The Transnet cowboys and the extraordinary push for that Gupta-linked China South Rail deal

17 May 2019

A Japanese supplier was on hand to match locomotives already in use by Transnet but a cabal of executives had other plans as they derailed the plan, ultimately swinging the deal into the hands of China South Rail – a company now accused of having paid kickbacks to the Guptas.

A sound business case to buy 100 locomotives for use on Transnet’s coal line from a Japanese supplier was virtually buried.

A later version, updated over a weekend as a special request, was unilaterally changed, this time to motivate for a Chinese competitor instead.

Ultimately, the initial proposal to confine the tender to Japan’s Mitsui for extremely valid reasons, never even went to the Board which later approved the R3.8-billion deal to China South Rail (CSR).

The costs have since jumped to nearly R5-billion.

On Friday, the State Capture Commission heard details of a series of questionable activities that resulted in CSR landing the deal to provide Transnet with a locomotive that the company had never produced along with payments totaling R2.6-billion within six months of signing the deal – cash paid before a single one was delivered.

Much information about this deal and a bigger one for 1 064 locomotives are in the public domain with allegations of staggering kick-backs to Gupta-linked entities.

Former Transnet strategy manager and engineer, Francis Callard, who had put together that initial business case for the acquisition of 100 locomotives in 2013, revealed the genesis of the deal during testimony.

It once again features the same cast of characters– Brian Molefe, Anoj Singh, Siyabonga Gama, Gary Pita and Thami Jiyane – whose fingerprints are all over other dirty deals at Transnet

The state-owned freight rail and logistic company was in the market for dual voltage locomotives that would be compatible with a fleet earlier purchased from Japan’s Mitsui.

Callard drafted the business case and on October 15 2013, it was signed off by Gama, Pita, Singh as well as the current acting group CEO, Mohammed Mahomedy who testified before the Commission earlier this week.

It recommended Mitsui for the deal to ensure compatibility with existing locomotives, noted the availability of facilities for immediate production and the fact that it was a known locomotive already in use by Transnet.

Because this was an urgent requirement, it was also important that Mitsui already had a manufacturing facility up and running in South Africa and could deliver the locomotives quicker.

Furthermore, there was no need to develop specifications, a design or any sort of prototype testing – that would save time and money.

This document had to go to a Board committee, known as the Board Acquisitions and Disposal Council (BADC) for approval before being submitted to the Board for final approval.

But the document would not make it to BADC. Callard, who had taken it upon himself to be on standby for the meeting in the event he was needed, instead received an SMS from Gama, the tone of which says much: “Please get out that boardroom. Thami (Jiyane) is coming to talk about 1064. The 160 (the deal involving the 100 locomotives) has been withdrawn so I am not sure why you are there.”

Callard said he was told that Molefe had withdrawn the memo for the 100 locomotives.

Around January 2014 he received another SMS from Gama, this time to produce an updated business case for the acquisition of 100 locomotives and now also wagons.

It was urgent as it needs to be presented to the BADC by the following week and Gama had asked him to work a “miracle” to make it happen.

Callard said he worked with a colleague over that weekend and produced an updated business case. There were slight changes but the overall logic for the deal with Mitsui remained the same.

A day or so after submitting this updated business case, on 22 January 2014, he received an email from Lindiwe Mdletshe in supply chain who asked for help with formatting his latest memo.

He then discovered that his document had been significantly changed. Fundamentally, that Mitsui had been removed as the preferred supplier as the document now recommended that CSR be awarded the deal on confinement.

Other changes included:

The requirement that it be a 19E equivalent locomotive was removed throughout the document, it could now seemingly be just about any locomotive;

The need to inform the Board of the final price negotiated was now gone and the power over process and approval was stipulated to rest with the group CEO, Brian Molefe;

An entire section on the benefit of standardisation to sync the new batch with the existing fleet was replaced with wording to the effect that CSR been adjudicated as being the best bidder in a different deal for freight locomotives (a bit useless as the coal line required a different product).

Callard said his proposal had made a case for the availability of spares and maintenance already available via Mitsui as there was no CSR locomotive in service at Transnet.

In addition, the urgency factor also disappeared entirely.

“Had urgency been left in, CSR would not have complied because none of their locomotives were in use by Transnet, the company had no production line in South Africa.”

“I did not agree with the amendments. I was taken aback by them. This will not work, I thought. This is not right, (was) flawed in thinking and in execution.”

Callard said he was deeply concerned and wrote to Gama and Jiyane the following day, highlighting the flaws in the edited document.

Jiyane called him, seemingly for no other reason than to ask ‘why did you send that email?’

Gama later sent an SMS simply saying, he would explain the “thinking of the GCE ( Molefe) to him.

This suggests that Molefe was instrumental in the drastic shift in thinking.

Callard said apart from the edits, the document was a mess, referring in some cases to General Electric when the author clearly meant CSR.

And the base price of the locomotives was given in Japanese Yen as the original proposal involved the Japanese company, Mitsui.

This implied that the due thought was not given to the process of the memo with a full understanding, Callard said.

“I cannot talk to who made the decision to make the changes but there is a trace of emails between myself and various parties indicating, very strongly, that Gary Pita was the author of the revised document,” he said.

He could not say if Pita did this on his own initiative or at the instruction of someone else.

But it was either “extreme negligence or a deliberate misrepresentation,” he said.

Over the course of the next few days, this edited business case favouring the Chinese rail company would go to the board’s bid committee where it was approved before going to the Board for final approval.

He said minutes showed that Molefe, Singh, Gama, Jiyane and Pita all attended this meeting and there is no record of any of them having informed the committee of his concerns with the edited business case.

“Nowhere were the concerns that I raised brought to the attention of the meeting as a potential risk to this transaction.”

The specifications of the locomotive that Transnet needed for its coal line was then adapted to suit China South Rail’s capabilities and gave birth to a brand new product, the E21.

Callard said the deal burdened Transnet with short-term payments totaling R2.6-billion, paid within six months of the deal being signed with CSR.

It was part of a R7.23-billion schedule of payments due to four original equipment manufacturers in the 1 064 deal and a smaller one involving General Electric.

Amid the negotiations in February 2014, a colleague in finance warned him there was pressure to raise an initial R4-billion deposit due across the various deals.

Callard responded by saying: “My giddy hat, what will the auditors say.”

She wrote back saying, ‘We’ve asked for an opinion. These boys are cowboys.”

*Callard’s testimony at the Commission resumes on Monday. DM

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