Transnet’s costly train detour
In March 2014 Bombardier was awarded a R13bn contract to supply Transnet with 240 electric locomotives. The contract formed part of a R54bn Transnet tender, split between four bidders, for a total of 1,064 diesel and electric locomotives.
Export Development Canada (EDC), the government agency that finances export deals for Canadian companies, provided US$450m towards Transnet’s contract with Bombardier.
EDC also provided 80% of the funding for Bombardier’s sale of a private jet to the politically connected Gupta family, though the company has stressed the two deals were not connected.
Since then the larger locomotive tender has become mired in controversy and will be the subject of a parliamentary inquiry early next year. One of the issues under scrutiny is how total costs escalated by 40%.
In November David Fine, a senior partner at global consultancy McKinsey, told parliament that Transnet had estimated it would cost R38.6bn to buy the 1,064 locomotives over seven years, including hedging and escalation costs. The estimates were provided by Transnet Freight Rail and were based on recent acquisitions and "expert input from [UK firm] Advanced Railway Technologies", Fine said.
McKinsey led a consortium of advisers to the project until shortly before the tenders were awarded.
"After McKinsey withdrew from the project, I am aware that Transnet signed a three-year locomotive acquisition contract with four manufacturers for 1,064 locomotives at a total cost of around R54bn (including contingencies) on March 17 2014, which compares with the original R38.6bn," Fine said.
Transnet had originally estimated electric locomotives would cost R34m each. This would have put the price tag for Bombardier’s 240 locomotives at R8.2bn, rather than the final price of R13bn, or R54m per locomotive.
Bombardier says the price differential is explained by the fact that the company initially put in a bid for 599 locomotives "with a certain unit price". After Transnet reduced this to 240 units, Bombardier "had to adjust its price accordingly (including amortising the development cost over a much smaller number of locomotives)", spokesman Mark Masluch says.
"This constitutes a fair and competitive market price considering the type of product, the number of locomotives to be delivered, the local content requirement, the delivery schedule and the safeguards requested by the client against inflation and rate variation."
The Transnet contracts that came under the most scrutiny were those with China South Rail, which won the lion’s share of the tender for the 1,064 locomotives, and several smaller tenders.
An investigation by the amaBhungane Centre for Investigative Journalism showed that China South Rail had since 2014 paid "consultancy fees" totalling R5.3bn to Hong Kong-based Tequestra, a company owned by close Gupta business associate Salim Essa.
Transnet later announced it would investigate these claims, as well as whether it had been overcharged and had followed its own procurement processes.