Transnet Freight Rail. Picture: ANDRE KRITZINGER.
Transnet Freight Rail. Picture: ANDRE KRITZINGER.

State-owned utility Transnet is embroiled in a spat with it auditors over items in its R49bn irregular expenditure reported in its 2019 financial year, acting group CEO Mohammed Mahomedy said on Monday.

Transnet, which reported a strong increase in its post-tax profit for the year to end-March of R6.05bn from R4.9bn, has increased its reported irregular expenditure, with deals before 2015 falling into the definition.

Irregular expenditure ballooned to R49bn from R8bn the previous year, with the entire locomotive procurement contract of R41bn falling into the category for the reporting period, said Mahomedy, adding that the two numbers were not directly comparable.

The contract to buy 1,064 new locomotives was one of the main matters at the Zondo commission of inquiry into state capture, and Mahomedy testified there that some members of the previous management were at the heart of dodgy contracts with Gupta-related companies that cost the utility hundreds of millions of rand.

 The new board reviewed these transactions since early 2018 and found some had been irregular.

There was an argument with external auditors SizweNtsalubaGobodo over pre-qualifying conditions Transnet had imposed on the suppliers of locomotives, said Mahomedy, describing the talks with the auditors, who had issued an adverse finding in the annual results, as “robust and difficult”.

The talks included the auditor-general and the Treasury, Mahomedy said.

Transnet's Acting Group CEO Mohammed Mahomedy speaks to Business Day TV about the state logistics firm's annual results, and why he believes a six-fold jump in irregular spending should be less than reported.

The main issue behind the qualification was around R1.9bn included in the R49bn irregular expenditure number.

This R1.9bn pertained to whether pre-qualification criteria had been met in certain contracts, with the Treasury favouring Transnet’s interpretation that the expenditure was not irregular, said Mark Gregg-Macdonald, acting CFO. 

There would be further talks with the auditor-general and the external auditors to clarify the matter, he said, adding the matter had only come up in the past eight weeks as potentially being an irregular expenditure item.

“In recent days, we've had other views supported by National Treasury that it’s not irregular. We could have debated this and taken another month or two to get alignment between Treasury, the auditor-general and the external auditor. We felt it was not worth delaying the issuance of our financial statements,” Gregg-Macdonald said.

Transnet had stopped using pre-qualification criteria in its tenders in June 2018, he said. 

The R41.5bn of irregular expenditure related mainly to the purchase of 1,064 locomotives from four companies, including General Electric, after an investigation at the instigation of the board revealed there were possible instances of fraud and corruption as well as aspects of non-compliance with the terms of the supply deals.

There were two other contracts for 100 and for 95 locomotives that fell within the R41.5bn and dated back to 2012. These engines had been delivered.

Transnet had received about half the 1,064 locomotives so far and these were in use, said Gregg-Macdonald.

Transnet was in talks with the four suppliers of the 1,064 locomotives to ensure conditions in the deals were met, Mahomedy said, adding that before the end of 2019 the talks would be concluded.

In the current year, irregular expenditure fell to R1.6bn from R3.4bn the year before, showing tighter controls within the business, said Gregg-Macdonald.

Transnet is investing heavily in its rolling stock and infrastructure, having spent close to R184bn over the past seven years.

Transnet generated R35bn from its operations, up nearly 1% from the previous year. 

By the end of March, Transnet had raised R6.2bn to bolster its balance sheet, which holds R127.7bn of total debt of which just 2.7% is guaranteed by the government.

seccombea@businesslive.co.za