Tracking Transnet Kickbacks
OUTA is investigating maladministration and corruption in the contracts between Transnet and locomotive manufacturers. These relate to three Transnet's projects to purchase locomotives: the 95 locomotives, the 100 locomotives and the 1064 locomotives projects, dating back to 2012, which resulted in billions of rand in kickbacks to the Gupta group of businesses. OUTA's work focussed on tracking the money flows in the kickbacks.
- Transnet's locomotive contracts
- what outa is investigating
- OUTA ACTION: submissions
- OUTA ACTION: The LEtter to crrc
Transnet ran three projects to procure locomotives for its fleet.
These were the 95 locomotives project, the 100 locomotives project and the 1064 locomotives project.
The key players for Transnet
On 31 October 2010, Malusi Gigaba was the Minister of Public Enterprises and the following month he appointed a new board for Transnet. This board included government official Iqbal Sharma, who went on to chair Transnet’s Acquisitions and Disposal Committee.
In March 2011, the Transnet board hired Brian Molefe as group CE and rehired Siyabonga Gama as CEO of Transnet Freight Rail although Gama was fired in 2010 by the previous Transnet board. Anoj Singh, who was acting CFO since 2009, became permanent CFO in July 2012. In August 2012, Transnet director Iqbal Sharma was appointed as chair of the board’s Acquisition and Disposal Committee, which oversaw procurement. These four were key to the decision-making on the three big freight locomotive contracts: the 95 contract was awarded in October 2012; the 100 contract was awarded in March 2014; and the 1064 contracts were awarded in March 2014.
By late 2015, Gama was acting CE of the Transnet group and Molefe and Singh had moved on to Eskom as CE and CFO respectively.
The locomotive manufacturers for the various contracts were General Electric, Bombardier and the Chinese state-owned manufacturers China South Rail (CSR), China North Rail (CNR) and CRRC Corporation (formed in June 2015 from the amalgamation of CSR and CNR).
The 1064 project
This project started in March 2012 and was to buy 1064 locomotives for freight trains, with 465 of them diesel and 599 electric locomotives.
By April 2013, the project was expected to cost R38.6 billion; the business case calculations included the effects of forex hedging, forex escalation and other price escalations but the board was told that the cost excluded these. Contracts were signed in March 2014 and Transnet immediately made an upfront payment of R7.37 billion. In May 2014, weeks after signing, the costs were revised, increasing to R54.5 billion, based on a recommendation by Gama, Molefe and Singh.
Four companies were hired to build the locomotives: China North Rail (contracted for 232 diesel locomotives), China South Rail (359 electric), General Electric (233 diesel) and Bombardier (240 electric).
The locomotives were all due to be delivered by 2018/19, but Transnet’s annual report for 2018/19 said that by March 2019, a total of 525 locomotives had been accepted into operations, with a further seven locomotives delivered and undergoing acceptance testing”. Only 107 locomotives were accepted during 2018/19, just half of the target of 216. Transnet’s 2018/19 report said that by March 2019, “the cumulative expenditure incurred on the 1 064 locomotive contract amounted to R33.6 billion, with R3.9 billion invested in the current year. The report said the total spend on the 1064 contract, the 95 contract and the 100 contract and associated transaction advisory services was R41.529 billion, including R3.837 billion during 2018/19. The report also said it had recovered R618 million from CSR and was pursuing a further R86 million.
The 95 project
In October 2012, a contract for this was awarded to China South Rail for 95 electric locomotives for R2.687 billion. However, only eight of the 95 locomotives were delivered by the January 2015 deadline. Transnet’s annual report for 2015/16 said that all 95 Class 20E electric locomotives were delivered and accepted into operations by 30 June 2015.
The 100 project
During 2013, while the 1064 deal was underway, Transnet decided to buy an extra 100 electric locomotives for the coal export line, with the expectation that these would be delivered sooner than the delayed 1064. These were in addition to the 1064 contract. In March 2014 China South Rail was contracted directly, rather than by open tender, to supply these for R3.871 billion, which later increased to R4.840 billion. The delivery was delayed, which negated the stated justification for this contract. Transnet’s annual report for 2015/16 said that the 100 Class 21E electric locomotives for the export coal line were accepted into operations by November 2015.
OUTA has focused on investigating the kickbacks which Transnet paid the Guptas and their cronies through these contracts to produce locomotives, and tracking the money flows showing where this money went. Transnet's 1064 locomotives project was initially supposed to cost R38.6 billion but ultimately increased to R54.5 billion. We believe as much as R9 billion was looted through backhanders paid on these contracts and that the price was increased to accommodate this.
The contracts involved kickbacks paid by Transnet through the Chinese locomotive manufacturers and then laundered by Gupta-lieutenant Salim Essa through his Hong Kong based businesses Tequesta and Regiments Asia. OUTA also looked at the role of the banks, particularly HSBC.
CSR and CNR, the two companies which merged to form CRRC, paid kickbacks to Essa and co to secure their contracts with Transnet.
The hard evidence OUTA obtained from the #GuptaLeaks and from whistleblowers confirmed payments of US$284 million (worth about R3.6 billion at the time, increased to about R4.97 billion by August 2020) to Essa and the Guptas, through the CRRC businesses. These were only the payments made through Hong Kong businesses.
OUTA also found evidence in several contracts where kickbacks of 19% to 21% were agreed on between the Chinese locomotive manufacturers and Essa. Using this percentage and the contract values, OUTA calculates that a total of R9 billion (at August 2020 values) was likely paid in kickbacks by CSR and CNR through their contracts from 2012 to 2014 on Transnet's projects on the 1064 locomotives, the 100 locomotives and the 95 locomotives.
Evidence was produced on about 160 recipients of the original Transnet funds. The majority of the money ended up in companies registered in Hong Kong and China, but funds were also transferred to Angola, the United Arab Emirates, Turkey and India. Some of the money was used towards the wedding of Ajay Gupta’s son in Istanbul in April 2016.
OUTA is now looking into the finance deals for the Transnet locomotive acquisitions. Evidence obtained show the involvement of Regiments Capital in its role as lead arrangers for the loans and implementing consultants. Trillian Asset management and several foreign and local banks were also involved in these transactions. The interest rate swap transactions between Transnet, the Transnet Second Defined Benefit Fund and Nedbank forms part of this investigation. OUTA found that a similar modus operandi to that used by Essa in Hong Kong was applied these funds, some of them ending up in Hong Kong and other countries.
In May 2019, OUTA made a submission to the State Capture Commission on the Transnet locomotive contracts.
In June 2019, OUTA made a submission to the National Prosecuting Authority (NPA) on the Transnet locomotive contracts.
This submission was made in terms of section 27 of the NPA Act, which allows the reporting on information on specified offences such as organised crime directly to the NPA investigating director through an affidavit.
In October 2019, OUTA made a second submission to the NPA. This focussed on the money flows in these contracts. This included the kickbacks paid by the Chinese locomotive manufacturers and the laundering of these funds by companies based in Hong Kong and run by Gupta lieutenant Salim Essa (Tequesta and Regiments Asia). The role of HSBC bank was highlighted and evidence was produced on about 160 recipients of the original Transnet funds.
After the referrals, OUTA had several meetings with the NPA on this matter.
The matter is currently under investigation by the NPA. OUTA has offered further assistance if it is needed.
During 2019 and 2020, OUTA also provided assistance to reputable international law enforcement agencies on this matter.
OUTA is currently compiling an affidavit on Transnet's finance deals for the locomotive contracts, to submit to the NPA.
On 4 August 2020, OUTA wrote to the chairman of the board of CRRC, the Chinese state-owned company formed from the amalgamation of the original Chinese locomotive manufacturers. This letter calls on this Chinese SOE to be accountable for its role in these corrupt transactions between Transnet and the Guptas.
The decision by OUTA to write and publish the letter to the executives of CRRC came after it was established that nobody is doing anything to hold this Chinese SOE to account for its role in the corrupt transactions involving Salim Essa and the Guptas. CSR and CNR, the two companies who merged to form CRRC paid kickbacks to Essa and co to secure their contracts with Transnet.
The hard evidence OUTA obtained confirmed payments of R3.6 billion to Essa and the Guptas, through the CRRC businesses.
OUTA also found evidence in several contracts where kickbacks of 19% to 21% were agreed on between the Chinese locomotive manufacturers and Essa. Using this percentage and the contract values, this indicates a total of R9 billion was paid in kickbacks by CSR and CNR through their contracts on Transnet's projects on the locomotive acquisitions from China.
It is therefore urgently important that the South African law enforcement agencies should investigate these transactions which had their origin with the Chinese government-owned locomotive manufacturers.
The letter to CRRC also serves as a warning to this locomotive manufacturers' clients worldwide to be alert and to scrutinise their transactions with CRRC, which is the world's largest supplier of rail transit equipment. South Africa cannot afford these kinds of corrupt deals with foreign countries and even less so when transacting with other government-owned companies.
A copy of the letter was sent to President Cyril Ramaphosa, to bring to his attention the corrupt dealings between the South African and Chinese state-owned entities.
OUTA's information suggests that Transnet paid kickbacks of up to R9-billion to the Guptas for the locomotive contracts.
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