Transnet: hearings

STANDING COMMITTEE ON PUBLIC ACCOUNTS
26 September 2003
TRANSNET: HEARING

Chairperson: Mr F Beukman (NNP)

Documents handed out
Preparation for Hearing on Transnet (Appendix)

SUMMARY
The Committee's questions centered on the following focus areas: tender procedures and awarding of contract to Xisaka, prices, losses to Transnet and recovery thereof, and disciplinary action envisaged, weighbridge certificates and irregularities and credit notes. Members asked Transnet to provide clarity on the reasons for the numerous complications in the Xisaka contract especially the reasons for failing to invite other competitors in the awarding of the contract to Xisaka. Members expressed concern over the reason why Transnet accepted prices for non-ferrous scrap in 1996 that were far below market values at the time; Transnet's failure to address the issue over the past eight years and the frequency with which the weighbridges were serviced in terms of required standards. Other issues included Transnet's reasons for refuting the Office of the Auditor-General's allegations that the relevant policies and legislation were not complied with; the current status of Transnet's Pension Fund No. 2 and the mechanisms that Transnet had put in place to both encourage and protect whistleblowers. Clarity was sought on government's decision to dispose of Transnet Housing as a single entity.

MINUTES
Input by Transnet CEO
Mr M Makwanazi, Transnet Group CEO thanked the Office of the Auditor-General for its Report, and stated that he would follow up on the recommendations made in the Report. He stated that he hoped he would be able to inform Members as to the steps Transnet had taken in following up on these recommendations.

Opening remarks by Mr Gerber
Mr P Gerber (ANC) stated that it was unfortunate that it had been eight years since the alarm bells were first rung regarding the Xisaka transaction. The losses according to the Office of the Auditor-General that were very conservatively attributed to Transnet and to the taxpayer were estimated at at least R15m. He stated that the ultimate costs were likely to be double that amount, and this represented about 600 housing opportunities to the public, represented by Members. Mr Gerber stated that it was difficult for Members of the ANC to defend such transactions because they were indefensible.

It was totally unsatisfactory that the Office of the Auditor-General had been struggling a great deal to receive the relevant documentation from Transnet, so much so that Transnet sought a legal opinion as to whether it was obliged to supply the relevant information to the Office of the Auditor-General or not. In this "act of revolutionary capitalism", executed by one of Transnet's previous directors with the full blessing of the Board and executive committee, many people's lives were destroyed. One young person actually died of a heart attack as a result of stress and threats.

It was unthinkable and unacceptable that a CEO or Board Member could read in the media about a controversial transaction taking place within his own organisation, yet fail to make any inquiries on his own initiative about the facts of the matter and take steps to clarify it. Transnet had apparently appointed Deloitte and Touche to investigate the forensic findings compiled by Gobodo and Associates, but this wastage of taxpayers; money could have been avoided if all entities and parastatals were made accountable to the Office of the Auditor-General. Mr Gerber stated that by involving itself in this transaction, Transnet had actually exposed itself by indirectly becoming associated with cartel activities in the scrap metal industry. He stated that complaints had apparently already been launched at the Competition Board in this regard.

Mr Gerber stated that it was these kinds of decisions that had forced this Committee to focus on parastatals such as Transnet, and the South African Post Office. He stated that the message is that the parastatals and State funded institutions had to start to function properly. The confusion and limbo created by transformation processes and experiments had created opportunities unfortunately also for unscrupulous business people, and because of this the Committee and Parliament were keeping a close eye on these parastatals. The days when parastatals could hide behind the fact that they were not listed in the PFMA were over, as the new Public Audit Bill which will be passed in November 2003 will terminate these issues.

He stated that he was pleased that Transnet was here today because this matter had been on the Committee's agenda for nearly four years. This Committee aimed to ensure that Transnet and other public institutions adhered to policies and institute sound financial and administration management practices to the benefit, first of all, to the taxpayers and the stakeholders.

1. Tender procedures and awarding of contract to Xisaka by Mr L Chiba
Mr L Chiba (ANC) asked Transnet to explain its reasons for not inviting other competitors or dealers as sole purchasers of non-ferrous scrap.

Mr Makwanazi agreed with Mr Gerber that this matter had taken far too long to be addressed. He stated that this matter was considered by Transnet internally, based on other irregularities that Transnet suspected were taking place. Mr Makwanazi stated that he was not aware that Transnet had appointed Deloitte and Touche to verify the report of the Office of the Auditor-General, but he did not have the necessary facts with him to confirm this statement by Mr Gerber. Transnet was however doing further work on the findings of the Office of the Auditor-General on a number fronts, which included taking disciplinary action against employees and taking legal action against some of the parties that were involved in the Xisaka transaction.

He stated that the perception that a cartel was being created was not far from the truth, because Transnet did not at any time open contracts up for tender. It could then "kill other potential suppliers" who would wish to do business with Transnet. Mr Makwanazi stated that it was for this reason that Transnet decided a few weeks ago to put this contract out on open tender, and he doubted whether any adjudication would have taken place already. Transnet has also been legally advised to contact the Scorpions to take this matter to its full conclusion.

Mr Makwanazi stated that he was not certain whether the decision not to invite other competitors actually succeeded in curbing theft, because theft still occurred after 1996. He did not have the exact figures on the quantum of the theft that has since occurred. A company named SARHWU Investments, which was owned by the largest union within Transnet at the time, was affiliated to the sole supplier that was awarded the contract. This company was part of the school of thought which decided that the route followed was a joint solution between management and labour, in an to attempt to reduce copper theft.

Mr Chiba stated that this contradicted the fact that, a later stage when the contract was extended, Saru was no longer party to the contract. He sought clarity on the basis on which Transnet then continued to award the contract to Xisaka without going on an open tender. The reason offered by Mr Makwanazi did not stand for this Committee.

Mr Makwanazi replied that the decision to award the contract to SARHWU Investments in 1996 and other black investors at a later stage was influenced by Black Economic Empowerment (BEE) concerns. The decision to extend the contract was made by the Transnet Board, because the previous provider had done a good job.

Mr Chiba asked why Transnet approved the appointment of Xisaka in principle as sole contractor prior to the contract prices being determined.

Mr Makwanazi replied that it is current practice for Transnet to negotiate contract prices after in principle approval had been given, even in terms of other contracts it concluded. It was current practice for an approving body to instruct the Transnet representatives to return and negotiate a lower price. He stated that it was thus normal business practice to negotiate prices.

Mr Chiba stated that this was an irregularity and would have adverse consequential for Transnet if it could not negotiate prices down in its favour. He cautioned that such practices should not be encouraged. Mr Chiba asked Transnet to explain whether this irregularity had a positive or negative impact on Transnet as well as Xisaka.

Mr Makwanazi replied that he assumed that, based on the information in the report of the Office of the Auditor-General, Transnet may be worse off by up to R15m, and Xisaka might then not be entitled to this R15m. This could be one impact. There were also certain "not well-explained practices" that were taking place between the points of collection of this scrap metal, which resulted in the issue of credit notes that did not have the necessary supporting documentation. Transnet was following up on this, and it hoped to take action and recover the monies lost.

Mr Chiba asked whether Mr Merkel's offer was the only offer considered by Transnet?

Mr Makwanazi replied that he was not "fully in the picture" on some of these detailed matters

Mr Chiba stated that this was understandable, and informed Mr Makwanazi that Transnet could furnish written answers to this Committee within the next two weeks.

Mr Makwanazi agreed.

Mr Chiba asked whether the Transnet Executive Committee formerly approved the Xisaka contract on 14 October 1996.

Mr Makwanazi answered in the affirmative. An important question was however whether it had the necessary mandate to do so. He stated that he was not presently in a position to answer this question.

Mr Chiba asked if Ms Serobe, an Executive Director at the time, had the necessary delegated powers to enter into closed contracts or accept offers without the approval of the Executive Committee or the Transnet Board.

Mr Makwanazi replied that Transnet's executive directors did have the necessary delegated authority to confine certain contracts to particular companies. He was not sure if Ms Serobe had the necessary powers in that specific case, and this had to be followed up. Mr Makwanazi stated that he had requested in 2002 that executive directors no longer be granted this power, because he became uncomfortable with the large numbers of confined contracts that were being awarded without the contract being properly debated at the Tender Board. He requested the Transnet procurement policy be altered to currently require even contracts that could be confined to be fully discussed by the Tender Board before being awarded. Mr Makwanazi stated that he was not certain, but Ms Serobe could have had the necessary delegated authority to confine the Xisaka contract.

Mr Chiba requested Mr Makwanazi to identify the exact facts of the situation and submit a written response to this Committee within the next two weeks. He asked whether the Executive Committee determined the necessary background to the contract to be entered into.

Mr Makwanazi responded that he was not present at that particular Executive Committee meeting. He stated that the matter would be debated during the meeting, and the executive director would have to motivate its approval. He stated that he assumed that Executive Committee did therefore apply its mind when it considered that contract in 1996.

Mr Chiba asked whether the Executive Committee established whether the Transnet Tender Board had approved the contract.

Mr Makwanazi replied that he was not certain, and would reply in writing.

Mr Chiba sought clarity on the basis on which the termination benefit of Ms Tager, a former independent non-executive director, was extended in November 2001.

Mr Makwanazi replied that at the time when Ms Tager's was about to leave the Transnet board, her contract of employment had just been extended by approximately three years in May 2001. Her services were terminated in about November 2001, and she instituted legal action against this decision. He stated that it was because of this legal action that Transnet had to settle in the amount indicated, and this was reached with the approval of the Transnet Board.

Mr Chiba suggested that the termination benefits surely only applied to the group CEO, the group CFO and the Group Executive, and not to an independent non-executive director.

Mr Makwanazi replied that at that level, especially for non-executive directors without contracts of employment, there would be a difference in the contracts. The Transnet Board would then have the right to terminate that contract at an Annual General Meeting (AGM), or at a special AGM.

Mr Chiba asked whether Ms Tager resigned from the Transnet Board, or whether her services were terminated. This had to be clarified, because it appeared that she had resigned.

Mr Makwanazi replied that her services were terminated and she did not resign. He suggested that the Transnet Annual Report appeared to reflect, erroneously, that she had resigned.

Mr Chiba asked whether it would perhaps have been more prudent to take corrective steps by resorting to an open tender procedure when the Xisaka contract was extended.

Mr Makwanazi replied that he should explain some of the dynamics within Transnet during the period 1996-1998. He stated that there were Transnet had extended certain contracts for close to twenty years, and the decision to extend these did not appear to be questioned. He doubted whether any tender process was followed in extending the contract. He did now know who exactly had secured the Xisaka contract for non-ferrous metals and for how long, before it was awarded to Xisaka. This matter would have to be followed up. He reminded Members that it was one of the first contracts in which BEE investors were incorporated into the economic development of this country.

He stated that it was actually the CEO of a company by the name of Promat that recommended to Transnet that Xisaka had done exceptionally well, and requested that it be granted a three year extension. The decision to extend the Xisaka contract for three years was then taken by Ms Serobe. He stated that he indicated during the Transnet meeting with the Office of the Auditor-General during June 2003, that notice had to be given to Xisaka so that its contract could be terminated. This notice was served by Dr T Madima, Transnet General Counsel. Mr Makwanazi requested both Spoornet and Transwerk, the two key entities involved in executing this contract, to ensure that they are prepared to award the contract to another contractor by the end of October 2003 when Xisaka's contract expires. They have engaged in an open tender process for the awarding of this contract, the tender board would adjudicate the decision and, effective 1 November 2003, there would be a new operator if the current supplier was not the preferred supplier.

Mr Chiba stated that the current government was creating opportunities for BEE, and there was thus no reason to not engage in a fair, transparent and open way. This was the point being made by this Committee. He requested Transnet to respond to the outstanding issues in writing.

2. Prices, losses to Transnet and recovery thereof, and disciplinary action envisaged by Mr P Gerber
Mr Gerber asked why Transnet in 1996 accepted prices far below the normal prices for certain categories of non-ferrous scrap, having regard to the then existing market values for such categories.

Mr Makwanazi said that the current price of ore was quite good for exporting, and the same applied to coal. There were valleys and peaks in this pricing market, but research would have to conducted on the ruling prices for non-ferrous scrap as far back as 1992. He stated that the very specialists who negotiated the prices with the supplier in 1996 would have to be consulted, and they should have been in a position to advise Transnet as to whether the prices were abnormally low. This had to be followed up.

Mr Gerber asked whether these prices could be justified.

Mr Makwanazi replied that, in hindsight and together with the work done by the Office of the Auditor-General, he doubted whether those prices were good for Transnet. It was for this reason that Mr Makwanazi was pursuing the matter further.

Mr Gerber asked whether the Transnet Board was aware of these discrepancies in the values during 1996 to 2000. If this was the case, he asked Transnet to indicate the action that was taken to remedy the position. If this was not the case, Transnet has to explain who should have been providing the Board and Executive Committee with the necessary information.

Mr Makwanazi said that the Transnet Board was not aware of the discrepancies, because even members of the executive directorate in 1996 were not aware of the price differentials. He stated that that he finds fault with the specialists that advised the executive to enter into that contract, and they have to be called to account and explain their reasons for advising Transnet in that manner. Mr Makwanazi stated this price differential was remedied at some stage.

Mr Gerber stated that he had been informed that the Executive Director who was responsible for this contract was actually informed by certain Transnet officials that the price was very low. He stated that that executive director should surely have informed the Transnet Board, but this did not happen.

Mr Makwanazi replied that he had just received documentation from 1996 which indicated that the Executive Manager of Promat considered the prices as fair and reasonable.

Mr Gerber stated that the Transnet Board would surely have heard about this problem at some stage over the past eight years, because it had received significant media attention and was even discussed in Parliament.

Mr Makwanazi said that the Transnet Board delegates certain powers to organisations, and these take two forms. The first was a sourcing delegation which was used to contract in services from a service provider, and would be able to conclude contracts valued between R20m-R50m. The other was a sales delegation which is virtually open-ended, and was used to generate value for Transnet. He stated that it could thus very well have been the case that this particular contract did not at the time warrant consideration by the Transnet Board, due to the delegation matrix which existed at the time. This information could be made available to this Committee.

Mr Gerber asked Transnet to supply information on the other decisions that were taken, involving Ms Serobe especially, regarding the exemptions that were granted by the Transnet tender Board in terms of Section 21(c) of the Transnet tender regulations.

Mr Gerber asked Transnet to explain why more favourable payment terms were negotiated and agreed to in respect of the Xisaka contract, and who was responsible for this.

Mr N Payne, previous Transnet General Manager: Group Internal Audit Services, replied that the justification for those terms was to facilitate the start-up of a BEE company. He stated that it was regular practice within Transnet for small entities to be given more favourable payment terms, especially in terms of BEE interests.

Mr Gerber stated that Transnet had now put out a new tender for the sale of non-ferrous scrap metals. There were at least 35 categories of scrap before the Xisaka contract was entered into, but all these categories were then reduced to only three as a result of the contract. This number was then increased to eight during the extension contract granted to Xisaka. Mr Gerber asked Transnet to explain the reason for the recategorisation.

Mr K Mogopa, Transnet Head: Tendering and Policy, said that this related to issue of 'spec', and Transnet did have personnel who design the 'spec' in terms of the manner in which the tender will be sent out. The information on exactly how the different categories of steel were arrived at could be provided to this Committee.

Mr Gerber stated that there had been large discrepancies between Transnet and Xisaka regarding weighbridge certificates yet, despite this, Clause 10(2) of the new contract did not require a Transnet official to be present at the weighbridges at all times.

Mr Makwanazi replied that this was a valid concern. He stated that Transnet would have to resolve this problem with Spoornet and Transwerk before the award of the new contract was concluded.

Mr Gerber stated that Clause 9 of the Xisaka extension contract allowed Transnet to reserve the right to hold back certain metal should it not be cost-effective to sell it at that point in time. He noted that a similar clause was not contained in the new contract offered by Transnet, and this was irresponsible.

Mr Makwanazi said that Transnet would consider this important point.

Mr Gerber stated that he had received a letter from the Minister of Public Enterprises in August 2000 which indicated that the contract was awarded to having regard to BEE, control of scrap and the best overall commercial value for Transnet. It also indicated that the contract was confined to Xisaka because no other competitor submitted a tender. He asked whether Mr Makwanazi was aware of this correspondence.

Mr Makwanazi answered in the negative.

Mr Gerber stated that he received a letter from the Office of the Auditor-General in May 2002 which indicated that it had "received substantial information from Transnet refuting the allegations indicating that the relevant policies and legislation were complied with". He asked Mr Makwanazi to explain the reasons for the refuting of the allegations.

Mr Makwanazi stated that it would probably be more appropriate for the Office of the Auditor-General to respond. He stated that Transnet was currently following up on some of the matters that were raised during the meeting that took place between Transnet and the Office of the Auditor-General.

Mr Nick van der Merwe, from the Office of the Auditor-General, replied that he had a copy of the minutes of that meeting with him, as well as a copy of the letter forwarded to Mr Gerber. He stated that his unit was not part of that discussion, but the records of the proceedings indicated that all parties were satisfied with the outcome of the discussion. Mr van der Merwe reminded Members that two different audit disciplines were involved here, and it could have been the case that the forensic audit unit was of the opinion that the normal audit unit had not delved into sufficient detail in the contract. .

Mr Payne stated that the interaction in questions centered on whether Ms Serobe had the necessary authority in terms of Section 21(c), and it was demonstrated that she had the necessary authority. He stated that the issue had progressed since then, and the issue now appeared to be whether that was in fact the best way in which to execute that particular transaction.

Mr Gerber stated that he received a later letter in November 2001 from the Office of the Auditor-General which indicated that the matter had been forwarded to the Transnet Board. He asked if the Board had discussed this matter at all, nearly two years down the line.

Mr Makwanazi responded that such a discussion could have taken place with the Chairperson of Transnet in November 2001, but the Chairmanship had changed since then and he was thus not sure who was party to those discussions. He stated that this matter was discussed with both himself and the current Chairperson, and certain steps have already been taken in an attempt to finalise the matter.

He stated that the matter was discussed by the various substructures within Transnet over a number of years, but not with the Board specifically.

Mr Gerber asked the Office of the Auditor-General to explain which member of the Transnet Board the original proposal from Mr Merkel was addressed to.

Mr van der Merwe replied that he had a copy of the proposal in question, which was dated 15 July 1996. It was not at all clear from the proposal to which Transnet official it was addressed to.

3. Weighbridge certificates and irregularities by Mr G Madikiza
Mr G Madikiza (UDM) asked Transnet to explain how often the weighbridge at Koedoespoort was serviced and tested according to the required testing standards.

Mr M Adroos, Transnet Senior Manager: Group Audit Services, responded that the issue of weighbridge certificates was currently being investigated by Transnet's forensic audit department, which would hopefully by completed at the end of October 2003. He stated that he did not have the information on how often the weighbridges were tested.
Mr Madikiza asked whether Transnet was stating that it did not know how often the weighbridges were tested.

Mr Adroos replied that he could not answer the question.

Mr Madikiza asked Transnet to respond to this question in writing. He asked Transnet to explain why it continued to rely on Xisaka readings to the extent that it continued to pay Xisaka in terms of its weight readings.

Mr Makwanazi said that this was one of the areas in which Transnet believed it would be possible to recoup from the abnormalities of the credit notes that would be given to Xisaka, based on the disputes lodged by Xisaka against Transnet's weighbridge certificates. The weighbridges were in most cases all certificated by the South African Bureau of Standards (SABS), and he was not sure why credit notes were given to Xisaka when such certificates were in place.

He stated that he was also considering whether Transnet employees acted improperly in continuing to pay Xisaka, because there could have been some collusion. Mr Makwanazi stated that he was also investigating the possible abuse of issue of credit notes by Transnet employees. He stated that both the legal division as well as the internal audit unit was following up on this.

Mr Madikiza asked whether the safeguarding of the entity's assets were not an inherent duty of the Board. If this was the case, he asked Transnet to explain whether this duty was diligently and efficiently performed by the Board

Mr Payne replied that Mr Madikiza was correct that the PFMA and principles of good corporate governance it was the responsibility of the Board, assisted by management. Even the PFMA conceded that these arrangements could break down from time to time. This was the case in this specific instance, either in terms of control or perhaps with criminal intent. As Mr Makwanazi had indicated this was being investigated both by Transnet's internal audit and legal divisions, and it would be referred to the Scorpions for assistance in the investigations. Disciplinary, criminal and civil action would be taken based on legal grounds.

4. Credit notes by Mr T Vezi
Mr T Vezi (IFP) stated that most of his questions had already been answered to some extent. He asked Transnet to explain the procedures and control that were followed, if any, when credit notes and/or new invoices were issued.

Mr Vezi asked whether the relevant employee had formal authority to issue credit notes or new invoices.

Mr Payne replied to these two questions by stating that Mr Vezi was correct in suggesting that the system did break down and employees were acting outside their prescribed authority. There was inappropriate management control at Koedoespoort, and this was one of the issues that were currently under investigation. He stated that Transnet had to date not been able to identify criminal liability other than breaches of the PFMA, which were criminal sanctions.

Mr Vezi asked how long the investigation process would continue before it was finalised. He stated that the primary concern here was to avoid the loss of millions of Rand because the matter had prescribed.

Mr Payne responded that, as indicated earlier by Mr Adroos, the deadline for the completion of the investigations was the end of October 2003. He assured Members that this would not be one of the matters that would be eroded by prescription.

Mr Vezi asked whether Transnet had any valid source documents to substantiate the validity of the issue of the credit notes and new invoices.

Mr Payne replied that the Office of the Auditor-General would confirm that the tests it conducted "were not a hundred percent", and Transnet's internal audit unit was now conducting a complete and thorough test. It aimed to reconcile all the items to provide an overall picture which would then form the basis of a claim against Xisaka.

5. Miscellaneous issues by Mr Nair
Mr B Nair (ANC) asked what progress had been made regarding the issues that were referred to the internal auditors, such as the issue of credit notes and invoices.

Secondly, Mr Nair asked whether Transnet's audit division conducted any investigations prior to the Office of the Auditor-General conducting any investigations. If so, he asked whether such reports were made available to the Office of the Auditor-General to assist them and, if not, he asked why this was not the case.

Mr Payne responded that Transnet's Internal Audit did in fact investigate this matter on three occasions prior to the Office of the Auditor-General investigations. The Office of the Auditor-General's report did indicate that there was total transparency by Transnet, and that it did assist the Office of the Auditor-General in its task.

Mr Nair asked whether any corrective steps were taken by management to address the shortcomings, assuming that the Internal Audit reports existed and that they contained material findings.

Mr Payne replied that the reality of situation was that Transnet did not uncover any wrongdoings. He stated that Transnet had been aware for some time that matters were not as they should be, but it was never able to find concrete evidence in support of this. It was expected that the additional information that came into the possession of the Office of the Auditor-General would assist Transnet to formulate a concrete charge. Breakdowns in the internal control procedures were identified, especially with regard to the weighbridges, and Transnet identified weighbridges that were not serviced even though they were required to be serviced in terms of the contract. He stated that these issues were addressed at the time.

Mr Nair asked whether Transnet had a built-in mechanism for checks and balances were in place to ensure irregularities do not occur.

Mr Makwanazi said that Mr Nair was correct in suggesting that perhaps Transnet's internal audit unit could have done a better job by picking up on these irregularities much sooner. He stated that spot checks are conducted by the internal audit unit within various entities and, based on these findings, the internal audit unit does submit reports to the entity's management unit.

Mr Payne added that Transnet had a such a mechanism. Items which were identified by the internal audit unit on any level were not addressed on a "three strike" basis or, if they were particularly significant on a "two strike" basis, they would have to be forwarded directly to Mr Makwanazi for action to be taken. The issue of the servicing of weighbridges and Transnet's ability to enforce this internal control mechanism was then rectified, but the time period in between gave rise to the problem credit notes referred to..

Mr Nair stated that he welcomed the handing over of this matter to the Scorpions, as suggested earlier by Mr Makwanazi, so that a thorough investigation could be conducted and the losses could be recovered.

Mr Makwanazi replied that Transnet did have some possibility of some recovery. Transnet would consult other institutions in an effort to assist in the recovery. The possibility of collusion would also be followed up thoroughly.

Dr Madima cautioned Members that there is no certainty in litigation, because the outcome could go either way. Transnet was optimistic that it would be able to recover funds, but it also had to be borne in mind that by the time the litigation stage is reached the entity might not have any assets left.

6. General by Mr F Beukman
The Chair asked Transnet to indicate the current status of the Transnet Pension Fund No. 2, and the steps being taken to rectify the current situation to move to a solvency state in the next few years.

Mr Mkhalipi said that this was a very difficult question because the interest rate had dropped by 3.5% since the end of the financial year, and there were market prospects that it might reduce by a further 2% by the end of this financial year. He stated that this would increase the liability of the Fund. Transnet was currently looking into submitting a proposal to its shareholder, so that it could be approved by all government structures by the end of February 2004. Mr Makwanazi stated that it was hoped that this proposal would reduce the potential impact on the income statement for year ending March 2004. Transnet would also raise other mechanisms of funding, such as acquiring equities from the pension fund by offering new bonds.

He stated that the medical aid liability was also an important concern here, because it ran into R3billion or R4billion. Transnet was engaged in discussions with Treasury and Transnet's shareholder to identify other mechanisms that would limit the medical aid liability going forward.

The Chair asked Transnet to indicate the percentage of the capital investment that would have to be made by government itself.

Mr Makwanazi replied that Transnet would be submitting a document to its shareholder before the end of October 2003 which contained this information. The recapitalisation referred to by the Chair involves the recapitalisation of other business units within the Transnet group. He stated that it was hoped that a decision would be made by the shareholder before February 2004.

The Chair asked whether any increase was anticipated in the coming financial year 2004/2005.

Mr Makwanazi replied that the current anticipated increase stood at 2% but, in view of the present financial situation, he did not foresee Transnet revisiting that decision within the next six months. He stated that he hoped that some of the funding proposals that Transnet would be submitting to its shareholder would allow it to review that policy as well. The current figures and the performance of the fund indicated that unsatisfactory progress.

The Chair asked Transnet to indicate the steps that had been undertaken by the trustees to inform members of the Pension Fund of the Trustees to inform of the current situation.

Mr Makwanazi replied that he had full confidence in the trustees. Most were also members of the Transnet Board, and brought some of these matters to the attention of the Board itself. Transnet was aware of the issues raised by the Public Protector, and it would be addressing them directly. He was not overly concerned by suggestions that the trustees were not doing their job properly, because they were elevating matters. There were open channels of communication between Transnet and its shareholder via the trustees.

Discussion
Mr B Bell (DA) stated that Mr Merkel's import and export company's contract was cancelled by Eskom South Africa for unethical business reasons. He asked Transnet to explain how it could have issued a similar contract less than a year later to Xisaka, which was essentially owned by Mr Merkel's import and export company.

Secondly, Mr Bell stated that in May 1997 the then Minister of Public Enterprises responded to a Parliamentary question by stating that efforts were being made to ensure wider participation. He asked Transnet to explain whether discussions in fact took place, and why further participation was not granted.

Mr Makwanazi responded that this was not part of his portfolio at all, and he would thus not have the knowledge of the inner workings of the decisions taken at that stage. Promat at the time fell under Ms Serobe, but he did not have the necessary information with him.

Mr Bell asked whether the Transnet Board was aware of the weighbridge differences before the investigation began, or had it only recently been discovered.

Mr Payne replied that the Transnet investigation was conducted prior to the investigation conducted by the Office of the Auditor-General, and the discrepancies were rectified. The questions as to whether there was collusion and the reasons for the matter never being addressed, as Transnet was unable to find conclusive information on these issues.

Mr Bell stated that Transnet indicated today that the Office of the Auditor-General would be assisting it. He asked Transnet to explain what the Office of the Auditor-General had done to assist Transnet in this regard, and suggested that the Office of the Auditor-General should surely have picked up on this issue in 1996.

Mr Payne replied that the Office of the Auditor-General possessed information that was not available to Transnet, and it did make that information available to Transnet.

Mr Bell stated that the Public Service Commission recently released a report on whistleblowing, which indicated that public servants knew that fraud was being perpetrated but they were all too petrified that they would land up in trouble if they reported it. He asked Transnet to indicate the kinds of policies it had in place to guard against this, and asked whether Transnet had taken that report into account.

Mr Payne replied that this was an area in which Transnet could proudly claim to be well ahead of the rest of the country. In 1996 a whistle-blowing function was established within Transnet which has worked very effectively, and it had contributed to approximately 300 forensic investigation annually since 1996. It had also formed the model for the majority of the other whistle-blowing functions that had arisen in Transnet. He stated that the procedures were taken very seriously, and assured Members that whistle-blowers were protected. In fact even before the introduction of the legislation which protects whistle-blowers, whistle-blowers were both encouraged and protected within Transnet. He stated that it was something that required continuous reinforcement by all structures, and the use of parallel structures such as the Public Protector and the Office of the Auditor-General were also encouraged.

Mr Gerber asked Transnet to explain the reasoning behind government's change of decision with regard to the disposal of Transnet Housing as a single entity. He asked Transnet to explain the amount of thought that had gone into the decision to dispose of the houses because it would leave tenants homeless. Mr Gerber suggested that Transnet perhaps rethink its decision to dispose of the houses.

Mr Makwanazi said that this issue had some history. At some stage consultants were brought in to look into the consolidation of Eskom Housing and Transnet Housing, and concluded that it would not be wise to consolidate the two entities. At a later date a decision was made by government that the housing book would be sold. Transnet then indicated to its shareholder that the decision was fundamentally flawed, for the following reason. The Transnet Housing book consists of two components: the first was the book itself, which is a good book worth about R3.4b, and is financial viable. The second element consisted of the properties, hostels and the properties referred to by Mr Gerber which, for some reason, are not financially viable. They exhibit a loss in one respect and a profit on the other. Transnet was of the opinion that it would not be economically viable to sever the successful portion of the entity and leave behind the portion that would require a subsidy.

It was for this reason that the Board later agreed with Transnet's Finance Committee that the entire entity should then instead be disposed of. He stated that the details as to the conditions to be attached to the sale of the entity, that would take into account interests such as low cost housing and low-income home owners still had to be ironed out.

Ms Mothoagae stated that Dr Madima's earlier response as to Transnet's prospects of recovering funds does not assist this Committee at all. He should instead inform Members fully.

Dr Madima replied that he stated earlier that "we should dampen our optimism", but he did not say that people should not be hopeful. There was sufficient evidence and, with further investigations, Transnet would have a solid case to recover funds. He stated that he was merely indicating that there were no guarantees in litigation.

Mr Madikiza stated that Transnet indicated that some of the weighbridges were not regularly serviced, and this impaired their accuracy. Evidence had been obtained from the external External Specialist Weighbridge Certification Officer as well as the District Manager that at no time,. Between 1996 and 2001, was the weighbridge at Koedoespoort defective. He asked whether Transnet was refuting this evidence and, if so, which weighbridges were found to be defective during the said period.

Mr Payne stated that the investigations by Transnet's internal audit into the weighbridges prior to 2001 that led to the complete overhaul in 2001. He would thus have to question the certification that there were no problems. There were problems, and that was the very reason for the complete overhaul.

Mr M Robertson (NNP) stated that there was a railway line in the Eastern Cape which had been removed and sold for a minimal price. Both schemes were being redeveloped, and the farmers were being cut off at the knees because they no longer had the necessary infrastructure to cart their produce. He asked Transnet to indicate the reasons for selling those railway lines, the contractor that did it and the price at which it was sold. Transnet could respond in writing.

Mr Makwanazi replied that he would reply in writing. He stated that Transnet was required to obtain the permission of its shareholder before selling redundant lines.

The meeting was adjourned.

Appendix
PREPARATIONS FOR THE HEARING ON TRANSNET SCHEDULED FOR THE 26 SEPTEMBER 2003 - FIRST DRAFT

1. HEARING OBJECTIVES
The Committee should determine whether-

1. the Transnet board has put in place control measures to address the control weaknesses identified in the report;
2. adequate steps have been taken by the Transnet Board to ensure compliance with applicable Transnet procurement and tender procedures in future;
3. disciplinary actions have been instituted against the wrongdoers where appropriate;
4. actions have been taken to recover some possible losses;
5. proper consideration has been given to the renewal or not of contract to Xisaka; and
6. satisfactory I valid reasons are given regarding numerous questions surrounding the contract with Xisaka, e.g. the circumstances under which the contract was entered into; non-market related prices that were paid to Transnet for the non-ferrous scrap metal.

2. POSSIBLE HEARING OUTCOMES

1. To warn all major Public entity boards of their duties and that Parliament (SCOPA) will hold them accountable.
2. To ensure a sense of urgency at Transnet and other public entities to adhere to policies and institute sound financial and administration management practices to the benefit of all stakeholders.
3. To ensure that the root causes for these irregularities have been eliminated, or are in the process of being eliminated by means of credible management actions (potential for corruption in public sector must be minimised)
4. To ensure a well managed public sector entity capable of safeguarding its assets and guarantee optimal income from disposal of obsolete stock.

HEARING QUESTIONS

A Tender procedures and awarding of contract to Xisaka. (L Chiba)
Question 1
The Committee accepts the general contention that the appointment of a single contractor for the purchase of non-ferrous scrap from Transnet would contribute towards curbing theft.

- Having accepted that contention, and taking into consideration the size of the contract, what were the reasons for Transnet not inviting other competitors! dealers as sole purchasers of non-ferrous scrap?

Question 2
It appears that the appointment of Xisaka as sole purchaser of non-ferrous scrap from Transnet was approved in principle before prices had been negotiated. In mid -1996, Mr Hughes and Mr van Wyk (assistant manager of the sales division of Promat) representing Transnet negotiated prices with Xisaka, after it had already been decided to allocate the contract to Xisaka. The Committee views this as highly irregular.

a) Why did Transnet approve the appointment of Xisaka in principle as sole contractor prior to the contract prices being determined? (give reasons for Transnet for having done so)
b) What in your opinion was the impact of this irregularity- was it positive or negative for Transnet as well as Xisaka?
c) Was Mr Merkel's offer the only offer considered?
d) lf so, why was the open tender procedure not followed having regard to the fact that the contract price was in excess of R300,OOO (ultimately of approximately R53 million)?
e) Were other Black Empowerment firms (or firms that also had the capacity to put Black Empowerment joint ventures together) afforded the opportunity to tender? If not, why not?

Question 3
On 14 October 1996, the Transnet Exco, chaired by Ms Louise Tager, was informed by Ms Serobe, and Executive Director of Transnet, of the Xisaka contract. The Committee is interested in whether or not the members of Exco properly applied their minds when they authorised the contract so as to take an informed decision.

(a) (i) Did Exco formerly approve the contract?
(ii) If not, did Ms Serobe have the necessary delegated powers to enter into closed contracts or
accept offers without Exco or Board approval?

(b) Did Exco determine the necessary background to the contract to be entered into? For example:4
(i) Did Exco establish whether the Transnet Tender Board had approved the contract?
(ii) Did you determine whether or not it was an open or closed tender or offer, and why such was accepted without following open tender procedures
(iii) Was the contract condition of empowering a Black Empowerment firm (to be formed) explained? (ask the above questions one by one - obtain answer to each question before asking the next)
(c) Do you agree that no emergency situation existed and that several buyers participated in the market at the time, which would have rendered the confinement procedure in terms of section 21(2) of Transnets Tender procedures inappropriate.
(d) In your opinion, did the circumstances surrounding the appointment of Xisaka justify not following an open tender procedure?
(e) What current practices has the board adopted to prevent approving contracts such as the contracts with Xisaka in future?

Question 4
It has come to the attention of the Committee that in terms of Transnet's annual report of 200112003(pa) Mr Tager's fees amounted to R531 000 for attending 20 meetings -i.e. an average of +_ R 26 550 per meeting. She then resigned on the 20 November 2001. Upon her resignation, she received a termination benefit of R1, 1 62 million, making her total fees and benefits for 2001/2002 financial year to R1, 693 million as an independent non-executive director.

a) Who authorised this, and on what basis was the termination benefit calculated?
b) Doesn't the termination benefits only apply to the group chief executive, the group chief financial officer and the Group Executive? (see page 105 of AR 2003)
c) Isn't there a clear and marked distinction between an individual's resignation on the one hand, and that individual's termination of services on the other hand?

Question 5
Despite the controversy and dissatisfaction and the fact that in terms of rule 6.3 of the new Transnet Procurement Policy, the divisional tender board had to consider and recommend the renewal of contracts exceeding R300 000 or where the period of contract exceed two years, the Xisaka contract was extended in November 2000 without pursuing an open tender process.

a) In the light of the controversy and dissatisfaction that the original appointment generated, as well as SARHWU no longer being part of Xisaka, would it not have been more prudent to take corrective steps by resorting to an open tender procedure when the contract was extended?
b) What were the reasons for Transnet not following an open tender procedure, in the light of the fact that it is apparent from the provisions of paragraph 21(2) and related clauses that the confinement procedure was not available as an option or appropriate option at the time? [similar question was asked in question 3 above}
c) When Xisaka's contract expire, is it envisaged to follow open tender procedures in future with reference to the sale of scrap metal?

B Prices, losses to Transnet and recovery thereof, and disciplinary action envisaged (P Gerber)

Price adjustments
Question 1
The tender prices for tenders awarded in 1992 and 1993 were on average R1.79 per kg (66%) higher than the prices as agreed with a private company in 1996 for non-ferrous scrap that fell under second category of the contract. In October 1996, contract for non-ferrous scrap falling in same category was sold at R2.70 per kg whereas the average price for the same non-ferrous scrap was R4.49 in 1992 and 1993.

a) Why did Transnet in 1996 accept prices far below the normal prices for certain categories of non-ferrous scrap, having regard to the then existing market values for such categories?
b) How do you justify these discrepancies?
c) Were the Board and Exco aware of these discrepancies in values during 1996 to 2000? If so, what action was taken to remedy the position? If not, who at Transnet should have been providing the Board and Exco with the necessary information?

Losses
Question 1
In respect of the third category of material, Transnet suffered a loss of approximately R8 482 241.88 during the period 1996 to 2002 because an open tender was not pursued.
a) Why did Transnet accept prices far below market related values (by selling such copper at only 70% (first contract) and not at least 95% of LME values-as was the existing practice by Transnet at the time when Xisaka contract was entered into) and later 85% (the extended contract).
b) Were there any disciplinary action taken against the responsible official(s) involved with pursuing incorrect tender procedures and or the negotiations surrounding the prices?
c) What have you done so far to recover these losses?

Question 2
In general payment terms as prescribed by Transnet required a bank guaranteed cheque before a specified date or monthly compound interest at prime interest rate plus one per cent to be levied on the outstanding amount. However, the payment terms stipulated in the Xisaka contract stated that payment should be effected within 60 days from date of invoice during the first two years of the contract and 30 days for the remaining period.

a) Why were more favourable payment terms negotiated and agreed to in respect of the Xisaka contract, and who was responsible for it?
b) Did the ostensibly more favouarble terms effect Transnet with regard to a potential interest loss and or late payment(s)? If so to what extent?
c) What substitute did Transnet negotiate in accompanied bank guaranteed cheques?
d) Is the situation with reference to the security, or absence thereof, of payments in respect of the Xisaka contract still the same or has it since been amended?
lieu of security that

C Weighbridge certificates and irregularities (G Madikiza)
Background
In various instances the weighbridge certificates of Transnet seemed to have been amended in favour of the private company without the apparent necessary authority or acceptable explanations for these variances stipulated on the documentation (weighbridge/charge sheets for the removal of the scrap). In the latter regard weight readings were amended when Xisaka informed Transnet that their own weighbridge readings differ from that of Transnet's.

Questions
1. How often was the weighbribdge at Koedoespoort serviced and tested according to the required testing standards?

[Obtain answer to above question 1 before asking question 2.]

2. Evidence was obtained from the external specialist weighbridge certification officer, as well as the district manager, that at no time, since 1996 to date the weigh bridge at Koedoespoort had been defective. In addition, a complete overhaul of the weighbrigde was done in 2001.
(a) Why did Transnet continue to rely on Xisaka readings to the extent that you continued to pay the in terms of their weight readings?
[In other words why did Transnet accept Xisaka'5 readings and not its own, having regard to the fact that Transnet Is weighbridge was regularly serviced and tested by using asized weights?]

3. Transnet employees reportedly effected weight changes to weighbridge certificates in favour of Xisaka.
(a) Why were these changes necessary?
(b) What procedures were followed to guarantee and verify the accuracy of changes effected?

4. Is the safeguarding of the entity's assets not an inherent duty of the accounting authority, the Board? If so,
- under these circumstances was this duty diligently and efficiently performed?
- if not, what would be the accounting authority's duty with regards to the assets?

D Credit notes (T Vezi)
Background
Transnet passed several credit notes and/or new invoices for the sale of non-ferrous scrap. At the time of writing this report, further information on these credit notes and/or new invoices was still outstanding from Transnet.

Questions
1. In 2001 Transnet (Promat) issued credit notes and or new invoices in favour of Xisaka. - Was the issuing of credit notes or new invoices appropriate? (In other words, what justified you to issue credit notes or new invoices?)

2. Do you have valid source documents to substantiate the validity (issuing) of these credit notes and/or new invoices?

3. (a) What procedures and controls were followed, if any, when credit notes and/or new invoices
were issued?
(b) Did the relevant employee have formal authority to issue credit notes or new invoices?

4. There was outstanding information with regards to the issue of credit notes during the audit. Has this information now become available, and has it been furnished to the internal auditors and will they follow up this matter? If not, when can you furnish it to the auditors?

E Miscellaneous issues (B Nair)
Background
The internal auditors' rules of conduct include among other things performing work with honesty, diligence and responsibility; shall not accept anything that may impair or presumed to impair their professional judgement and disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review.

It was noted that certain issues mentioned in the report were given to the
internal auditors to follow up.

Questions
1. What progress has been made regarding the issues that were referred to the internal auditors? for example credit notes, incorrect invoicing etc
2. Did the internal Audit division of Transnet prior to the AG office conduct any investigations? If so, were such report(s) made available to the AG office to assist them in their task? If not, why not?
3. Assuming that Internal Audit report(s) exist and they contained material findings, what corrective steps were taken by management to address shortcomings?)

F Pension fund no.2 (Mr F Beukman)
Questions
1. What is the current status (financial) of Transnet pension fund No.2
2. What steps are being undertaken to rectify the current situation?
3. What steps have been undertaken by the Trustees to inform members of the Pension Fund of the Trustees to inform members of the pension fund of the current situation?
4. When is it envisaged that the Fund will again be in a surplus situation?
5. Is any increase anticipated in the coming financial year 2004/2005?