Why Gordhan’s diplomatic visit to China is a make-or-break moment for Transnet

Public Enterprises Minister Pravin Gordhan has taken the extraordinary step of visiting China to get idle locomotives belonging to Transnet to move and be used by the state-owned transport group.  

The step taken by Gordhan will see South Africa flex its diplomatic muscle on China, testing the existing relationship between both countries.  

In April, Gordhan is set to meet his diplomatic counterparts in China to resolve a dispute between Transnet and China Railway Rolling Stock Corporation (CRRC), a state-owned company in China that manufactures locomotives. CRRC is a global rail giant; it is the world’s largest manufacturer of rolling stock (locomotives/vehicles) and rail equipment.  

The dispute is significant as it risks further dragging down South Africa’s economy because Transnet has locomotives from CRRC that are idle and should be servicing major domestic industries including mining and manufacturing — prompting Gordhan to intervene to find a political solution with Chinese leaders.  

It is an extraordinary move by Gordhan because, up until this point, it was left to Transnet’s executive management team (led by CEO Portia Derby) to find a solution to the dispute, but it has failed to do so. And now, the dispute has escalated and will reach diplomatic circles next month.  

When the dispute started  

The genesis of the dispute between Transnet and CRRC dates back to 2014. At the time, Transnet bought 1,064 new locomotives — the heavy haul ones that are supposed to pull the coal and iron ore wagons — for R54.4-billion. Transnet bought about 25% of the 1,064 new locomotives from CRRC.

The purchase by Transnet was laudable as it was projected to increase South Africa’s rail capacity, helping the country operate the fifth-largest rail system in the world by 2019.  

It’s arguably easy to forget that Transnet’s operations are a crucial cog in South Africa’s economy. Transnet is responsible for ferrying most of the iron ore and coal that South Africa produces and exports to countries around the world. It also carries freight and fuel around the country. When Transnet isn’t operating properly, businesses in South Africa don’t operate and the country’s exports are held hostage.  

Underinvestment in Transnet’s rail network, and not owning and operating enough locomotives have created problems for the company as its rail volumes (goods Transnet rails to market) have been in decline for many years.  

For instance, Transnet’s coal volumes that are moved through the Richards Bay coal terminal peaked at 76 million tonnes in 2017, but are said to have hit a record low of 49 million tonnes in 2022. The mining sector has put the cost of lost export opportunities in 2022 at R50-billion. With less than 2,000 locomotives in operation, Transnet is effectively operating at 50% capacity. So, the deal with CRRC was meant to be a game-changer.  

But the R54.4-billion deal became mired in State Capture corruption. The price tag of purchasing 1,064 new locomotives from CRRC and other suppliers escalated by almost R16-billion from the “all-inclusive” R38.6-billion originally agreed upon. The R16-billion escalation was created to facilitate kickbacks to Gupta-linked firms, Zondo Commission reports dealing with State Capture at Transnet have found. The commission’s evidence shows CRRC planned to funnel 21% of the contract value (R9-billion) to Gupta-linked shell companies. But the companies ended up receiving at least R3.6-billion in late 2016.  

Former Transnet bosses including Brian Molefe and Siyabonga Gama (ex-CEOs), and Anoj Singh (ex-CFO) have been charged with corruption and money laundering relating to the locomotives deal with CRRC. No one from the local arm of CRRC has been charged. 

Read more in Daily Maverick: “Transnet corruption: Brian Molefe, Anoj Singh, Eric Wood, Kuben Moodley, Siyabonga Gama and 13 co-accused in court” 

But the tax collection agency, the South African Revenue Service (SARS), has attempted to hold the CRRC accountable for its role in State Capture. SARS found that CRRC E-Loco, the local arm of CRRC, overstated the price of its locomotives sold to Transnet and that the company has a tax debt of more than R3.6-billion. CRRC challenged the tax debt at the high court in Pretoria but lost the case.  

In its case, SARS argued that it was entitled to instruct CRRC to pay over the money because it was dealing with a “dishonest taxpayer”, given the evidence of “large-scale corruption” committed by the Chinese company in its dealings with Transnet. And because of this, the relationship between Transnet and CRRC has broken down.  

CRRC retaliates 

Transnet has taken delivery of the 1,064 new locomotives from CRRC and other suppliers. But 300 or so of the locomotives from CRRC stand idle because the Chinese company has refused to provide Transnet with spare parts and components to run the locomotives. In January 2023, CRRC withdrew from an in-principle agreement to provide the spare parts to Transnet, which said the Chinese firm refused to cooperate with authorities in South Africa, including SARS. CRRC is what is known as an original equipment manufacturer and only has the technical know-how to fix/maintain the locomotives and return them to the tracks.  

Without CRRC’s assistance, the locomotives cannot run, and Transnet cannot increase its rail volumes or generate money. The economy is also held for ransom.

Transnet’s solution to the problem was to buy more locomotives from another company. It planned to go out to procure more locomotives, which would be a costly exercise. It is understood by Business Maverick that Gordhan wants Transnet to resolve its dispute with CRRC and use the locomotives it already has in its possession rather than purchase new locomotives. One of Gordhan’s priorities, when he meets CRRC executives in China, is to get the firm to assist Transnet and service the locomotives. But a big hurdle before CRRC does so would be for Gordhan to convince the firm to engage and cooperate with authorities in South Africa, including SARS. DM/BM

Article corrected to reflect that CRRC was not the only locomotive supplier to Transnet. In fact, of the 1,064 locomotives that Transnet required, only 25% were procured from CRRC.