A confidential report on Transnet’s R50bn deal to buy 1 064 locomotives implicates a second Chinese supplier in paying what appear to be kickbacks to a Gupta-linked firm.
The 108-page report by law firm Werksmans shows that China North Rail (CNR) paid a middleman to extract R647m from Transnet for a project that, by one internal estimate, should have cost just R9m.
Other documents obtained by amaBhungane suggest the middleman was a front for Gupta associate Salim Essa.
Together, these documents provide the first evidence that not one but two locomotive manufacturers enlisted Essa’s help to benefit in the largest locomotive acquisition in Transnet’s history.
AmaBhungane previously exposed how China South Rail (CNR’s sister company) agreed to pay 21% of its portion of the Transnet locomotive contract to Tequesta – an Essa-controlled letterbox company in Hong Kong – in exchange for Essa’s help in securing the contract.
Shadowy shelf company
In 2014, CNR was awarded a R9.9bn slice of the deal and was tasked with delivering 232 diesel locomotives, roughly a quarter of the 1 064 Transnet would acquire. The rest were divided between China South Rail, Bombardier and General Electric.
The understanding was that CNR’s locomotives would be partly built by Transnet at its Koedoespoort facility in Pretoria. However, before the deal was finalised, Transnet decided to move CNR and Bombardier to Transnet’s facilities in Durban.
The plan was pitched to Transnet’s board as a way “to stimulate development in other parts of South Africa”, but would ultimately cost R1.2bn and delay the entire project by months, if not years.
“The relocation carried with it significant delivery risk for the 1 064 project as it created a ready excuse for non or late delivery …” the Werksmans report noted. Transnet’s failure to investigate other options was “peculiar” and “inexplicable”.
The delay undermined the rationale for splitting the contract between four manufacturers in the first place.
CNR’s initial back-of-envelope calculation was that the relocation would cost R9m.
Curiously, CNR enlisted the help of a dormant shelf company to negotiate the “best possible price” with Transnet on its behalf.
On paper, Business Expansion Structured Products (BEX*) was an odd choice for a lead negotiator. The company’s sole director, 28-year-old Taufique Hasware, previously worked selling cellphones and Persian carpets.
Undeterred, CNR signed a contract with BEX in April 2015 to provide “business development” services.
Among CNR’s local partners, the BEX contract set off alarm bells. Roberto Gonsalves, one of three directors representing CNR’s local partners, told amaBhungane this week: “We as [minority] directors dissented.”
But he said CNR used its majority to push the contract through. Gonsalves and the other local directors subsequently refused to sign off on CNR South Africa’s financials.
For both CNR and BEX, the relocation project was potentially a major windfall.
Departing far from the initial estimate of R9m, CNR gave BEX a new benchmark of R280 million. Whatever Transnet agreed to pay over and above R280m would go to BEX as an “agency commission”.
For example – and this is the actual example CNR gave its local partners – if Transnet agreed to pay R650m for the relocation project, BEX would receive R370m (R650m minus R280m) as payment for negotiating the deal.
Everything over R280m would go to BEX, Gonsalves confirmed, a deal he describes as hugely excessive for a company that had never traded.
Two months later, BEX came up with a figure: R719m.
“On this price, CNR is prepared to offer a 10% settlement discount … This results in a revised project relocation cost of R647 181 494,” BEX wrote in an email seen by amaBhungane.
BEX’s figure was a substantial increase from the R9m estimate, and more than double CNR’s benchmark of R280m.
In addition to this, BEX wanted half – R323.6m – to be paid within 14 days of a deal being signed.
Werksmans found nothing to suggest Transnet investigated the figures it was being fed.
“Such a vast cost for relocation should have been the subject of detailed investigation and verification and consideration by Transnet. Remarkably, it appears that no independent verification or investigation of the costs was undertaken by Transnet,” the Werksmans report noted.
In a written response to amaBhungane, Transnet said: “There were various threats made to Transnet in terms of delay penalties based on the foreign exchange structures and escalations which were fixed for the duration of the contract. Transnet was informed by these bidders that the delay in signing off the relocation is also impacting other suppliers.”
On July 23 2015, Transnet acting chief executive Siyabonga Gama approved the payments: CNR would receive R647m, while Bombardier would receive R618m.
Detailed questions were sent to CRRC, the company formed when China South Rail and China North Rail merged, but no response has been forthcoming.
There is no evidence connecting Bombardier to BEX, but it may be tainted by any suggestion the relocation costs were inflated. The company denied “any suggestion of misconduct in connection with the Transnet procurement process”.
The Essa connection
Even without the leaked BEX email, there were clues that Essa was the hidden hand behind BEX.
The sole director of BEX, Hasware, was a director of three other companies – Homix, Forsure Consultants and Hastauf – which appear to operate as “letterboxes” for the Guptas and Essa, passing back large “commissions” from Transnet contracts.
AmaBhungane tried to reach Hasware, but was told by the man who answered his phone that Hasware had moved to India.
In addition, when Werksmans’ forensic auditor, Wits University Professor Harvey Wainer, saw the BEX “business development” contract, he remarked that it looked “identical” to the now notorious R5.3bn “kickback” agreement signed between China South Rail and Tequesta as part of the same Transnet locomotive deal.
AmaBhungane and Daily Maverick first published the agreement in June last year.
“Notably, the layout, style and format of the Tequesta contract is the same … the cover pages appear to be identical (just different names inserted),” Wainer noted in his own 103-page report.
But the most definitive proof of Essa’s involvement comes from the leaked BEX email. The email trail shows that BEX forwarded the proposed CNR relocation fees to Essa with a simple “FYI”.
Two days later, Essa forwarded the same documents to Eric Wood, at the time a director of Regiments Capital and Transnet’s adviser on the 1 064 locomotive deal.
All of this took place while BEX and CNR were negotiating the R647m relocation fee with Transnet.
Wood confirmed Essa’s involvement in the CNR relocation project, saying: “Essa would bring work or business opportunities to Regiments from time to time,” which included the BEX deal.
“While the documents were sent to Regiments for consideration … Regiments passed on the opportunity to work on this,” Wood said in a written statement.
It took two years before official red flags started going up around the BEX deal.
From the Werksmans report, we know that CNR’s minority shareholders continued to question the R65.9m commission BEX ultimately received.
In June, CNR’s auditors KPMG reported the R65.9m payment to the Independent Regulatory Board for Auditors (Irba) as a “reportable irregularity”.
KPMG told Irba that CNR “significantly misrepresented to Transnet the cost of the relocation … from Pretoria to Durban”, and that CNR “made payments to BEX which appear to lack sound commercial substance and purpose”.
This week, Transnet said it had tasked internal auditors and Werksmans with investigating the relocation fees.
“When, in 2017, issues around BEX surfaced, Mr Gama requested Werksmans to investigate that matter as he had never been party to any relocation negotiations, and his approval was based on substantive documentation presented by the negotiators,” Transnet said.
It also said the relocation fees were “subject to a number of investigations by a number of law enforcement authorities”.
Gonsalves confirmed that CNR’s minority shareholders had also laid a charge with the police in terms of the Prevention and Combating of Corrupt Activities Act.
*BEX should not be confused with Bex Structure Products – indications are that BEX tried to misappropriate the identity of an existing company by mimicking its name and address. AmaBhungane has confirmed that the two companies are in no way related
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