Chinese company CRRC E-Loco Supply, using local empowerment partner MBC as a front, scored three tenders worth R25bn from Transnet
A report by the Broad-Based Black Economic Empowerment Commission has for the first time detailed how South Africa’s train-building industry lost billions of rands after Transnet awarded massive tenders to a Chinese company.
The report deals with three tenders awarded to CRRC E-Loco Supply, including the infamous “1 064 locomotives” tender with saw Gupta-linked companies score R5 billion in kickbacks.
It found that the Chinese company used its empowerment partner, the Matsete Basadi Consortium (MBC), as a front to bag locomotive tenders worth more than R25 billion from Transnet, which cost the MBC R7.5 billion.
CRRC E-Loco Supply is the South African division of the state-owned Chinese train manufacturer, CRRC Corporation Limited. CRRC was formed after the merger of China South Rail and China North Rail, which bagged the lion’s share of the 1 064 locomotives tender.
But CRRC E-Loco Supply, formed in 2012 before the merger, was established as a joint venture between China South Rail and MBC. CRRC Corporation Limited now owns 70% of CRRC E-Loco Supply and the remaining 30% is owned by MBC.
The commission’s report, dated November last year and which has not been publicly released, recommends that Transnet go to court and cancel all contracts with CRRC E-Loco because of the alleged fronting.
The commission has also asked Transnet to audit all contracts awarded to CRRC E-Loco, and all other companies, since 2014 to determine if they complied with the B-BBEE Act.
The commission’s report found that the joint venture, established for the sole purpose of bidding for Transnet’s locomotive tenders, operated “in a manner which directly or indirectly undermines the objectives of the B-BBEE Act”.
The complaint against CRRC E-Loco was filed by MBC’s former directors, Lietsiso Mohapeloa and Juliet Mxhakaza.
The report found that CRRC E-Loco Supply acted in a way that undermined the B-BBEE Act, which promotes transformation to enable meaningful participation of black people in the economy.
“CRRC E-Loco Supply as a joint venture falls short of meeting the requirement of black ownership in that the critical components of ownership … were severely restricted and economic interest did not accrue to MBC in line with its 30% shareholding, indicating a fronting practice, which is an offence under the B-BBEE Act.”
The report states that between 2012 and 2014, CRRC E-Loco, still known as China South Rail at the time,was awarded three tenders to manufacture 554 locomotives.
In October 2012, Transnet awarded it its first tender to supply 95 locomotives. In mid-2013 it received another tender to build 100 locomotives. And in March 2014, it received yet another to build 359 locomotives.
The 2014 contract formed part of the controversial 1 064 locomotives tender.
An investigation by National Treasury into the procurement of the 1 064 locomotives, released in May last year, found that former Transnet chief executive Brian Molefe lied in order to inflate the cost of the project by more than R16 billion, from R38 billion to R54.5 billion.
In May, Transnet acting chief executive Mohammed Mahomedy told the judicial commission of inquiry into allegations of state capture that China South Rail’s three contracts were riddled with irregularities.
The commission’s report shows that CRRC E-Loco in effect sidelined its empowerment partner’s directors and treated them as employees, and not as 30% shareholders, as soon as the company received its first tender from Transnet.
A shareholder agreement signed by China South Rail and MBC in October 2012 gives the impression that the directors of both companies should have been involved in all aspects of the project, the report found.
But MBC’s directors were excluded from key decision-making, financial management and procurement, and “denied involvement in the management decision of the joint venture”.
CRRC E-Loco, the report found, refused to source components from local suppliers through MBC, instead ordering it to buy from a list of companies based in China.
Expenditure on international suppliers between January and December 2014 amounted to R2.7 billion, the report found, adding that the components were bought without proof that they could not be bought in South Africa.
A senior source in the local rail manufacturing industry said government’s efforts to industrialise the country have suffered severe setbacks because of Transnet’s failure to enforce its localisation requirements on its locomotives tenders.
“To be honest with you, local companies have the capacity and sophisticated skills to manufacture locomotives and supply all the components here. There was no need to go to China. How do you preach black industrialisation and yet you hand over multibillion-rand industrialisation projects to foreigners?” he asked.
“We have a locomotives industry here based in the corridor between Germiston and Springs. That industry is now dying and companies are retrenching because this ANC government decided to give tenders to Chinese companies.”
The commission’s report also found that between October 2014 and April 2016, CRRC E-Loco worked without a Broad-Based Black Economic Empowerment certificate after the one it had was withdrawn.
CRRC E-Loco, which did not respond to a detailed list of questions sent on Thursday, is now challenging the commission’s findings.
In May, it filed an application at the High Court in Pretoria to have the commission’s findings declared null and void and its report set aside.
The commission’s spokesperson, Sidwell Medupe, said it would defend its report in court.
“The commission cannot comment on the merits of the matter. However, it can confirm that where its decisions are taken on review, it will defend its decisions.”
Transnet did not respond to questions sent on Friday.
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