A high court has found that Transnet’s approach to identifying International Container Terminal Services Incorporated as the preferred bidder for the tender to manage the Durban Container Terminal Pier 2 was ‘potentially flawed and … unfair to the other bidders’.
The KwaZulu-Natal Division of the High Court in Durban has interdicted Transnet from proceeding with a deal that would have seen the Philippines-based International Container Terminal Services Incorporated (Ictsi) taking over the management of Durban Container Terminal Pier 2 as a private sector partner to the public entity.
Judge Robin Mossop ruled on Wednesday that Transnet’s approach to identifying Ictsi as the preferred bidder for the deal was “potentially flawed and prima facie unfair to the other bidders”. He noted that allowances were made for Ictsi that were not offered to its competitors.
The case was brought to the high court on an urgent basis by APM Terminals, one of the losing bidders. It argued that Ictsi had failed to meet the solvency test required as part of the minimum financial criteria for proceeding past the first stage of the bidding process, referred to as the “request for qualifications” or RFQ stage.
Durban Container Terminal Pier 2 comprises three clusters of berths, with infrastructure that includes specialised equipment for handling containerised cargo.
Issue of solvency
Given the scale of the proposed project, bidders needed to provide evidence of financial capacity. This included a test showing that their solvency after investment exceeded or was equal to 0.4 at the latest financial year-end. Transnet’s written document detailing the criteria declared that solvency needed to be determined using a calculation that divided a bidder’s total equity by its total assets.
However, Ictsi changed the solvency ratio calculation and divided its market capitalisation by its total assets. Market capitalisation is the total market value of a company’s outstanding shares of stock, while total equity is the difference between the company’s assets and its liabilities.
Having made this change, Ictsi “calculated its solvency ratio to be a spectacular 1.28, far exceeding the prescribed 0.4. It submitted that figure with its response to the RFQ to Transnet. It is, however, common cause that if [Ictsi] had used its total equity in the solvency ratio calculation and had calculated that figure with reference to its annual financial statements, as all the other bidders did, it would not have met the prescribed ratio of 0.4,” ruled Mossop.
“The solvency ratio calculation, when applied as it was published by Transnet, would have yielded [Ictsi] a ratio of 0.24.”
Despite Ictsi’s change to the solvency ratio calculation, it was permitted to proceed to the next phase of the bidding process — the “request for proposals” — and was identified as the entity with which Transnet would conclude the contract on 1 March.
As part of its successful bid, Ictsi committed to paying about R11.1-billion to Transnet for a minority shareholding in Newco, the new special-purpose vehicle to be registered for the port management project. Transnet would be the majority shareholder.
APM Terminals had the second-highest offer for the project, about R2-billion less than Ictsi’s. In its application to the high court, it argued that Ictsi should never have made it beyond the first stage of the bidding process; first, because it did not meet the solvency test and second, because its failure to properly calculate its solvency ratio meant that no independent third party could verify that it had calculated the ratio correctly.
“[APM Terminals] believes that it ought to have been ranked first and that it ought to have been awarded the right to negotiate the contract with Transnet,” according to the high court ruling.
Transnet and Ictsi’s arguments
Transnet told the court that the solvency requirement was not a mandatory part of the first stage of the bidding process and that a failure to complete the section devoted to the minimum financial criteria was immaterial.
Ictsi told the court that “it did not make any of the decisions sought to be reviewed and therefore is not in a position to explain or defend those decisions that it did not make”. It asserted that the Durban Container Terminal Pier 2 project was an issue of national importance and could not wait for APM Terminals to “ventilate its ill-conceived complaint”.
Mossop was not convinced by Transnet’s argument that the minimum financial criteria did not comprise a mandatory part of the process.
“To describe information required as being the smallest amount required, as Transnet does, and then to assert that it was not mandatory for it to be provided in the form defined by Transnet, seems to me to be incongruous and unlikely. On this view, it was thus not mandatory to supply even the minimum of financial information,” he said.
Mossop pointed out that Transnet had twice sought expert opinions on whether Ictsi’s solvency ratio calculation was valid and acceptable — once from the financial services company Mettle Corporate Finance and once from its own internal audit team. Both entities found it unacceptable for the market capitalisation of the company to be substituted as total equity for the purpose of calculating its solvency.
Transnet sought these opinions in late 2023 after APM Terminals had informed it of Ictsi’s change to the solvency ratio calculation.
“Remarkably, and perhaps calamitously for it, Transnet had itself not recognised that [Ictsi] had used the incorrect value for market capitalisation in performing the solvency ratio calculation. It only came to this realisation when the applicant [APM Terminals] informed it of that fact in writing on 23 July 2023… The applicant had done the sums. Transnet had not,” said Mossop.
“Transnet permitted a bidder that had not established its financial credentials to proceed to the further stages of the tender in which financial capacity was a central requirement. To regularise what it had done, for it did not realise that [Ictsi] had not used the correct information in calculating the solvency ratio calculation, it then had to permit the ex post facto establishment of facts that ought to have been established at the commencement of the process. In other words, its position is now that the end justifies the means.”
What next?
Mossop granted an interdict prohibiting Transnet from proceeding with its deal with Ictsi, pending a judicial review of its decision to award the contract to the company.
“In my view, having considered the grounds of review, the applicant has good prospects of ultimate success in the review. It therefore seems to me that I should exercise my discretion and grant the interim relief sought by the applicant. In so doing, the public interest in ensuring that tenders are conducted fairly and scrupulously will be preserved,” he said.
A date for the judicial review of Transnet’s decision has yet to be set.
Business Day reported that Transnet had already extended the validation period of the tender to the end of March 2025, from the initial 30 September.
A spokesperson for Ictsi said that while the company respected the court, it was “very disappointed” with its decision.
“The objective of the RFQ was to determine financial capacity and operational capability. We were deemed to have fulfilled this criteria after a very transparent and forthright RFQ submission and therefore were invited to participate in the RFP stage. Ictsi has been a committed participant in the container terminal industry for over 30 years, is a financially robust publicly listed company that discloses detailed financial information on a quarterly basis, is among the top 10 port operators globally with superior profitability, and we maintain that we meet the tender requirements,” the spokesperson said.
“Notably, We were only informed of Maersk’s protests after having submitted a far superior bid in the RFP process more than a year after that initial RFQ process. If these questions were raised at that time or as part of the RFQ, we would have endeavoured to address them then.”
Maersk is the company under which APM Terminals operates.
The spokesperson for Ictsi told Daily Maverick that the company strongly disagreed with the high court’s decision and would make its case “vigorously” through the next stage of the legal process.
Ictsi objected to the timing of the APM Terminal’s application to the high court, with the spokesperson saying that it was launched at a “late stage” nine months after a July 2023 announcement from Transnet that Ictsi the preferred bidder. Mossop addressed this issue in his judgment, stating that Transnet’s final decision to conclude the contract with Ictsi was communicated on 1 March 2024, and APM Terminal’s court application was prepared and issued by the registrar of the court within five days of this date.
“In my view, the applicant did not delay unnecessarily in making its election to challenge Transnet’s decision,” said Mossop. DM
This article was updated at 4.35pm on 10 October 2024 to include comment from the International Container Terminal Services Incorporated.