What’s behind Transnet’s ‘impasse’ with Gupta-linked locomotive supplier?

Transnet appears to have had enough of locomotive supplier CRRC E-Loco, declaring an “impasse” with the Chinese company over its unwillingness to “engage with the relevant authorities in South Africa to normalise its operations in the country”.

CRRC, or China Railway Rolling Stock Corporation, featured prominently in the Zondo Report dealing with state capture at Transnet.

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“As a matter of urgency, in the next few weeks Transnet will therefore be issuing an open, competitive tender inviting any eligible original equipment manufacturer (OEM) to step-in to rehabilitate the non-operational Chinese locomotives,” says Transnet in a statement.

The tainted tender

Asked for further clarification, Transnet says the contract with CRRC was for the delivery of 359 locomotives, 260 of which were supplied prior to the company being suspended (as a supplier).

That leaves a balance of 99 to be delivered against the contract.

Testifying before the Zondo Commission, Paul Holden of Shadow World Investigations said irregular contracts worth R41.2 billion were made to entities linked to the Guptas and their point man, Salim Essa. That’s equivalent to about 72% of total ‘tainted’ payments by the state.

Impact

The CRRC locomotives impact three major corridors (the North, Northeast and Cape corridors) that account for roughly 50% of Transnet Freight Rail’s revenue, and support three primary mining sector segments – export coal, chrome and manganese.

Last year, Minerals Council SA said the country lost a potential R50 billion in bulk minerals exports because it was unable to meet targeted export volumes. This comes on top of R35 billion lost for the same reason in 2021.

In November 2022, Transnet concluded a settlement agreement with CRRC whereby it agreed to normalise its operations in SA with regard to the South African Revenue Service (Sars) and the SA Reserve Bank.

As part of the settlement agreement, CRRC was to rehabilitate 161 non-operational 22E locomotives and provide long-term material and reliability support to Transnet. It was also required to repay Transnet “unjustified” profits earned on the locomotive supply contract, and deliver the outstanding 99 locomotives at the agreed, corrected price.

“This is a critical intervention not only for Transnet’s sustainability, but for the South African economy,” says the Transnet statement.

Responding to Moneyweb questions, Transnet says the majority of the locomotives supplied by CRRC are standing idle because the company “has refused to supply Transnet with the necessary spare parts to repair them”.

“CRRC on two previous contracts delivered 95 x 20E and 100 x 21E locomotives and the OM [original manufacturer] has also refused to support Transnet with regards to the fleet.”

Last week Transnet issued a tender to OEMs for repairs of the other long-standing locomotives, which came from Wabtec, Mitsui and Alstom.

“The resolution of this matter is key in supporting Transnet’s efforts to normalise its operations, enhancing the service provided to customers, and boosting the national fiscus,” it says.

This is part of Transnet’s efforts to normalise operations in light of revelations in the Zondo Report and its ongoing operational difficulties.

Minerals Council not happy

Last week, Business Day and News24 reported on a confidential letter from the Minerals Council to Transnet chair Popo Molefe on 4 December 2022 demanding the firing of CEO Portia Derby and for the Transnet board to take over the running of the company. The letter also called for the replacement of Transnet Freight Rail CEO Sizakele Mzimela.

Read: Transnet, Minerals Council join forces to tackle port and rail bottlenecks [Dec 2022]

Warning of imminent liquidation unless drastic action is taken, the letter goes on: “Given that Transnet SOC’s operating performance is deteriorating, we cannot see how the company will avoid breaching its debt covenants early in 2023, at which stage the directors of Transnet SOC will need to place the company into liquidation or risk being sued for trading recklessly.

“The bulk commodity mining companies that are members of the Minerals Council are now demanding urgent action on this crisis, as it is now posing an existential crisis for Transnet and for the mining companies.”

Responding to the leak of the confidential letter, the council says it is “working in close collaboration and in a spirit of cooperation with the Transnet Board and Management to urgently resolve deep-seated problems and constraints in the rail and port logistics to the benefit of bulk commodity companies, Transnet and the fiscus”.

“The Minerals Council and Transnet have established joint teams to address constraints on bulk commodity export channels. The Minerals Council and its members are committed to finding urgent, pragmatic and lasting solutions to the problems curtailing mineral exports.”