Unaccountable 00022 | 31 March 2021 |
Where is the Transnet loot and why hasn’t it been recovered? Given the government’s recently announced austerity measures targeting social spending, this question demands an urgent answer.
Why have institutions such as Transnet thus far largely failed to fully recover funds looted during the State Capture era? The R16-billion price hike in a 2014 Transnet train deal was engineered to send kickbacks to Gupta-linked firms. While the Guptas aimed to get rich from corruption, special mention must be made of the Chinese state-owned Chinese Railway Rolling Stock Corporation (CRRC). Why has the world’s richest rolling stock company never been held to account for its South Africa profits?
South Africa had not seen a more devastating corruption-linked scandal, with a price tag as hefty as this, since the notoriously corrupt Arms Deal. The seven-year-old Transnet swindle exemplifies the need to hold state capturers accountable. Without recovery of funds, any accountability remains a smokescreen.
To understand the role of CRRC in State Capture we need to go to the genesis of the deal in May 2014 when Transnet struck a deal to buy 1,064 new locomotives for an astonishing R54.4-billion. This was an escalation of almost R16-billion from the “all-inclusive” R38.6-billion originally agreed upon. The 1,064 locomotives deal was part of a “Road to Rail” initiative by the state-owned enterprise (SOE) which was meant to bolster the South African economy. Instead, it became an opportunity for corrupt networks to loot public funds.
Transnet’s procurement of the locomotives was regarded as a laudable idea and was projected to increase South Africa’s rail capacity to the point where the country could boast being the fifth-largest rail system in the world by 2019. According to a 2020 annual report, Transnet had only 571 of the new locomotives in operation — effectively operating at 50% capacity. Not surprisingly, Transnet fell short of its own target to move 350.3 million tons of cargo during the 2018/19 financial year. It only achieved 215.1 million tons in 2019 which inevitably helped bleed the economy and the prospect of employment for many in the process.
The R16-billion escalation was created to facilitate kickbacks to Gupta-linked firms and was made possible through private- and state-actor collusion. Transnet awarded CRRC several tenders to supply the locomotives. The Chinese SOE pledged to route money to the Guptas’ network. Evidence shows CRRC planned to funnel 21% of the contract value (R9-billion) to Gupta-linked shell companies.
CRRC: China South Rail and China North Rail
The CRRC is a global rail giant. It is the world’s largest manufacturer of rolling stock (locomotives/vehicles) and rail equipment. As of May 2020, the company reported a workforce of more than 165,000 employees operating in 101 countries. Its market capital value was an enormous $15.2-billion (R223.7-billion). CRRC is the result of the 2014 megamerger between China North Rail (CNR) and China South Rail (CSR), the country’s two largest train manufacturers. This created a behemoth with revenue reaching $14-billion (R206-billion) and assets amounting to $65-billion (R956.6-billion) in 2020.
CRRC was initially established in 1881 during the Qing dynasty until state reform of SOEs in 2000 saw a split into CSR and CNR. In terms of the 1,064 locomotive deal, Transnet transacted with these two companies before they were again merged as CRRC in 2015.
CRRC said a key reason for the re-merger was international competitiveness. This came as no surprise as a week before the announcement of the merger, the Chinese state introduced the “Made in China 2025” initiative. It included targets to be met by specific deadlines and was intended to create a self-sustainable China, able to compete with global manufacturing giants. CRRC had a monopoly on China’s domestic market, which contributed more than 90% to operational revenue in 2017. Between shifts in its domestic market and CRRC’s demanding targets, foreign expansion was crucial. The locomotive deals with Transnet show what CRRC — and ultimately its proprietors in the Beijing government — was prepared to do to access new markets.
Both CNR and CSR were the successful bidders at various stages of Transnet’s procurement processes. First for the 1,064 locomotives deal of 2014 and the earlier 2012 contracts for the 95 and 100 locomotives. However, as the evidence shows, the procurement processes were riddled with irregularities.
The 95 deal
In 2012, Transnet awarded CSR a tender for the 95 locomotives deal valued at R2.7-billion. Irregularities emerged early in this process. Transnet executives were going out of their way to ensure that CSR won the contract. For one, CSR failed to pay the required fee linked to the tender application and it did not meet the required broad-based black economic empowerment (BBBEE) score. This should have disqualified CSR. Worryingly, emails from Transnet’s then CEO, Brain Molefe, predicted CSR would win the tender before the final decision was made. The final result was that the deal was R100-million over Transnet’s original estimated budget of R2.6-billion.
After being paid by Transnet, CSR forwarded 20% of this payment to Century General Trading (CGT), a front company offering “consulting services” to CSR. This was despite there being no evidence of the purpose of these consulting services or whether they were rendered. CGT is listed in the United Arab Emirates (a well-known Gupta bolt hole) trading goods including scrap metal and non-perishables like — wait for it — beans. It became a funnel for probable kickbacks in the Transnet rail deal and according to official records is managed by Ratan Jagati, an associate of the Gupta family.
This method of forwarding consulting fees would become the model for funnelling money out of Transnet into Gupta hands. CRRC would acquire “consulting services” offered by a Gupta-linked shell company and pay it large sums. These firms, like CGT and JJ Trading, would then forward this money to other Gupta fronts. CGT’s “consulting service” fee for CSR was set at 20% of Transnet’s 95 locomotives contract value. CGT made a little more than R80-million.
In 2015, the Guptas swapped their favoured front company, CGT, and shifted their attention to other shell companies offshore. There was a new contract with Hong Kong-based Tequesta for “advisory fees” at a rate of 21% of CSR’s earnings from the 359 locomotives making up part of the 1,064 locomotives deal. The model employed was simple — pay exorbitant fees to front companies which add no discernible value to deals such as these, but whose offshore status means that the potential proceeds of crime bleed into global money flows where they are hard to track and trace by South African authorities. This model for paying kickbacks into Gupta hands and siphoning money out of Transnet would become the framework for future deals between CSR and CNR, Transnet and the Gupta front companies.
The 100 Deal
Next were the 100 heavy-haul electric locomotives that cost Transnet R4.8-billion. This was close to R1-billion more than initially budgeted by Transnet. CSR won this bid despite competitors such as Japanese manufacturer Mitsui offering trains for R1.2-billion less. In short — this was a spectacular rip-off.
Like clockwork (as seen in the 95 locomotives deal) after receiving payment from Transnet, CSR made “consulting services” payments to a Dubai based shell company. This time JJ Trading FZE acted as the conduit for cash in the UAE. As with Century General Trading, JJ Trading FZE was also registered by Ratan Jagati as mainly trading scrap metal and non-perishables such as beans.
The 1,064 deal
The last (and, by far most devastating) of these deals between Transnet and what became CRRC was the 1,064 locomotives contract. This was to be the largest purchase of locomotives yet made by Transnet. CNR won the tender for 232 diesel locomotives and CSR won one for 359 electric locomotives. Transnet paid R18-billion to CSR. In turn, CSR paid upwards of R3-billion in “advisory fees” to Tequesta.
Not only did the 1,064 locomotives contract skyrocket by R16-billion, the trains CRRC ultimately delivered were late and of poor quality. Only 249 of the 359 locomotives have been delivered and these are largely defective and useless prototypes. According to the Fundudzi forensic report, an investigation commissioned by National Treasury to investigate various allegations at Transnet and Eskom, CRRC did not receive any penalties for late delivery. Consequently, Transnet failed to levy close to R54-million in penalties.
According to agreements uncovered in the #Guptaleaks investigation, R9-billion in kickbacks (for the 1,064, 100 and 95 locomotives deals) were promised to Gupta-linked firms through contract price hikes. What we know so far from amaBhungane investigations is that R3.7-billion has been paid to these Gupta firms. CRRC paid billions in fees to obscure companies whose primary trade involved scrap metal and non-perishables, and for no obvious (or, indeed, discernable) services being rendered. Once the front companies received payment, they would distribute funds to a series of further fronts. This is a money-laundering process called “layering”, by which monies are routed via different bank accounts belonging to different shell companies’ multiple times, thus distancing beneficiaries from transactions. The South African Revenue Service (SARS) would later find that CRRC was paying a fifth of its revenue from Transnet locomotives contracts to Gupta offshore fronts as kickbacks in the form of inflated forex transfers.
Fraud, corruption and money laundering at Transnet (beyond and including the Chinese rail deals) forms a significant work stream at the State Capture Inquiry. According to reports in Daily Maverick, some testimonies have even prompted Deputy Chief Justice Raymond Zondo to order follow-ups from entities such as the Hawks. As such, comprehensive evidence, along with oral testimony, has been presented at the inquiry on the 1,064 locomotive matter. It seems that Zondo has missed a pivotal opportunity to wield his powers in terms of the Rules of the Commission to call private actors from CNR, CSR and CRRC to account for their actions. Could it be that the Chinese SOE is deemed too powerful?
Although inexplicably delayed, Transnet has recently made efforts to overturn the locomotive contracts worth R54-billion. In a matter before the high court as of 9 March 2021, the Special Investigating Unit (SIU) and Transnet argued for the cancellation of the R54-billion contract of 1,064 locomotives, stating that the manufacturers acquired tenders in an irregular manner. If the high court deal is set aside, we need to think of other mechanisms of accountability which include prosecutions of CRRC and its executives.
Who pays the price?
Transnet’s Road to Rail strategy, launched through the 1,064 locomotives deal, was meant to benefit the South African economy. The SOE is responsible for South African freight rail, national ports and fuel pipelines pumping and storing petroleum and gas. Freight rail infrastructure, including the efficient distribution of goods at the lowest cost possible, is key to development. The environment and roads also benefit from getting as many gas-guzzling trucks off the road as is possible. The mining industry was set to be one of the biggest benefactors of the strategy as greater rail capacity, including improved coal freighting, would significantly boost these sectors. Instead, the failure at Transnet — brought on by Jacob Zuma’s Gupta network and assisted by CRCC — added to ongoing debt problems compounding South Africa’s burden of sovereign debt.
Following the downgrade of Transnet, R3.8-billion of its debt is guaranteed by the government, meaning Treasury will have to step in should Transnet fail to pay its creditors. This forms part of R122.5-billion in outstanding loans with banks, development finance institutions and export development agencies.
The freeze begins?
At the end of 2020, the South African Reserve Bank and SARS initiated the freezing of a fraction of the funds connected to the 1,064 locomotives deal. SARS froze R1.26-billion of an amount initially frozen in 2017 because of doubts about the veracity of the description CRRC recorded for the funds. SARS intervened as an initial freeze by the Reserve Bank on R4.2-billion was about to expire and returned to the CRRC Group. SARS found CRRC companies were paying a fifth of their revenue from Transnet locomotives contracts to Gupta offshore fronts as kickbacks in the form of inflated forex transfers to China from its local subsidiary, CRRC E-Loco Supply. These payments were allegedly recorded by CRRC E-Loco as inflated, tax-deductible costs of sale.
Furthermore, the price of foreign currency was misrepresented by Transnet and CRRC E-Loco to inflate the contract’s costs and thus payments due to CRRC. An order handed down on 8 December 2020 by the North Gauteng High Court has ensured R1.5-billion will remain frozen pending a bank guarantee from CRRC for the same amount to SARS. Thus, a total of R2.8-billion will remain preserved while SARS finalises a tax claim against CRRC.
According to SARS documents, in terms of money actually recovered, only R618-million was returned by CRRC in 2019. This was for the 10% advance Transnet paid to CRRC in 2016, for the R6.18-billion maintenance contract. However, this comparatively meagre figure excludes interest accumulated, value-added tax and the damage caused. To make matters worse, Transnet has yet to charge CRRC penalties for several delays in the delivery of locomotives for the 1,064 deal and the 95 and 100 deals. The Fundudzi report records that outstanding penalties from CSR alone amount to close to R54-million. To date, the SOE has inexplicably failed to collect these penalties.
Currently, there is no public information to suggest the National Prosecuting Authority (NPA) intends holding CRRC to account, and no criminal prosecution has been initiated. This is despite persuasive evidence of wrongdoing and evidence-based submissions by the Organisation Undoing Tax Abuse (OUTA) in June 2019. As it stands, only civil society continues to apply pressure. CRRC’s lack of response to a letter from OUTA, calling for the return of R4.3-billion in known kickbacks, shows the company’s sheer indifference to their reckless engagements in South Africa. Could it be that CRRC knows it has protection from a higher power — the Chinese government in Beijing?
Accountability — on a slow boat to China
It is about seven years since Transnet irregularly awarded CRRC what became a multibillion-rand contract for locomotives. Spending meant to overhaul South African freight rail instead lined the pockets of Gupta-linked postbox firms offering phantom consulting services.
However, State Capture at Transnet didn’t rely on Zuma’s Gupta network alone. The evidence shows that CRRC was a central driver and beneficiary of State Capture in South Africa. With only a few hundred metres separating the presidential residence and the Chinese embassy in Pretoria, it is inexplicable why China has not been given an ultimatum to clean up this mess. Prosecutions should start in China which is bound to do so in terms of the United Nations Convention against Corruption.
If Beijing decides to go soft on its corporations then we need to see far more concerted action from South African authorities. Remedial pursuits such as asset recovery or the SIU contract cancellation bid are only the start. The same applies to the belated efforts of SARS and the Reserve Bank in freezing associated assets.
The Zondo Commission should recommend that the NPA urgently lay criminal charges against all the corporations and individuals implicated in the great Transnet heist. This should be one of the top accountability priorities for the NPA. Advocate Shamila Batohi and her colleagues have a constitutional responsibility to uphold the law, regardless of the consequences in Beijing and beyond.