at coal power plants

Workers stand at the construction site of Eskom's Medupi power station, a coal-fired power plant, in South Africa in 2012. This and a sister project suffered huge cost overruns.

TOKYO -- Mitsubishi Heavy Industries and Hitachi are poised to settle a dispute over losses related to coal-fired power plants in South Africa, Nikkei has learned, looking to put the yearslong battle behind them as both industrial groups restructure.

Mitsubishi Heavy had demanded that Hitachi shoulder nearly 91 billion rand ($6.3 billion at current rates) in cost overruns for boiler contracts held by a joint venture between the two Japanese companies.

After arbitration, Mitsubishi Heavy has in effect agreed to accept a smaller compensation. The figure is likely to total roughly $4.6 billion in an arrangement that includes Hitachi ceding shares in the venture to its partner.

The proposed settlement, which the boards of the two companies are expected to approve by Wednesday, should let both sides focus more on shifting to new growth strategies.

Mitsubishi Heavy is considering selling a flagship shipyard in Nagasaki, while Hitachi is solidifying plans to sell listed subsidiary Hitachi Chemical and its diagnostic imaging business.

The losses stem from the troubled construction of the Medupi and Kusile coal power plants for South African state utility Eskom.

The South African projects were initially handled by Hitachi and later taken over by Mitsubishi Hitachi Power Systems, a joint venture established in 2014 through the merger of the two companies' thermal power equipment operations. Mitsubishi owns 65% of the venture, with Hitachi holding the rest.

The orders, initially estimated at roughly 570 billion yen ($5.2 billion at current rates), faced major delays as a result of local labor disputes and other problems. Construction costs also ballooned beyond Hitachi's original projection.

Mitsubishi Heavy faulted Hitachi's initial contract terms and schedule management and argued that its partner should bear all the additional costs. Hitachi insisted that losses incurred after the joint venture's creation be shouldered by both companies in proportion to their ownership stakes. Mitsubishi Heavy sought arbitration in July 2017.

Totaling 9,600 MW of capacity, the two plants are equipped with boilers that are "more efficient power generation than conventional coal-fired systems, resulting in a significant reduction in carbon dioxide emissions," according to the joint venture.

Japan has faced international criticism, including at the recent COP25 United Nations climate change summit, for continuing to build coal-burning power plants at home and abroad, even as other major economies abandon this fossil fuel.

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