Locomotive local build deal delayed

Rolling start: Then Transnet chief executive Brian Molefe signs off a deal with a Chinese company to build locomotives for the parastatal. (Puxley Makgatho/Business Day)

Rolling start: Then Transnet chief executive Brian Molefe signs off a deal with a Chinese company to build locomotives for the parastatal. (Puxley Makgatho/Business Day)

Grand promises that train engines made for Transnet under a R50-billion contract would be locally manufactured seem to be off to a rocky start with the Chinese bidders the slowest to localise — amid allegations of Gupta associates’ palms being greased.

The deal, announced in 2012, was heralded as a major driver for local industrial development but has been mired in controversy.

The slow start to localisation was documented by research commissioned by the government-linked think-tank, Trade and Industrial Policy Strategies (Tips).

The research, completed in November last year, said localisation had got off to a “rocky start”, particularly by the Chinese winners of the contract — China North Rail and China South Rail.

The two companies have since merged to form the CRRC, a Chinese state-owned train manufacturer, and together they account for more than half of the contract — 591 of the 1 064 locomotives Transnet is procuring.

After the release of leaked emails, the amaBhungane Centre for Investigative Journalism recently reported that China South Rail and Gupta family associate Salim Essa allegedly struck a deal for China South to pay Essa and companies allegedly linked to the Guptas a 21% fee to ensure its successful bid.

This amounted to about R3.8-billion of China South’s R18-billion part of the locomotive deal, according to amaBhungane. China South was to make 359 locomotives.

Last week, the Economic Freedom Fighters said it would lay criminal charges over the contract, claiming that, in total, the tender was inflated by more than R17-billion.

Apart from China North and China South, two other companies, Bombardier and General Electric, got a share of the project.

According to the Tips research, Transnet granted the Chinese firms generous exemptions, allowing them to produce the first 60 locomotives in China. General Electric was expected to produce six of its 233 in the United States and Bombardier was expected to produce all its 240 locomotives locally. The bidding firms were required to localise production, invest in local firms and build a competitive local supplier base. But the research report said, at the time, localisation on the programme “has got off to an uneven, if not rocky start”. It was carried out by the Centre for Competition Regulation and Economic Development.

Bombardier and General Electric had made some progress in investing in South Africa, it noted, but the Chinese firms “have secured permission to build the largest number of locomotives outside of South Africa and with limited evidence thus far of investments being made in South Africa”.

It added there “is scepticism among suppliers about the Chinese firm’s commitment to localisation”.

According to Tips, the lack of localisation is reflected by South Africa’s import bill for locomotives, which had increased exponentially from 2013. They were less than $50-million a year in 2013, but then climbed to $100-million in 2014 and $550-million in 2015, it said.

“Where government policies designed to stimulate industrialisation have been captured, the result is not only corruption and money laundering, but also weaker foreign direct investment and slower industrialisation,” it said.

The report’s findings are limited. The research was done during the early stages of the manufacturing processes and only one of the four bidders participated in an interview because of non-disclosure agreements with Transnet.

When asked whether there was any reason to believe the observations would have changed materially since the report was completed, the lead researcher of the report, Rod Crompton, said he had not looked into it since the fieldwork was conducted between July and September last year.

It is not clear whether, in recent months, the Chinese company has delivered more than a handful of the locomotives to Transnet, or to what extent they have begun to produce them locally.

Neither Transnet nor the CRRC responded to questions.

In January this year, Media24 reported that the first two trains delivered by CRRC were experiencing technical difficulties because of faulty alternators.

The report said at the time that the parastatal had refused to accept another 18 waiting to be shipped to Transnet from China.

General Electric said it has delivered 137 of its 233 locomotives.

A spokesperson for Bombadier said the company makes all its locomotives locally. The first six are being tested and it hopes to hand these over to Transnet officially in the next three to four months.

The Tips research said several respondents had also alleged there was corruption involving the contract. The claims ranged from “government sanctioning of corruption, to board level corruption, to corruption at lower levels in Transnet, such as procurement staff which ensure that their cronies obtain contracts”.

Crompton said the purpose of the research was not to investigate possible corruption and so none of these claims was verified.

In 2014, other stakeholders raised red flags about the locomotive programme. The National Union of Mineworkers (Numsa) protested, listing many concerns it had with the deal. These included that South African suppliers had been overlooked in favour of the international bidders, and the empowerment partners of the winning companies had no rail experience. They ranged from the well known to the obscure. General Electric partnered with the Mineworkers’ Investment Corporation, and China North’s empowerment partners included Cosatu’s investment arm Kopano Ke Matla. Others less well known included one of China South’s partners, Adoword Motivational & Life Coaching.

Numsa also complained that localisation requirements were being flouted.

In response to the allegations of corruption on the project, Transnet said in a statement last week that it was “confident that our procurement processes have sufficient checks and balances to guarantee integrity”, including oversight at “various governance levels”.

All contracts above a certain threshold were taken through Transnet’s high-value tender process that is run by an independent auditing firm.

It has set up a special committee made up of “mainly independent directors to review the company’s processes, with a specific focus on the locomotive acquisition programme”.

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