Transnet Overpaid $38 Million for Locomotives, Report Says

(Bloomberg) -- Transnet SOC Ltd., South Africa's state-owned rail and ports operator, paid 509 million rand ($38 million) more for 100 locomotives after switching a supply contract to a Chinese rail company from Mitsui & Co. of Japan, according to a report commissioned by the National Treasury.

The finding is part of an investigation into so-called state capture, in which private individuals used influence over government officials to win contracts from state companies. At the center of these allegations is the Gupta family, who were friends with former President Jacob Zuma. They deny wrongdoing.

Transnet's decision to buy locomotives from China South Rail also resulted in the vehicles being imported rather than made in South Africa, according to the draft report compiled by Fundudzi Forensic Services, seen by Bloomberg. Regarding the increased cost of the contract, Transnet board members -- then led by Brian Molefe -- must give reasons why they shouldn't be held accountable, the investigators said.

Transnet's media office didn't immediately respond to an email seeking comment and calls went unanswered.

President Cyril Ramaphosa has pledged to stamp out corruption since taking over from Zuma in February. That has included replacing directors at a number of state companies including utility Eskom Holdings SOC Ltd., which has also been embroiled in allegations of misuse of funds and incorrect awarding of contracts.

Proper Procedure

In June, a probe by law firm Mncedisi Ndlovu & Sedumedi Attorneys found that Transnet didn't follow proper bidding and evaluation procedures for contracts, and some executives were “negligent” or took “unlawful decisions.” Top officials should be liable for the resulting losses, according to the report.

Details of the draft document were earlier reported by Business Day newspaper.

Transnet appointed a group led by U.S. consultancy McKinsey & Co. to advise on a further contract to acquire 1,064 locomotives, according to the report. The fee was increased to 267 million rand from 35.2 million rand after various “scope extensions,” though there's no evidence of proposals to justify the increase, it said, adding that an investigation was still in progress.

Mckinsey withdrew from the contract before the fee was paid, a spokesman said in an emailed response to questions. The beneficiary was a South African advisory firm called Regiments. A call to Regiments' Johannesburg office wasn't answered.

McKinsey did not help determine the locomotive prices, did not help select the winning supplier, and did not work on the transaction advisory service, a spokesman said. It also didn't pay for Anoj Singh, a former chief financial officer at Transnet, to go on international trips at its expense in 2012 and 2013, as alleged in the document, the consulting firm said.

The consultancy last month reached a settlement to repay almost 1 billion rand to Eskom and apologized for wrongdoing regarding how it did business with the utility.

--With assistance from Paul Burkhardt.

To contact the reporters on this story: John Bowker in Johannesburg at jbowker2@bloomberg.net;Sam Mkokeli in Johannesburg at mmkokeli@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Gordon Bell, Vernon Wessels

©2018 Bloomberg L.P.