/ 15 March 2019

Ports body bungles gas deal

Cahoots? Transnet National Ports Authority’s legal team failed to enforce its contract with Sunrise Energy.
Cahoots? Transnet National Ports Authority’s legal team failed to enforce its contract with Sunrise Energy. (Bloomberg)

The Transnet National Ports Authority (TNPA), which manages the country’s commercial ports, could be sued for about R1-billion because its legal team has failed to manage and enforce its contract with Sunrise Energy, the developers and operators of a liquid petroleum gas (LPG) import and storage facility in Saldanha Bay.

A report by forensic auditors Sekela Xabiso concludes that the ports authority could be seen to be “in cahoots” with Sunrise because it had entered into a “technically void” section 56 concession agreement, granting Sunrise permission to fund, develop and operate the R1-billion facility. Furthermore, the TNPA had failed to enforce material aspects of its agreement when there was a clear breach by the operator.

Sekela Xabiso was appointed by Transnet after Avedia Energy, a competitor to Sunrise, wrote to the office of the chief audit executive and challenged the lawfulness of the concession granted to Sunrise. It also raised problems it was having with connecting to the open-use pipeline.

The forensic report says the TNPA could be liable for at least R1-billion in damages — the cost of the development, which had increased from R600-million to R1-billion.

The state-owned Industrial Development Corporation approved a R709-million loan for the terminal and Sunrise raised a R150-million loan from the Public Investment Corporation (PIC), which manages state employee pensions.

Early on in the bidding process, after the TNPA had issued a request for proposals to build the LPG terminal, one of the stipulations was that the facility had to be built on land owned by the authority.

But, the report says, the request was “misleading or alternatively, collusive with Sunrise in that the pitch by Sunrise included a land portion which was not owned by the authority”. This contravened the National Ports Act and meant the TNPA could neither own nor exercise regulatory oversight over the storage and handling facility built by Sunrise.

At the time, the authority believed it would be able to extend its port limits and incorporate that piece of land to fall under its jurisdiction, which is allowed according to the Act. But the transport minister is the only authority who can extend the port land area and the TNPA has yet to approach the minister to do this.

The matter began in 2011 when Sunrise successfully won a bid to build, own, operate and transfer the terminal to the ports authority. The terminal was built to address the shortage of LPG in the country and to diversify its energy mix.

A critical addition to the agreement to operate the terminal was a sale of land agreement between Sunrise and the TNPA to remedy the fact that the land did not belong to the authority. The sale agreement stated that Sunrise, which had bought land from a third party, ArcelorMittal, had to sell it to the TNPA for R1 no later than five years from the time when the area was rezoned. At the end of the
operations concessions agreement, which is valid for 30 years, the authority will have full ownership of the entire facility at no charge.

The commencement date of the sale agreement was September 2013 and the ownership of the land had to be transferred by September 2018, but Sunrise has “failed, refused or neglected” to do so.

Apart from Sunrise being in breach of a “material term” by not initiating the land transfer, the forensic auditors found that this “has not ignited any action on the part of the authority, even in circumstances where the breach by Sunrise has led to the concession agreement being void”.

A clause in the agreement states that the TNPA has to give Sunrise 30 days written notice of its intention to cancel the agreement if Sunrise fails to remedy any breach, failing which “the authority may cancel this agreement in its entirety by written notice to Sunrise Energy with immediate effect”. The forensic auditors spoke to the TNPA’s executive head of legal, Peter Balfour, its general manager for legal, risk and regulatory compliance, Sagree Chetty, and its property manager, Donovan Samuels, who all confirmed that the authority had done nothing to enforce the terms of the agreement.

“[Chief executive] Shulami Qalinge did not seem to know that Sunrise was in breach of the land sale agreement, which forms an integral part of the section 56 concession agreement,” the report says.

Even after Samuels had written to notify Sunrise of its breach of contract, “nothing ever came of this”. He sent the letter to compliance manager Rolene Muller and port manager Vernal Jones, but he did not receive a response.

Investigators found the TNPA does not have a structure to manage or enforce breaches of section 56 contracts. Its legal team and its leadership shifted the responsibility from one to the other when asked who was responsible for that function.

The TNPA’s legal division and its leadership had failed to ensure that there was proper contract management and compliance with the provisions of the National Ports Act in the handling of the concession agreement and the report recommends that the TNPA should consider taking disciplinary action against the officials, who “neglected to ensure compliance with the legal and contractual framework of the entire concession arrangement”. Investigators have also recommended that the authority establish a function for contract management.

At the centre of Sunrise’s opposition to transferring the land is what it sees as a breach of the terminal operation agreement by the TNPA, which has allowed Avedia to offload gas from the docks at Saldanha.

The two companies have been locked in legal battles since Sunrise was awarded the concession.

The agreement between Sunrise and the TNPA states that there must be open access to the terminal and to allow third parties to use it for a commercially reasonable fee. But Avedia has not been able to connect to Sunrise’s pipeline and storage facility because Sunrise did not agree with Avedia’s technical drawings.

Meanwhile, the TNPA has on several occasions authorised Avedia to offload LPG from ships on to trucks for delivery to its storage facility.

Sunrise chief executive Pieter Coetzee told the investigators the TNPA had breached a “tacit” term of the concession agreement by authorising Avedia’s mobile offloading facility. He said the land sale agreement was “inextricably linked” to the operating agreement and the TNPA breaches may ultimately result in it being terminated and consequently the sale agreement would fall away.

“Accordingly, Sunrise Energy is of the view that it is appropriate for the transfer of the land to the TNPA to be held in abeyance pending the resolution of the dispute which exists between those parties,” he said.

Investigators say the TNPA must attend to Sunrise’s allegations of a breach urgently because it “could lead to a massive lawsuit where the TNPA may be sued for damages and costs incurred by Sunrise in putting up the infrastructure”.

In response to questions sent by M&G, TNPA said issues with Sunrise’s contracts continue to be managed by them and would not disclose if they would be taking any disciplinary action against their officials as these are internal issues.

Tebogo Tshwane is an Adamela Trust journalist at the M&G