TRANSNET Annual Report, deviations, expansions & SIU investigations, with DPE Minister

Public Accounts (SCOPA)

09 March 2021
Chairperson: Mr M Hlengwa (IFP)
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Meeting Summary

Video: Standing Committee on Public Accounts, 9 March 2021

Annual Reports 2019/20

In this virtual meeting, Transnet briefed the Committee on the entity’s 2019/20 Annual Report, deviations and expansions in 2020/21 and SIU investigations.

The Minister of Public Enterprises highlighted that Transnet was at the centre of state capture and he was impressed with the progress made by the new Transnet Board in that regard. There was continued effort to recover funds. There was a review application to the high court in respect of all of the parties involved in the infamous 1064 locomotive deal. The Minister stated that the past kept contaminating efforts of the present and advised that the old matters needed to be ring-fenced.

The Committee asked what the plan was to recover money and what factors contributed to the entity’s under performance.

Members interrogated a wide range of issues, including:

-What steps were being taken by the Board and the Executives to ensure that irregular expenditure was fully disclosed at Transnet? What was Transnet going to do in future to prevent this audit finding?
-What disciplinary actions were taken against persons involved in irregular expenditure?
-Are the officials in the Small Medium Enterprises (SME) unit provided with adequate training on the prescripts of the PFMA, Treasury regulations, PPPFA and SMC policies?
-What are the timeframes relating to the completion of the digitisation system?
- Did Transnet have adequate skills and workforce for its operations? What was the current vacancy rate in total at Transnet?
- How many of the members of the current Audit Committee were at Transnet for over five years and how long the current Audit Committee had been in place
-What was the progress regarding the pensioners class action and the merging of the funds?
-On what basis was a loan made to SA Express?
-What was the status of the 1064 locomotives received?

The Chairperson was glad to see that there was progress. He indicated that the Committee would continue to monitor the company to ensure this continued.

Meeting report

Opening Remarks
The Chairperson welcomed the Minister of Public Enterprises, Mr Pravin Gordhan, and the Transnet Management.

Minister Gordhan stated that Transnet was at the centre of state capture under its various Chief Financial Officers (CFOs) and Board Members. The new management team took over at the beginning of 2020. His view and the view of the Department was that the Board had done a remarkable job to start repositioning Transnet. Thirdly, as a result of the Board’s efforts and the efforts of the senior management, there was now a clear transparent picture, as opposed to what was presented to the public by the previous management teams in terms of what the financial standing was and the operational issues were. There was continued effort to recover funds to review contracts and as of that morning he was informed by the Chair of Transnet that there was a review application to the high court in respect of all of the parties involved in the infamous ’1064’ locomotive deal. The Board was quite decisive in recovering from the very nefarious chapter in Transnet’s existence.

The management and Board were in the process of repositioning and directing the business so that Transnet was as a major logistics provider in South Africa, both in terms of port and rail. Apart from the pipeline, Transnet would play a significant role in enhancing government’s reconstruction and recovery plan. Both in terms of investment from its own limited funds and through creative partnerships with the private sector and encouraging the involvement of small and medium sized black businesses.

Briefing by Transnet
Ms Portia Derby, Group Chief Executive Officer, Transnet, and Ms Nonkululeko Dlamini, Group Chief Financial Officer, Transnet, briefed the Committee.

The financial performance as of 31 March 2020 was presented, the Public Finance Management Act (PFMA) and audit outcome was presented as well as deviations, expansions and consequence management. The strategic outlook was outlined.

Up 1,3 percent to R75,1 billion, mainly due to a weighted tariff increase of 2,9 percent, partially offset by a 1,3 percent decline in rail freight volumes and a 2,4 percent decline in port container throughput. Revenue remained consistent amid subdued economic activity.

Net operating expenses:
Up 1,9 percent to R41,1 billion – positive, considering FY2019 cost level reflected zero growth compared to FY2018.

Net profit:
Down 34,9 percent to R3,9 billion, primarily due to prior year’s fair value adjustments being R2,5 billion higher than the current year.

Public Finance Management Act
Sections 51 and 55 of the PFMA impose certain obligations on the Company relating to the prevention, identification and reporting of fruitless and wasteful expenditure, irregular expenditure losses through criminal conduct and the collection of all revenue.

Criminal conduct:
Definition: Losses incurred as a result of criminal conduct or action.
Examples: Theft, malicious damage, fraud and embezzlement.

Fruitless and wasteful expenditure:
Definition: Expenditure that was made in vain; and would have been avoided had reasonable care been taken. No value nor benefit received.
Examples: Interest, penalties, contract cancellation or withdrawal fees.

Irregular expenditure:
Definition: Irregular expenditure is when expenditure is incurred in contravention/ not in accordance with the requirements of the applicable legislation and/or internal policies
Examples: Unapproved procurement, non-compliance to the Preferential Procurement Policy Framework Act (PPPFA), Construction Industry Development Board (CIDB), Procurement Procedures Manual (PPM) or the incorrect Delegation of Authority applied.

Transnet was issued with a qualified audit opinion for the past three years (2017/18; 2018/19 and 2019/20).

The qualified audit opinion is due to the understatement of reported irregular expenditure. The financial statements have not been qualified from the perspective of compliance with IFRS

Irregular expenditure dates back:
Historical Context:
- In FY2018, Transnet reported a significant increase in incidents of irregular expenditure dating back to 2011/12.
- The bulk of irregular expenditure was reported for the first time as part of the annual compliance audit conducted by Transnet’s external auditors, which resulted in a qualified audit report.

Prior year challenges:
- In the FY2019 audit, irregular expenditure related to the use of Supplier Development (SD) as a tender pre-qualification was raised.
- This was in relation to the Preferential Procurement Regulations (PPR) of 2017.
- Transnet had discontinued this practice but had not reported the related contracts and expenditure as irregular.
- Due to the significance of the impact, the AFS of FY2019 were again qualified.

Current Year:
- It was further determined that the use of SD as a tender pre- qualification from 2011/12 was irregular after the release PPR 2011.
- Following the FY2018 qualified audit outcome, the Board and Management embarked on a remedial plan.
- Although a remedial plan was implemented and tracked, challenges in supply management have not been fully arrested.
- The improvements achieved through the remedial plan have resulted in reduced irregular expenditure from contracts placed post FY2018.
- However, expenditure from active contracts placed prior to 2018 continues to result in irregular expenditure.

Remedial plan relating to audit outcome
The remedial plan of 2018 was reviewed to close gaps and address the backlog.
Continue to identify sustainable solutions to address these challenges, including:
- IT solutions
- Enhanced governance
- New supply-chain operating model
- Setting up a loss-control function to drive the implementation
- Improve internal controls and reporting capability
- The progress of the implementation is reported and tracked at various governance structures

Actions by Transnet to reduce non-compliance and irregular expenditure
Procurement reforms - new supply-chain operating model, Enhanced governance, Enhanced internal audit capacity,
Setting up a loss-control function to drive the implementation and; o Improving internal controls and reporting capability
- Transnet is confident that the sustainable solutions outlined above will significantly reduce on-compliance.
The remedial plan timelines will follow a two phased process:
- Critical parts to be addressed by 31 March 2021 and;
- Incremental gains of the plan over the next 18 months, 24 months to 36 months.
The manual payments review process will continue, to ensure completeness and accuracy of reporting.
Transnet will continue to cooperate with law enforcement agencies to ensure the finalisation of all matters currently underway.

In response to the Committee’s request, Transnet reported on all deviations and expansions and included: (a) the date of the incidence, (b) the company involved, (c) amount involved, (d) official/s involved and (e) action taken against the officials.

(See Presentation)

Remarks by Board Chairperson
Dr Popo Molefe, Board Chairperson, Transnet, stated that the company was in the process of filing the review application on the 1064 that morning. It was a complex contract that disadvantaged Transnet in many respects. It also implicated freight rail which was a critical component of revenue generation within Transnet. They were reversing that process so that they could start anew. 

Ms B Swarts (ANC) asked what steps were being taken by the Board and the Executives to ensure that irregular expenditure was fully disclosed at Transnet. What was Transnet going to do in future to prevent this audit finding?

Mr Louis von Zeuner, Chairman: Audit Committee, Transnet, stated that over the past year, the Chief Audit Executive had been replaced and the Chief Financial Officer (CFO) joined the Audit Committee in July of 2020. There were new executives at procurement and the majority of other functions. This had allowed them to dig further into the issues of mismanagement that happened in the past. The Audit Committee was confident that they were nearing the end of that process. The Audit Committee had put in place a specific process and project of the remedial action of PFMA with a woman at Treasury that joined the Audit Committee at the end of 2020. On the 1 March 2021 at their most recent Audit Committee meeting, she had presented a clear project update as well as deliverables. He confirmed that they were already seeing progress.

Furthermore, the consequence management the Audit Committee was applying to wrongdoing went into a number of cases that were being dealt with. With enhanced audit and finance functions, there was a much tighter consequence management. This was emphasising the message that Transnet would not tolerate any wrongdoing. The Auditor General, who had submitted a report to the Standing Committee on Public Accounts (SCOPA), had also indicated some of the reduction in numbers compared to the past. The Audit Committee had elevated this to the level of Audit Committee Oversight reporting to the Board, a clear project, accountable executives that were all members of the Executive Committee (Exco). Definite consequence management and regular engagement with the Auditor General was taking place to ensure that they ‘cracked’ this. They were proactively dealing with the challenges. They were seeing some of the early signs of improvement.

Ms Dlamini stated that Transnet’s starting point was to strengthen the controls and make sure it had the right people in the right posts. It also needed to ensure that the rest of the organisation was trained in terms of what was required for it to arrest the matter. There was a comprehensive project that it was reporting to the Audit Committee on. It was managed through the project lead, the Loss Control Officer, a new role within Transnet. The Loss Control Officer needed to understand the requirements of the PFMA and rally the whole organization around ensuring that all the matters were covered.

Ms Silindile Kubheka, Loss Control Officer, Transnet, responded to Ms Swarts question, in terms of what Transnet was doing to prevent irregular expenditure in future. Transnet has put in a lot of work in the remedial plan. This was accepted by the lenders. Transnet was also ensuring that there were constant engagements to get clarity on matters of disagreement where it arose between the National Treasury and the Auditor General. Transnet was ensuring that it went back to the opening balance testing, in identifying previous matters that may not have been highlighted. This was done, as it was seen in the report that part of Transnet’s unqualified report was as a result of incomplete and inaccurate irregular expenditure. She was in the process of applying for a Condonation with National Treasury.

Minister Gordhan recalled the debate about supplier development that took place a year or so prior and the technical side of that went on for a long time. Transnet then conceded to the current arrangement. Irregular expenditure during the state capture period was not disclosed adequately, even by the Audit firms that were paid hefty fees to do proper audits during that time. This has been a bone of contention between Transnet and the Department of Public Enterprises (DPE) on the one hand and the audit firms on the other. It was occurring in a number of SOEs, where history was being pulled forward to the current period and then one saw large numbers as far as irregular expenditure was concerned. In some instances, there were irregular expenditure items waiting in the queue for Treasury to condone or otherwise. That processing had a backlog. That past of capture needed to be ring-fenced and clearly within that framework one must identify the nature of the problem. The contracts and the malfeasance which resulted in court actions to recover funds, the Committee would shortly hear about this. Each of those was reported on as ring-fenced items about the past to SCOPA and the public more broadly. Then the current period was dealt with separately as well. The past kept contaminating efforts of the present in a sense. Transnet needed to find some structural formula to deal with that.

Ms Swarts asked how long the Loss Control Officer had been in the position. She asked whether she had heard correctly that Louis von Zeuner Chaired the Audit Committee; how long had he been at Transnet for? How many of the members of the current Audit Committee were at Transnet for over five years? Transnet had an irregular expenditure of R6.3 billion from the previous financial year, it was all well and good that the Committee was hearing what Transnet was putting in place, and what had happened throughout the previous years. The Minister had highlighted that even the audit firms were not fully disclosing information. How long has the current Audit Committee been in place?
Mr von Zeuner replied that he was the Chair of the Audit Committee since May 2020. He was an Audit Committee member since 2018. There was another member who had also been on the Committee since 2018. With their engagement with auditors, it had forced the Audit Committee to revert back to activities that were started in 2011 and 2012. He referred the Committee to some of the commentary in the pack and the Auditor General’s Report. Current transactions fell under the Audit Committee’s control presently. Efforts to improve compliance led to a significant reduction in irregular expenditure arising from new contracts entered into in the FY2020. However, any number of irregular expenditure was unacceptable. Transnet was not where it needed to be. Unfortunately, it was dealing with more than 13 000 contracts from the past. It was only in October 2020 that it has been involved in discussions around supplier development. The problem was a lot deeper than that and that was helped by having the Auditor General come on board as the official auditor of Transnet in the current financial year. That audit changed their focus, assisted the Audit Committee, Board and management to get to a deeper understanding of how big the problem really was.

Ms Kubheka replied that she joined Transnet from 1 November 2020.

Ms Swarts asked why Management had not ensured that daily and monthly reconciliations for irregular expenditure were processed. What was the current status on the irregular expenditure? Are the reconciliations now done?

Ms Derby explained that it was both a complex and simple matter. It was a managerial responsibility that there was proper record keeping. One of the big projects within Transnet currently was to digitise most of the processes. It was often difficult to find documents within the organisation. That had driven a large part of the need for change. Transnet was doing a complete review of the finance function. In terms of procurement, they were looking to ensure a simplified procurement process which aligned with clause 217 of the Constitution. It would also ensure that it was B-BEE compliant. The lack of digitisation was tied to what they had found to be a strange IT strategy – where there was way too much outsourcing of the IT function. They were in the process of rebuilding that and pulling some of that responsibility directly into Transnet. The intention was not to kill a hybrid model, they wanted to make sure that as far as systems and data – they had direct control inside Transnet.

Ms Dlamini agreed that digitisation would assist Transnet greatly in ensuring that if it did come across any irregular expenditure it was highlighted, as most of their contracts were fairly long-term, i.e. spanning over a period of five years. The critical thing was that if they did come across an irregular contract that related to the past, that they would touch it once and report it. When one looked at the audit report, the one issue raised was that their report was not complete on all irregular expenditure. That was why the digitisation would assist them in flagging a contract that was found to be irregular. They would be led by the Loss Control Officer in ensuring that they went through the determination test as required and could complete the process of condonation properly.

The Audit Committee was considering the irregular expenditure in two parts, one was to ensure that all new contracts were as clean as possible in relation to the irregular expenditure, so that they did not have a lot to report going forward. For the existing contracts they had in place, they had projects setup at divisional level. There were teams that were identifying the irregular contracts at the divisional level and those reports were consolidated and dealt with at the Exco of the division. It then got consolidated as Transnet Group as well. On a monthly basis, Transnet Exco chaired by the Group Chief Executive got a report that indicated how much of the irregular expenditure had been identified. What was done in terms of consequence management - it may well be an awareness training requirement or a harsher requirement. The human capital team driven by the Chief of People was assisting them in ensuring that they were speedy in dealing with the consequence management within the same project. The report from the Exco of Transnet then got sent to the Audit Committee for oversight to give the Audit Committee feedback on what was done in terms of the issues identified. Therefore, they were working on improving. There was significant improvement already in terms of ensuring that the reporting and reconciliations were happening at the core centre level and then were given to the various higher levels. They needed to focus on ensuring that they had dealt with the 13 000 contracts that may have come from the past – that was where they anticipated a lot of work required of themselves.

Ms Swarts asked what the timeframes were to complete the digitisation system that was being implemented.

Ms Derby stated that she almost wanted to ‘hold her head,’ as she ‘did not want to lie.’ That was a hard job. One of the first things that they needed to do was set up the shared services. They were quite far down the line in terms of the design of the shared services as it had a direct impact on the bargaining unit employees. They needed to still talk to the unions to ensure they moved the appropriate people into this function. There was obviously a concern about the loss of employment. They should be closing on the recruitment of the head of the shared services. This was one dimension of it.

The other issue was ensuring that they had the appropriate applications. A couple of years ago they used SAP as the fundamental operating system throughout the organisation. One of the things they were doing was ensuring that they updated all of their applications. Surprisingly, all of it was way out of date. It was not a quick process; it was a process in play. She was hopeful that by the time they came to the beginning of the following year, at the very least, they would be starting to digitise what they were already working on. There also needed to be a process of the digitising of the history.

Mr von Zeuner stated that it was important to highlight that the Transnet of the past had a fully outsourced IT function and it was only with the support of their Chief Legal Officer Advocate Sandra Coetzee, that the contract with Gijima, that was now their service provider, was completed in 2020. A lot of these aspirations coincided with a total changeover of supplier, which brought challenges as well. He assured the Committee that at the next engagement Transnet would be able to commit on timelines and they would add them to the remedial program.

Ms Dlamini stated that in terms of the shared services the design work was largely done. They were now moving toward implementation and they were working on recruiting the herd of that function. It would assist them in creating standardisation across the business. This would ensure that they would not pick up an issue in one division and resolved it in isolation while the other division continued to experience similar issues. Having a shared services centre would help in many ways to ensure that issues were picked up once in the organisation and the rest of the organisation learnt from the other parts of the business. With the design work done, they did believe that within the coming financial year they would progress significantly in setting up the shared services centre and the systems processes were also on the go.

Ms Swarts stated that she had asked that timeframes relating to the digitisation process because she wanted to clearly understand these. The one official said that they may not have the timeframes, the other said ‘in the near future, soon, year to come.’ It did not give her the sense that Transnet was now keeping records.

The independent auditors reported that they could not obtain evidence that disciplinary actions were taken against officials who were involved in the irregular expenditure, as required by 51(e)(3) of the PFMA. Why were these records not kept by the entity?

Mr Khaya Ngema, Chief of People, Transnet, stated that the records were kept in the Cura system. The system recorded these instances. Mainly because they did not have dedicated capacity in the space of irregular expenditure, by way of the Loss Control, they had a PFMA compliance, but those functions tended to be mixed with other functions. Transnet now had dedicated compliance mechanisms. The system was there, but it was incomplete. Part of what they were dealing with presently was to populate the system and ensure that it was fully compliant as well as conducting data cleansing. Information that was irrelevant was taken out. Cura was being managed under the Loss Control Officer. From the HR function they were then ensuring that they were following the path of each of the investigations and the consequence management cases on a regular basis. Some of the irregularities pertained to cases where people had followed organisational processes or policies that turned out to be non-compliant. There was no intention to not follow process. They followed process as they understood it at the time. There were cases where people were guilty of something more, such as criminal conduct. The numbers were big but the bulk of the numbers were accounted for.

Ms Dlamini stated that they were trying to give a sense of the numbers in relation to consequence management. The audit finding itself talked to the fact that Transnet had systems that were not talking to each other. Cura was designed to report on irregular expenditure. In the recent processes that were setup they had started checking the irregular spending numbers but also the process of dealing with the consequence management.

Ms Kubheka stated that in terms of ensuring that consequence management was done, they had allocated per operational division. At the end of February 2021 they were sitting with 1 127 cases that were dealt with in relation to previous years. They had also started with processes relating to the current year and there were approximately 208 transgressions and consequence management issues. They also looked to ensure that they had provided the necessary support in terms of the training that was required. They did conduct consistent training. Every Thursday they had ‘knowledge sharing sessions’ as part of the PFMA improvement plan. There were also Chief Financial Officers (CFOs) of operating divisions and Central Procurement Officers (CPOs) who attended on a weekly basis. Transnet had identified one of the matters that they had dealt with and had broken it down in terms of what was irregular expenditure and what was fruitless.

For 2018/19 financial year she wanted to highlight that they had already completed 706 cases in relation to that particular year. For the last year’s expenditure and fruitless and wasteful expenditure, they had already completed 314 cases.

Ms Swarts asked that the Committee be provided with the list that was tabled. In considering the irregular expenditure that amounted to R56.2 billion mostly resulted from contravening SMC policies and incorrect application of the PPPFA. Are the officials in the Small Medium Enterprises (SME) unit provided with adequate training on the prescripts of the PFMA, Treasury regulations, PPPFA and SMC policies?

Mr Vule Nemukula, Group Chief Procurement Officer, Transnet, stated that there was a process that the GCEO alluded to at the beginning of the conversation. In terms of the work that Transnet was doing, there was a project they were currently running, which was a reform of the procurement process across Transnet. Part of that process was touching on people, processes and systems. Part of what they were doing at the moment was the retraining of people in terms of their understanding of the PFMA, the PPPFA and the impact of section 217 of the Constitution on Transnet’s processes. Transnet was reviewing all of its policies and procedures to ensure that they were compliant and simplified across the whole organisation. The training would not only focus on supply chain management personnel, it would be extended to the end users. They needed their end users specifically to understand what they needed to comply with when they approached Transnet for a procurement service.

Ms Swarts stated that she hoped these changes would yield results. They would see over the next audit period whether the systems would have assisted them. Was the supply chain management unit fully capacitated? What was the vacancy rate at Transnet currently and why was the entity experiencing challenges in this area?

Mr Nemukula stated that in terms of the whole supply chain management (SCM) unit, they had a vacancy rate of approximately 20 percent. The reason there were vacancies was because when the new management came on board, a conscious decision was made that they would review the whole process of procurement across the organisation. Once they had finished the review they would be able to implement a clear operating model, specifically in terms of the roles and responsibilities of each person within the organisation. When they had come on board the roles and responsibilities were not clear and that was why there was a lot of confusion. They had gone through the process to understand the roles they needed to have in place. As leadership of the organisation they had also identified the skills they needed to be able to move forward with the organisation.

Over the past few years, the role of procurement remained stagnant, whereas the demand of the business was changing. From that perspective, they were now trying to align the demand with the skills they needed in terms of supply chain. They also needed to ensure that they got the relevant people in the respective environments. Part of what they would do once they had completed the process was to ensure that they had people that were capacitated to do what they were supposed to do. In areas that they could not fulfil obligations with existing personnel, they would look for those skills outside of the organisation. This would ensure that they brought in new skills that would blend with the skills in the organisation. This would ensure that they did not disturb the business continuity in terms of service delivery.

Ms Derby stated that in terms of contract management, it was a fair point that was highlighted by Ms Swarts, in terms of the number of administrative changes. Some arose from the fact that when they reviewed audit findings and were briefed by the Board as an incoming executive, those key areas of weakness were indicated. Invariably a lot more effort went toward those areas in terms of strengthening and putting in new processes. One of the issues Mr Nemukula was having to deal with in Procurement was the modernisation of the skills they had. To a large extent, many of the procurement people had often been administrative process watchers as opposed to being more skilled, commodity or category managers, as one would find in other large organisations. One dimension of the training was understanding properly what the situation was. They were not too worried about that, by virtue of the fact that inside Transnet, both in Transnet Freight Rail (TFR) and Transnet Engineering they had a strong contingent of engineers. These design engineers knew exactly the specifications they had and the capacity in South Africa. They had been trying to bring that team together with the procurement team so that the two could work together to create, a supplier basis. In as far as issues around condonation, they had been talking to the Department of Trade Industry and Competition (DTICs) as well as National Treasury to ensure that there was increased standardisation around this. This would ensure that as an SOE they did not run ahead of government but followed government processes.

She suggested that the Chief Legal Officer, Adv Sandra Coetzee, could explain further about how they were approaching contract management. In terms of the legality of the contract and the complexity of the contract that they had and monitoring when the contract came to an end, this was a truism across the operation, even in revenue generating contracts. They had not been very good in making sure that they followed up before the contract came to an end to actually decide whether they would go out on a tender. This was what had driven some of the irregularities. They were not procuring fast enough. It was one of the reasons why, in restructuring Transnet, the procurement function was taken out of finance and put with the strategy and planning. Thus it was included where it rightfully belonged. In the early stages when one was planning for procurement, or any investment for any project, the procurement was part and parcel so that they could go out on a faster basis. Transnet were heavily reliant on systems to ensure smoother procurement processes with so many projects.

Adv Coetzee stated that in addition to what Ms Derby had highlighted in terms of the digitisation of the contract management function, the approach they were taking was an integrated one. This involved the business owners of the individual contracts, be that a procurement contract, be that a revenue generating contract, it was familiarising themselves with the terms and conditions in a way that limited contingent liabilities to Transnet. They were creating a platform whereby key milestones of those contracts were monitored on a regular basis. This ensured that the necessary planning, be that from a procurement or expenditure point of view, was in place in advance. In that way, they then ensured that they limited the number of variation applications that they had to put to National Treasury or through their governance structures. They were trying to stay within the budget and anticipated expenditure and hold contractors to their obligations and paying in accordance with Transnet’s obligations. They needed to ensure that they did not create new contractual liabilities without the necessary approvals. It was a training and awareness building exercise. It was also a matter of recognising the internal controls that should go with each and every contract, even if it was a revenue generating contract.

Ms Swarts referred to the 15/20 percent vacancy rate and asked that the Committee be provided with the list of that rate in terms of the actual numbers of vacancies. She referred to the SCM employees and executives, and asked whether they had been vetted. What was the current status on vetting at Transnet?

Mr Nemukula stated that in terms of the SCM professionals, the levels A to C were vetted. There was a process that was managed across the whole organisation. At the moment they were going through the process where they were vetting the rest of the organisation, taking into consideration grade level D up to the bottom level in the organisation. This would be part of the process they would utilise in terms of ensuring that the people that were cleared in the process, would be people they would put in the positions. Where they found that there were certain people found wanting, they would manage them through the normal process in the organisation that was dealing with issues regarding declaration or conflict of interest. At the moment they would basically extend the vetting beyond the levels of the senior executives, which was in line with the processes they were running at the moment, in terms of the whole reform of the procurement process.

Ms Swarts asked a question in relation to fruitless and wasteful expenditure. Although they saw a decrease in this expenditure from the previous year, this expenditure should have been avoided. She noted that Transnet had said they were taking actions against responsible officials, but were there any plans in place to recover the money from those officials? What was the plan in place to recover that money?

Ms Derby referred to the vetting question and lifestyle audits. This was one area that gratefully they were able to reach quick agreement with the unions and vet every single person, from the bargaining unit to the management level who worked in the procurement function. Transnet had a couple of files that were with the State Security Agency (SSA) which were waiting for vetting. Transnet had indicated to them that they could not establish capacity to do vetting because they just did not have enough capacity to be able to run through all of their people. It was a priority area that they were looking at. Not only was Transnet doing lifestyle and vetting of all of their members, they were also ensuring that they provided the appropriate training for them. She stated that Mr Eric Neethling was leading their investigations, she suggested he response to the question raised by Ms Swarts.

Mr Eric Neethling, Head of Investigations, Transnet, stated that in terms of the status of the lifestyle audits, of the 400 original members (levels A-C), 130 had various items against them which were being addressed accordingly. The process for lifestyle audits for members on levels D-F had commenced from a procurement perspective. There were approximately 5 600 affected employees that would need to go through the process. Transnet would be following a phased process but also a risk process – in terms of ordering and prioritising of individuals for the lifestyle audits in terms of their positions and access to public finance. From an investigative perspective, some of the slides showed where they were working with the SIU very closely, especially the Transnet Working Group. They had seen significant progress in that regard. From an investigative perspective, one of the core functionalities/activities was cleaning out the case inventory, there was a lot of duplication. The team was centralised and was working accordingly. The cases were flowing through the consequence management space as well. 

Ms Swarts stated that once again the independent auditors reported a lack of evidence relating to disciplinary steps taken against officials responsible for fruitless and wasteful expenditure. Why was there slow progress by senior management in enforcing compliance with legislation? She noted that Transnet was providing responses, ultimately where was Management when irregular expenditure took place? The PFMA stated that irregular expenditure must not be incurred at all. Why was there slow progress in enforcing compliance with legislation? It was all good and well that the presentation had highlighted all the systems Transnet were putting in place but the pace was rather slow. If Transnet went back to the ‘bible that governed them,’ in terms of how government’s money should be spent, it clearly stated that there should be no irregular expenditure incurred at all.

Ms Derby replied that she did not think that the progress was slow. The digitisation was about ensuring how things were dealt with in the future. At the end of the day they had a responsibility to be just and fair, with the investigations and individuals concerned. In certain instances, it was not an irregularity that arose because somebody was wilfully trying to break the law. Sometimes it was due their processes. Those individuals might comply with the internal Transnet processes but were not compliant with the PFMA or the PPPFA or in certain instances with the CIDB. The cleaning up was essential so that their internal processes were completely aligned with the regulations. If one was complying with the Transnet processes, one would be compliant with the other legislation/regulations. She reiterated that she would argue that real progress was being made and in certain instances one could see that it was the same kind of offence linked to the same contract – so it looked like it was increasing. This was one of the statements that the Minister had indicated, if there was a way to ring fence systemic problems… For example, competitive supplier infringements were going to be with them as long as the contract was alive. When the contract closed or when they were able to approach Treasury to get condonation for that - it grew. What Transnet could indicate to the Committee was where they were at in the immediate – in terms of dealing with it and ensuring that going forward it was limited. Ideally they would like to never have irregular expenditure but bear in mind that irregular expenditure, unlike fruitless and wasteful expenditure, was something that sometimes happened not because one was wilfully trying to break the law. Sometimes it was the process at the respective moment that pressurised one to move in a particular direction. For example, the Delegation of Authority (DoA), it was too centralised that it actually made Transnet very slow. In the end, Transnet needed to run trains on time, they needed to make sure that the ports were operating. Transnet had been trying to review the operating model to ensure that there was a deeper delegation of authority out of the centre toward the operating division. In the operating divisions they had given some fairly clear guidance that they also wanted to see delegation of authority a little bit further down toward the points of operation in depots, at the ports themselves and at the various corridors for Transnet Freight Rail (TFR). Then they would be ensuring that their procurement policies and processes enabled those individuals to comply with the policies and to procure. It was a complicated process. She asked that the Loss Control Officer outline how far Transnet was in terms of consequence management. Some of the consequences were not so much about a wrongful action, those were being dealt with severely i.e final letters of warning were issued as well as disciplinary processes. There was a good number of people where it was about ensuring that there was training and ensuring that there were appropriate delegations of authority so that the actions they undertook were in line with the approved levels of authorities.

Mr von Zeuner stated that it was of course embarrassing if they could not put forward a Transnet that all South Africans could be proud of. They would not leave any stone unturned. This was a new management team: the GCEO was in the office for 13 months and the CFO only joined in July of the previous year. Given the size of Transnet, from an Audit Committee perspective, he would have liked to have progressed further/faster. With respect to the current management team, with the exception of two individuals, they were all new, with less than twelve months of service. The new eyes and perspectives helped them get to the bottom of the issues. He thought it was phenomenal what the management had achieved so far, but he thought the momentum would only pick up, as one needed a period of time as a new executive to adjust…

The Chairperson interrupted Mr Zeuner to state that he did not think that the Committee wanted to venture into that space. Transnet was not there to be called into question about the credentials or capabilities of the management. It was not pertinent to the issues under discussion.

Ms Swarts raised questions regarding the performance of Transnet. What factors contributed to the entity’s under performance? Did Transnet have adequate skills and workforce for its operations? What was the current vacancy rate in total at Transnet?

Ms Dlamini stated that she would comment on Transnet’s financial performance for the year ending 2020. This was presented on the first few slides of the presentation. This highlighted that over the past few years, much as they had seen subdued economic conditions across the globe and more so in the country, Transnet had continued to be able to generate quite significant revenue, the R75 billion referred to earlier. Much as they had been able to continue moving volumes, they had not been at the levels they had wanted to achieve, for a number of reasons. The economic conditions had impacted on the performance in terms of the volumes. Transnet had also seen the impact of COVID-19. There had seen a significant dip in items such as petroleum – due to the lockdown and restricted movement in the Country at certain times during 2020. In terms of general freight, they were only focusing on the essential goods and services. This was also applicable to the mining sector – where Transnet was only permitted to operate at reduced levels. They were now seeing much flatter volumes in comparison to growth which was what they would have wanted to see.

Ms Derby stated that in the last financial year 2019/20, there were a lot of vacant positions and acting positions. It was not an excuse; it was a fact of life. If one had that level of uncertainty, the ability of the operations to proceed was quite limited. She had just started at Transnet when the financials were being closed, and rail and TFR volumes were getting to a point where they were calibrating where the end of the year. They were able to close at 212 million tons per annum.

Ms Swarts interrupted to state that she wanted to rephrase her question because she wanted a focused answer. She was not getting the answer to the current vacancy rate. In terms of the year under review, the entity only received approximately 28 percent key performance indicators out of a total of 74 which were contained in the 2020 shareholders contracts. This overall performance was significantly below the DPE threshold and the prior year’s performance. Does Transnet have adequate skills and workforce for these operations. The question they should equally answer was what was the current vacancy rate?

Mr Ngema indicated that roughly the vacancy rate was sitting at about three percent overall. In terms of capacity, Transnet was considering the workforce in line with the zero based budgeting process that the CFO had spoken to, to make sure they were adequate to the task. There were some lags and gaps in some operational areas in some of the operating divisions. There were also some up-skilling initiatives. They had the numbers but they might need to do some up-skilling. The vacancy rate was not the issue, but it was the skills mix, especially the balance between operational skills and administrative skills. They were recalibrating functions across levels. There were areas where they were not strong, in relation to transactions and certain types of logistics.

Ms Derby stated that she had not been trying to deviate from the questions posed by the Committee, it was simply a reality of the situation. There were more than enough competent and properly skilled individuals in Transnet. She did not want to create the impression that it was a weak organisation. It had fantastic skills. If one planned wrong and one’s assumptions were wrong – remember they were coming from an economy that was growing at 0.4 percent, there was no way that Transnet could defy the trend of the economy. Those were very real issues. If one was not able to procure rail to do the maintenance on time, one could not run trains on time. One of the things they had were speed restrictions, to the extent that the usual slot numbers that were available, were not available.

The issue of buying rails, took them almost a year, because that area of rail was designated for 100 percent procurement in South Africa. It was impossible to procure something that was not made in South Africa. It took a lot of communication with various government departments to get approval to go ahead. The issue of the 1064 locomotives was a matter pending for a long-time.

With due respect to the Members, it was a management and leadership issue if they did not forecast the right numbers in terms of what they expected to see in terms of performance. There were however some of the best people in Transnet. The issues raised about the reorganisation of operational people toward the operations themselves, ‘de-layering’ the organisation, was absolutely essential in ensuring that going forward they were able to meet performance. To have 74 performance indicators, it was nearly impossible to meet that. The question she had asked when considering the performance indicators was how many of those 74 indicators were directly related to the value to the South African economy. She would hazard a guess that in a lot of areas around social economic transformation – all those developmental indicators – they had actually done really well. The problems lay in insufficient investment in the trains; it was an issue they needed to change and address.

Zero based budgeting, meant that Transnet needed to go to every last person that was working for them and ensure that they had a role and division. At that point they would be able to indicate if they had vacancies.

Ms Swarts asked which divisions mainly underperformed and what steps were being taken to improve performance.

Ms Sizakele Mzimela, CEO, TFR, outlined the initiatives Transnet was undertaking to improve performance within the TFR space. They had organised their teams along the various corridors in order to make sure that there was better alignment between the rail operation and the ports operation. They had placed their senior executives at the ports so that the alignment and improvement was achieved as quickly as possible. In addition to that, they had been working very hard to ensure that they gave them the ability to be able to speed up execution in all of the corridors. This was one of their main challenges, especially in improving the speed of execution along each of their corridors. They had been working in ensuring that they were provided with the necessary DoAs to do what was necessary within those corridors. Transnet had been working hard to improve the delivery of the rail network infrastructure. There were a number of challenges over the past few months in terms of bringing in the critical material that was required to improve the infrastructure, a lot of that was now in place. Transnet had done significant work on most of the corridors to ensure that they had a more efficient running of their trains on each of their corridors. There were still one or two where they were experiencing challenges. They were hoping that in the next three to four months, the work that needed to be done, on the infrastructure side, would have been largely completed.

In addition to that, they did continue to face challenges relating to security and theft on their lines. They had to look at different ways of how to manage the security issues that they were experiencing. It would take them a good three years to try and implement some of the solutions relating to security. They would do what they could to replace the cable theft that was at an extremely high level as quickly as possible, but in the longer term they had to find a different way of replacing cable which was less theft prone. They believed this would be a challenge that would be with them for years to come. They were also looking at other forms of technology to guard the infrastructure to ensure that in the next two to three years there was less dependency on traditional ways of monitoring the security concerns in their space. Transnet was still challenged in terms of the availability of locomotives. A number of issues had been undertaken to help resolve those issues. They had also been working to improve the maintenance and efficiency of the locomotives that they needed in terms of improving the volume delivered on each of their corridors.

They did not have a problem in terms of the amount of demand that was on the table – it was an issue of how to improve efficiencies within their own system in order to be able to take advantage of that demand. Transnet had acknowledged that they would require some help in various parts of the business which was why they had also been working very hard with some of their partners to try and move some of the goods off the road and onto the rail. In this last year they had made significant improvements in that regard. In the Natal Corridor specifically, they were able to move 45 000 truckloads off the road and onto rail over the past year.

Ms Dlamini referred to the shareholder compact, specifically the list of items. In terms of what was being done to improve - in reference to their financial statements on page 24, where one of the items they had committed to deliver on was a property strategy, that would be finalised and improved. Regarding the point that was made earlier – that Transnet had to put together the Exco team, particularly in the property space, the property strategy was approved by the Board and incorporated into their corporate plan for the 2021/22 year. They were expecting that they would see exponential delivery on the strategy and not just the approval element. In terms of the private sector participation (PSP) programme, this was one of the strategic intents that they were focusing on delivering for the year 2020/22.

Mr A Lees (DA) stated that as a user of the N3 and faced with hundreds and thousands of trucks on the roads, having used it on a regular basis, he thought the figure of 43 000 truckloads being taken off the roads nationally was a small figure. Despite the slow economic progress being made by the economy, the opportunities for Transnet were massive. He did not think it was right to say that the performance was flat lining because of the slow economy. The opportunities were there and he hoped that they would see some real action and not just more plans to improve that kind of performance of Transnet.

In terms of the annual report, on page eight, the external auditor said they checked the going concern/assumption made by the Board but they did not state, that he could see, that they actually accepted. The Board went to great length to talk about the going concerns status, the auditor did not confirm that assumption – it just said that it was checked. Why was that?

On page 22 of the annual report, the pensioners class action and the merging of the funds which was due to be effective from the 31 March 2021 – he requested progress on that.

He was unable to find a safety report within the annual report. He apologised if it had in fact been included – he had battled with the digital report as opposed to a hardcopy. He was looking for a comparison of derailments year on year.

On page 19 there was a note there about a loan to SA Express which was R222 million. At the end of the last financial year it had grown to R260 million with interest added – it was requested by the Minister of Public Enterprises. He noted that Ms Siza Mzimela, the previous CEO of SA Express, was on the call – ‘who had crash landed’ after leaving SA Express. On what basis, other than a request from the Minister of Public Enterprises was a loan made to SA Express? How could that possibly be part of the mandate of Transnet?

Ms Dlamini referred to page eight of the Independent Auditors Report. The way that the auditors tabulate their reports, was that they would have looked at Transnet’s submission to the auditors, and their ultimate goal was to state whether the statements of Transnet were a fair representation of the financial year under review. In terms of page eight, Transnet had the responsibility to confirm that it was a going concern through the modelling, work again and future outlook. On the left had side, there was a table that indicated that this was a key audit matter that they need to review. This was also because it had some judgement issues in relation to what was likely to pan out in relation to the future. On the right hand side, they articulated as auditors how they addressed the matter. They had indicated what they had done to satisfy themselves. If they were concerned about the assessment made by the Board – they would have put a note in their opinion. On the basis that they did not put a note that they were concerned, it told them they were comfortable with the work the Board had done to address the going concern.

Mr von Zeuner stated that from the Transnet Audit Committee perspective, he confirmed that the Audit Committee recommended to the Board, the Board approved it and the auditors then took note of it. If they differed they would make comments. That debate and discussion was tabled at the Audit Committee where the recommendations were done and the Board minutes confirmed the going concern. The auditors were comfortable with the position, otherwise they would have raised it.

Ms Dlamini stated that they could arrange hardcopies for the Committee – they had not done so in light of the need for soft copies due to COVID-19 and a change in approach. Regarding the safety, the financial statements were contained in one book, there was another book that was the Integrated Report of 2020. On page 95 of the Integrated Report of 2020, they did have details around safety performance of the organisation.

Ms Derby responded to the question relating to SA Express. That loan was given in December 2017; it was an amount of R222 million. It was approved by the then Board of Transnet. This was at the request of Minister Brown. She could not provide more detail than that on that issue. She asked that Adv Coetzee respond in terms of whether that was out of the norm of the PFMA.

Adv Coetzee stated that the request was put by the Minister, however it was supported by a resolution of the Board to extend the loan. In terms of the PFMA it was supported by a Board resolution. With regard to Transnet’s claim, they had lodged their claim but as a related party they were not optimistic about the net result of that claim – in terms of how much they would be able to recover. It was registered with the liquidators.

In terms of the pension funds, the merger of the pension funds was on track – it was not behind schedule and would proceed accordingly. With regard to the class action, there were no outstanding items in that regard.

Ms Derby stated that there were 84 derailments in 2019/20 and to date there were 68.

Mr Lees stated that in terms of the SA Express loan, was there not a chance of Transnet needing to make a contribution toward SA Express?

Adv Coetzee stated that there was no obligation to make a contribution, what was at risk was Transnet’s claim against the loan extended to South African Express. Transnet was not a preferential claimant. There was no obligation to contribute at all.

Mr Molefe highlighted that Mr Lees had made reference to the fact that Ms Mzimela was sitting in the meeting, the implication of that statement was that she might have been responsible for procuring the loan. She was not with SA Express when that loan was given. She really had nothing to do with it.

Ms Swarts asked whether there were any performance bonuses paid during the year under review.

Mr Ngema stated that the performance bonuses were not paid. It was not as a result of the incentive system being suspended. In the bargaining unit, in the operating divisions, those who did meet their performance targets were paid productivity incentives. There were some months or quarters where many did meet the thresholds. In general, none of them reached their performance incentives so they were not paid those other than the long-term incentives that aggregated over the three-year term.

Mr Lees noted that the investigations were ongoing and Transnet would have to play a role in resolving the investigations. In terms of the conflicts of interest investigation by the SIU, they had talked a lot about the process that was in place, such as the lifestyle audits and so on. He got uncomfortable when the solution was ‘training’ – which was essential for new employees but should not really apply to existing employees. The SIU had prioritised high-level officials and had made recommendations to Transnet. Who were the high-level officials?

Adv Coetzee stated that in broad terms what they were doing currently within Transnet with regard to their responsiveness to the SIU investigation was that they had intensified engagements with SIU to be able to plan with them an immediate response to their recommendations. Transnet had conducted an audit of all the recommendations made by the SIU and they were progressively moving through all of those recommendations. Those have mostly been completed – and predominantly refer to disciplinary actions that were taken. They secured the forfeiture of assets of the Transnet official’s assets – this was under appeal at the moment. With regard to the investigations on the New Multi-Product Pipeline (NMPP), they had taken the necessary actions as well as on the TPL side, three individuals were disciplined. They were conducting a review of policies as recommended by SIU. The SIU investigations had progressed to a stage where they were now engaging with SIU and their Council to determine the next action steps in terms of the recovery of losses and disciplinary actions. With regard to the conflict of interest matters, they had reviewed their policies in that regard. The lifestyle audit covered all of the senior officials as well as Board members. The latest position, with regard to the category ‘A2C’ staff members and board members was attended to. They were currently pursuing twelve matters through disciplinary processes.

Mr Neethling stated that one of the primary features that was undertaken internally was to move the investigators from a regional scenario into a central space so that they could operate across all the operating divisions (ODs), in that way relevant skills sets could be developed accordingly. From a policy perspective the Anti-Fraud and Corruption policy was also being reviewed so that it conformed to the National Anti-Corruption Strategy.

Regarding lifestyle audits, it was often perceived as the ‘holy grail’ but it needed to be run in conjunction with activities. It was but one source of information. In terms of how they looked at investigations, they considered investigations from a sensitive perspective – individuals that were operating at grade levels A to C. Levels D onwards would be regarded as less sensitive, where the grading was considered the determining factor. From the 3 844 cases that they had reviewed, 178 cases related to sensitive matters – that would be individuals within the grade A-C environment. The bulk of the allegations were from the public or were internally related to scams, such as criminals who from the outside misused Transnet in relation to employment scams. Regarding the sensitive cases reported by the SIU, those matters were still in the investigative space within the SIU, he stated that he was not in a position to comment on that – other than what was contained in the slides.

Mr Lees referred to the pace at which the investigations were taking place. He urged some haste in resolving the matters. He stated that they now had a senior official involved in the NMPP investigation by the SIU – who was the service provider involved?

Ms Michelle Philips, CEO, Transnet Pipelines, stated that the service provider was IGS Consulting Engineers cc. The second matter was the theft of petroleum, no loss took place – as they were able to stop the theft. However, per SIU’s recommendation they reported the matter to the Directorate for Priority Crime Investigation (DPCI). There were three companies involved, the one was listed and was at the root of the offence, New Horizon Energy. Those matter were referred to Hawks for further investigation per their obligation of section 34 of the Act. Once they had the matter investigated, action would be taken against the companies involved. Three employees were dismissed from Transnet, the former Chief Executive, the Executive for sales and the Chief Information Officer (CIO).

Mr Lees stated that if they considered the SIU report, the second matter was a question of theft and it was interesting that when he drove along the N3 it appeared that there was often a breach in the pipeline that was being worked on. The theft seemed to continue unabated. He was interested to know how many days in the past year the pipeline was actually able to operate unabated. Would they experience a shortage of diesel – as was experienced the year before?

Ms Philips stated that the theft of fuel had been a problem. Over the past year they had instituted a number of measures which they were still in the process of implementing. They had engaged with the South African Police Services (SAPS) and the prosecuting authorities. They had seen a number of arrests – but the situation had continued. They had appointed an advocate to keep a watch over those matters. Transnet had a number of people that were arrested - actual theft incidents. There were 38 suspects related to the cases opened. In the past year 84 suspects were arrested – out of that they had only one conviction. This was a matter of concern for them. Transnet had implemented a number of measures to avoid an intrusion into the pipeline. They were rolling out IoT devices, security management systems and were also engaging with the CSIR for a system that could protect the pipeline as a whole. The risk of fuel theft was not identified as a major risk in the planning process of the pipeline. They had applied for the pipeline to be considered critical infrastructure. They had increased security and the drone and helicopter surveillance.

There seemed to be some internal collusion – they did have some investigations at a very sensitive stage with the Hawks to identify the internal players and syndicates involved in organising attempts against their pipeline. They anticipated successes in the future. They did not anticipate a negative impact on diesel supply.

Mr Lees requested a report on the remedial costs of the breaches. He was told it would cost Transnet R150 million to make good – not just on the repair, but in terms of the loss in revenue from the sale of product. If that was the kind of cost on a weekly basis – it required robust intervention – beyond Transnet’s ability perhaps. He suggested military patrols to safeguard the pipeline. He would support the move for it to be considered a national key point – or whatever the current terminology was for that. It really had an enormous impact on the economy.

In terms of the SIU investigation – they were looking at a contract of a R150 million and a judgement was handed down in November 2020. Assets of R18 million were forfeited to the State. He requested information about that particular contract. What was the basis for it being an invalid contract? How much of that had been paid out?

Adv Coetzee stated that the reason why it was determined irregular was a consequence of the corrupt relationship between the relevant individual and the Company. There was evidence of self-enrichment in the securing of the contract. The contract was paid out in full.

Mr Lees asked what it would have costed in a normal market relationship. He was trying to ascertain whether the R18 million recovered was in line with the market devalue of the contract.

Adv Coetzee replied that they should note that the SIU investigation did not report an undue enrichment on the part of the contractor. It would be difficult for her to take a view on the fair value of the contract.

Ms Philips stated that her understanding was that the Court had indicated that it was specifically the enrichment portion that needed to be recovered and nothing further than that.

Mr Lees referred to the 1064 Locomotives on page 10. The original contract estimated cost was R38.6 billion, it then escalated to R54 billion and then a further escalation took it to R55.4 billion. The SIU had identified maladministration – what were the names of the people involved in that maladministration?

Adv Coetzee stated that the names were those of former executives of the Company. By name it would include Mr Anoj Singh, Mr Siyabonga Gama and Brian Molefe in the main. It also included Mr Giani [spelling unconfirmed]. In respect of all those individuals, Transnet had instituted civil claims to recover losses from those individuals.

Mr Lees asked whether they had any ball park figure of the excess of recoveries they were looking for.

Adv Coetzee stated that they were distinguishing between the kick-back numbers which were easily quantified with reference to the business development agreements entered into. That was approximately 21 percent of the relevant contracts. With regard to the profits and excessive profits, they were going through a process of statement and rebatement to ensure that there was audited evidence that could support their claim and a representation by the Original Equipment Manufacturers (OEMs) with regard to what reasonable costs would constitute. The exact quantum of the profit element had not been settled.

Mr Lees asked if the OEMs were cooperating. Were these contracts still in place?

Adv Coetzee stated that the two Chinese contracts were suspended as a consequence of the concerns regarding criminal conduct. The other contracts, General Electric delivered in full, Bombardier was continuing to deliver. They had only commenced the process of filing and engagement with the OEMs to come to a just and equitable settlement that would include the return of the profits.

Mr Lees asked whether any of the locomotives had been delivered and were operational. Was it still in the process of manufacturing somewhere in South Africa? He had seen the manufacturing facilities were moved, and that had cost another R1.5 billion.

Adv Coetzee stated that there had been delivery – in the case of General Electric, those locomotives were in operation. Bombardier had also delivered against the contract – not completely but those that were delivered were in operation. China South Rail had also delivered partially which were in operation. China North Rail had performed in a limited sense and most of those locomotives were defective. The remedy they were seeking was that they retained what they had acquired minus the profits. That which was defective and not remedied would not be retained.

Mr Ralph Mills, CEO: Transnet Engineering, stated that General Electric were contracted for 233 locomotives – those were delivered. China South Rail was contracted for 359 locomotives – 260 were delivered to date. China North Rail were contracted to deliver 232 locomotives – 22 were delivered. Bombardier Transport were contracted for 240 and delivered 68 locomotives – this was in process so the numbers varied.

Mr lees stated that it seemed like more than half of the locomotives were delivered. Were they delivered on time or were there big delays?

Mr Mills stated that Bombardier contract continued to have some delays. General Electric had no delays – built in Pretoria. China South Rail was running quite well until it was suspended and the China North Rail contract had not run well at all. The production line still had to be established correctly, the jigs were not up to standard.

Mr Lees stated that the 1064 contract was presented as part of the reason for Transnet’s inability to operate at full steam – it seemed that a large number of locomotives were delivered. It was likely still somewhat of a constraint.

The role of the three transactional advisors in the procurement of the locomotives – were there details of the names of those three advisors? Where were they in dealing with their malfeasance?

Adv Coetzee stated that with regards to Regiments, Transnet entered into a settlement agreement to recover fees. While Regiments was subject to litigation and liquidation, at this point in time, their claim was still secure. However, the South African Revenue Services (SARS), and one of the other creditors had indicated that they would petition the application by Regiments to lift the liquidation. The motivation by Regiments was unbundling of their group would result in a higher return on the claims to all of the concurrent claimants. That matter was still being finalised at that point in time. The order of call provided for Transnet’s claim to be honoured. With regard to McKinsey, their court papers indicated the extent to which the 1064 acquisition was premised on the market demand strategy - which McKinsey provided advice. They were presently engaging in unprejudiced discussions with McKinsey. With regard to the funding elements, they were involved in unprejudiced discussions with Nedbank as well.

Mr Lees asked what the malfeasance was on the part of Nedbank.

Adv Coetzee stated that the core of their concern and matter was a conflict of interest on the part of Nedbank with regard to the bank’s swops arrangement which was entered into days after the club-loan was arranged. A floating rate was switched to a fixed rate. That happened within days – that was the core of their concern.

Ms Derby referred to the 1064 matter – she wanted to close off on the matter properly. Transnet basically had an under-delivery of 481 locomotives that they needed. The idea was to do a fleet renewal and the reduction of the number of platforms that would be running as Transnet. At present Transnet had 194 staged locomotives. ‘Staged’ meant parked locomotives that were waiting for parts. The 1064 case was material in terms of the two Chinese rails which were not forthcoming in terms of supporting them with regard to spares. They had been working hard to find work-around solutions to ensure they could bring back to service the 194 locomotives parked. Bearing in mind that they were unable to get the 481 locomotives, it meant they were using locomotives that they had actually planned to retire from their operations. They were therefore facing a much higher failure rate and unscheduled maintenance that they had to undertake on the locomotives. The 1064 matter was therefore not just an excuse from their side it did have material impacts on their functioning.

Mr Mills stated that they had brought back 678 locomotives from the B-fleet, those were run to stop – which meant they were not serviced toward the end of their lives as a deliberate process. They averaged 30 to 40 years. It was a bit of a challenge in terms of continued maintenance and their reliability. 477 Locomotives were presently in service from the Chinese fleet, there were four different types of locomotives in that fleet. Two of those types ran on the 1064 program but the other two types were acquired prior to the 1064 program. As a result of the litigation the China Rail had now stopped engaging with Transnet altogether in terms of maintenance and spares, which had made it difficult. Transnet was looking at various avenues to find alternative suppliers.

Closing Remarks
The Chairperson was glad to see that there was progress – compared to their previous meeting with the company, which was under more trying times. The Committee would continue to monitor the situation with Transnet to ensure that progress was made.

He stated that Transnet would hear the Committee emphasise the need for urgency in terms of where consequence management was concerned and dealing with corruption. This was because they were racing against time. The elements of corruption and state capture were moving at a far greater pace wanting to hide the wrongs that were done. The movement of money etc made recovery very difficult. The Committee commended the work of SIU in dealing with those matters. This required state entities to play ball. They would deal with issues of deviations and expansions at a later date and interrogate those further. He highlighted that the issue regarding Ms Mzimela was not meant to cast doubt against her – those issues would follow proper proceedings. There was general concern about how government officials moved across government into different positions. Any unanswered matters needed to be communicated to the Committee within the week.

Mr Molefe made some closing remarks having reflected on the questions raised and how Transnet Management would response and move forward. There was no interest in trying to cover anything up. They would continue to manifest transparency in their relationship with SCOPA. SCOPA may want to give Transnet the opportunity, at some point, to reflect on the vision of the new Transnet and the strategy to attain that vision.

The Chairperson stated that they would invite Transnet back to do so.

The meeting was adjourned.


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