South African probe urges suspension of controversial US$1.2-billion Bombardier locomotive deal

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An internal investigation has urged the South African government to consider suspending a US$1.2-billion contract with Bombardier Inc. as part of a wider probe into corruption and soaring costs in a US$5-billion locomotive project.

Canada’s export agency, Export Development Canada, provided US$450-million in financing for the locomotive project to help Bombardier become one of four manufacturers to secure contracts in the deal.

The cost of the locomotive project ballooned by nearly 40 per cent after South Africa’s controversial Gupta family gained influence over procurement decisions at South Africa’s state-owned freight company, Transnet.

The Guptas, now the targets of arrest warrants and police raids, were at the heart of the country’s biggest post-apartheid corruption scandal, which led to the resignation of former president Jacob Zuma, whose son was a business partner of the Guptas.

The new government of President Cyril Ramaphosa, who took office in February, has launched a massive clean-up campaign at Transnet and other state-owned companies in which the Guptas were influential. It says it is now taking action on the recommendations of the locomotive investigation, which was conducted by Werksmans, a South African law firm hired by Transnet, with the assistance of a forensic auditor.

Mr. Ramaphosa’s Minister of Public Enterprises, Pravin Gordhan, is threatening to imprison those responsible for the soaring cost of the locomotive project. Originally estimated to cost 38 billion rand in 2013, the cost leaped to 54 billion rand (about US$5-billion at the time) when the contracts were awarded to Bombardier and three other manufacturers in March, 2014.

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“I can assure you that our intention is to get to the bottom of all of this and make sure that the true facts are known,” Mr. Gordhan told the South African parliament last week.

“The sudden expansion from 30-odd billion rand to 50-odd billion rand has either a valid explanation or some orange uniforms need to be waiting for the people concerned.”

In an e-mail to The Globe and Mail on Tuesday, a spokesman for Mr. Gordhan provided excerpts from a document that the minister had used in a recent briefing, based on the recommendations from the investigation by the Werksmans law firm.

“It was recommended that consideration be given to suspending all or certain of the transaction agreements, to review and possibly set aside said agreements under the principle of legality, in particular in relation to CNR and BT,” the minister’s statement said.

His statement refers to two of the four companies that received locomotive contracts: China North Rail (CNR) and Bombardier Transportation (BT).

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Olivier Marcil, vice-president of external relations at Bombardier, said the company cannot comment on the content of documents that are not public and have not been seen by the company. “We are aware that reports have been produced about Transnet procurement process, but we did not get a copy,” he told The Globe in response to questions.

“Bombardier Transportation has never been questioned nor asked any information by the law firm or auditor regarding Transnet,” he said. “Bombardier denies any suggestion of misconduct in connection with this contract.”

Shelley Maclean, a spokeswoman for Export Development Canada, said the agency could not provide any specific comment on Mr. Gordhan’s statement about the Bombardier contract “for reasons of commercial confidentiality.” She added: “EDC takes this matter seriously and is following developments closely.”

The 219-page report from the Werksmans investigation has not been officially released, but a leaked copy was obtained by a South African newspaper, City Press. It quoted the report as concluding that the locomotive deal was “cloaked in corrupt and reckless activity.” The evidence of “bribery and similar unlawful conduct” should be investigated by a judicial inquiry, it said.

The soaring cost of the locomotive deal “appears inexplicable, unreasonable and excessive” and was tainted by “suspicious conduct” and “a cavalier waste of vast sums of money,” the report said, according to City Press.

Mr. Gordhan, who was dismissed from cabinet by Mr. Zuma and reinstated in a different portfolio by Mr. Ramaphosa, has now replaced the entire board of directors of Transnet, accusing the former directors of failing to act on the recommendations of the internal investigation into the locomotive project – the biggest locomotive acquisition project in South Africa’s history.

The investigation by Werksmans reported “scathing” findings on “wasteful expenditure” and “malfeasance” in the locomotive deal, Mr. Gordhan told the recent briefing.

When this report was submitted to Transnet last December, the response of the Transnet board was “reckless or worse,” he said, in explaining why he decided to sack the remaining members of the board last week after months of inaction.

He said he has directed the new Transnet board members to act on the findings of the Werksmans investigation and to review the legality of the locomotive contract.

So far, the bribery allegations have focused on a Chinese company, China South Rail, one of the four manufacturers to receive contracts in the locomotive deal. The company paid about US$320-million in “consulting fees” – about 20 per cent of the value of its contract – to a Gupta-controlled company in Hong Kong, according to leaked e-mails cited in the South African media.

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In 2015, when Canadian export agency EDC announced US$450-million in financing for Bombardier’s US$1.2-billion contract to produce 240 locomotives for Transnet, it hailed the deal as a “showcase” for “Canadian capability to build and deliver on landmark projects worldwide.”

Brian Molefe, the chief executive of Transnet at the time, said the EDC loan was “a massive thumbs-up for our country.”

Today, however, the locomotive contract is years behind schedule, partly due to South Africa’s decision to require Bombardier’s locomotives to be assembled by a less experienced Transnet company in the port city of Durban, and only a small fraction of Bombardier’s planned 240 locomotives have been delivered to Transnet.

A separate investigation in 2016 by South Africa’s Public Protector, an anti-corruption watchdog with official powers, found evidence of a “cozy relationship” between Mr. Molefe and the Guptas, including 58 phone calls in a seven-month period between the Transnet CEO and a senior member of the Gupta family.

Several weeks before the locomotive contract announcement in 2014, Bombardier agreed to sell a US$52-million luxury jet to the Guptas, with EDC providing 80 per cent of the financing. This year, EDC cancelled its financing for the airplane deal and is fighting a court battle to recover the plane.

“At Transnet, governance structures were repurposed to enable corruption and rent-seeking,” Mr. Gordhan said in a speech to Parliament last week.

“There is evidence that contracts were awarded to people with close links to some of the Transnet officials,” he said. “There were clear conflicts of interest. The directors of Transnet as well as senior executives were derelict in their duties and there were regular violations of the Public Finance Management Act, the Companies Act and the Prevention of Corruption and Criminal Activities Act.”

Police investigators and criminal prosecutors are reviewing the evidence from the Werksmans report and other forensic reports on Transnet and other state-owned companies, Mr. Gordhan said.

“We shall not only be satisfied with putting the criminals in jail,” he said. “The money that have stolen from the state-owned companies and the things they have bought with them – expensive houses, flashy cars, jets – must be recovered and returned. They belong to our people, not to crooks.”