How to go from a price tag of R9.7m to R700m, Transnet-style

A Gupta-linked middleman company slipped into a Transnet deal and spiked the price of relocating a locomotive-manufacturing venue from Gauteng to Durban from a mere R9.7-million to about R700-million.

Business Expansion Structured Products, in short, BEX, a company then having barely traded, and which had seemingly hijacked the credentials of a different company, scored roughly 10% for its troubles.

This July 2018 article by amaBhungane is the blueprint against which South African businessman Roberto Gonsalves testified at the State Capture Commission on Thursday.

The Amabhungane investigation puts Gupta kingpin Salim Essa and a private company linked to former Transnet Board member Stan Shane at the genesis of BEX.

So disturbed was Gonsalves and a group of fellow South African minority partners in the locomotive deal, they went up against their international partners, China North Rail (CNR), formally brought the matter to the attention of former Transnet executives Anoj Singh and Siyabonga Gama and reported it to the Hawks in terms of the Prevention and Combating of Corrupt Activities Act.

The Commission heard that unbeknown to Gonsalves, Gama and Singh had already signed off on the claim by the time they were granted an audience to raise concerns — but neglected to mention this.

There was absolutely no justification for Transnet to agree to pay China North Rail SA (CNR SA), contracted to supply 232 diesel locomotives, close to R700-million for moving a yet-to-be operational plant to Durban, said Gonsalves. The deal was part of the equally tainted 1,064 deal.

The exorbitant spike in price first came to the local group’s attention after it was asked to sign off on the appointment of BEX at the request of its Chinese partners.

When the price for the locomotives was being developed, it was on the basis that CNR SA would be manufacturing in Gauteng.

But CNR knew it would actually be manufacturing in Durban because Transnet had asked the company to produce figures for the impact on costs of a relocation shortly before the deal was signed.

While the consortium also preferred to manufacture in Gauteng, it appears the plan was to split manufacturing between the two cities across four groups contracted at the last minute to supply Transnet with 1,064 locomotives.

CNR and a second original equipment manufacturer, General Electric, were then asked to shift to Durban — and CNR had no facilities up and running so there was physically nothing to move, Gonsalves said.

The consortium crunched the numbers and came up with a figure of R9.7-million to cover the relocation.

“We calculated the extra costs and the total was R9.7-million for the full batch of locomotives,” he said.

The costs related to measurable financial implications and covered costs including transportation, flights, accommodation and had factored in savings from importing equipment directly to the Durban port instead of having it moved to Gauteng thereafter.

But on April 23 2015 China North Rail signed a contract with BEX to act as an intermediary to negotiate a claim for the cost of the relocation from Transnet.

“The company was not known to us at all and had not played any role when we submitted the R9.7-million figure to Transnet,” Gonsalves said.

The consortium had also never had dealings with BEX until then.

Gonsalves said he had received an email, containing a draft agreement for BEX, from CNR SA with a resolution dated 8 April 2015 that required minority directors to sign off on the appointment of BEX as an agent to negotiate the relocation claim.

Gonsalves and the other local partners disagreed, seemingly vehemently, and refused to do it.

“There was already a relocation fee of R9.7-million. In our minds we had already been reimbursed for the relocation and did not see any basis for any claim from Transnet for a relocation,” he said.

Although they refused to sign, China North Rail’s representatives went ahead because they controlled the board of the local joint venture company.

This gave CNR SA access to a payment of 50% of the claim within two weeks of Transnet signing off and the balance payable in 13 equal instalments thereafter.

Gonsalves said the local partners asked questions, seemingly repeatedly, and never quite got a straight answer.

“Despite our objections, they controlled the board and went ahead,” Gonsalves said.

The initial cost of R9.7-million shot up, once BEX arrived on the scene, first to R287-million, and then finally to R719-million, though CNR offered Transnet a discount in the end.

“We didn’t know where the figures came from,” said Gonsalves.

He testified about a document signed by Gama in July 2015 in which Transnet confirmed acceptance of the claim with 50% payable within two weeks thereof. Gama allegedly failed to mention this when Gonsalves and a colleague met him and Singh about a year later, in August 2016.

“Why did Transnet not have us do the calculations, instead of going for a company with no trading history?” Gonsalves said.

“We are shareholders, (that payment) would have been nice, but we could not see any justification for it.”

BEX was paid R67-million for pulling off what an entire consortium, packed with expertise, seemingly couldn’t do.

But while Gonsalves and his local partners were in the dark about who BEX was, he said China North Rail’s team in SA was not too bothered by the question.

“I sense they were aware of who they were dealing with.”

Gonsalves told the commission the relocation of the venue from Gauteng to Durban may well have been motivated by capacity concerns.

But then, Transnet should have provided reasons and, importantly, what in the original contract of more than 500 pages made provision for this staggering surge in the cost of relocation.

The commission resumes on Friday when Gonsalves is scheduled to conclude his testimony. DM