Gordhan to the rescue: a visit to China to get Transnet rolling
The public enterprises minister is to meet his diplomatic counterparts in China to resolve a dispute that risks further dragging down the economy. By
Public Enterprises Minister Pravin Gordhan has taken the extraordinary step of visiting China to get idle locomotives belonging to Transnet to move and able to be used by the company.
With this visit, South Africa will flex its diplomatic muscles, testing the relationship between the two countries.
Gordhan is to meet his diplomatic counterparts in China next month to resolve a dispute between the state-owned transport enterprise and China Railway Rolling Stock Corporation (CRRC), a state-owned company in China that manufactures locomotives. The CRRC is a global rail giant; it is the world’s largest manufacturer of rolling stock (locomotives/carriages) and rail equipment.
The dispute is significant as it risks further dragging down South Africa’s economy because Transnet has locomotives from the CRRC that are idle but should be servicing major domestic industries, including mining and manufacturing – prompting Gordhan to intervene to find a political solution with Chinese leaders.
It is an extraordinary move by Gordhan because, up to this point, it was left to Transnet’s executive management team (led by CEO Portia Derby) to find a solution for the issue, but it has failed to do so. And now it has escalated and will reach diplomatic circles next month.
When the dispute started
The genesis of the dispute between Transnet and the CRRC dates back to 2014. At the time, Transnet bought 1,064 new heavy-haul locomotives, which are supposed to pull the coal and iron ore wagons, for R54.4-billion. Transnet bought about 25% of the 1,064 new locomotives from the CRRC. The purchase was laudable as it was projected to increase South Africa’s rail capacity, helping the country to operate the fifth-largest rail system in the world by 2019.
It’s arguably easy to forget that Transnet’s operations are a crucial cog in South Africa’s economy. It is responsible for ferrying most of the iron ore and coal that South Africa produces and exports to countries around the world. It also carries freight and fuel around the country. When Transnet isn’t operating properly, businesses in South Africa don’t operate and the country’s exports are held hostage.
Underinvestment in Transnet’s rail network and not owning and operating enough locomotives have created problems for the company as its rail volumes (goods Transnet rails to market) have been in decline for many years.
For instance, Transnet’s coal volumes moved through the Richards Bay coal terminal peaked at 76 million tonnes in 2017, but are said to have hit a record low of 49 million tonnes last year. The mining sector has put the cost of lost export opportunities last year at R50-billion.
With fewer than 2,000 locomotives in operation, Transnet is in effect operating at 50% capacity. The deal with the CRRC and other suppliers was meant to be a game-changer.
But the R54.4-billion deal became mired in State Capture corruption. The price tag for 1,064 new locomotives from the CRRC and other suppliers escalated by almost R16-billion from the “all-inclusive” R38.6-billion originally agreed upon. This escalation was created to facilitate kickbacks to Gupta-linked firms, Zondo Commission reports dealing with State Capture at Transnet have found. The commission’s evidence shows the CRRC planned to funnel 21% of the contract value (R9-billion) to Gupta-linked shell companies. But they ended up receiving at least R3.6-billion in late 2016.
Former Transnet bosses including Brian Molefe and Siyabonga Gama (ex-CEOs), and Anoj Singh (ex-CFO) have been charged with corruption and money laundering relating to the locomotives deal.
No one from CRRC E-Loco, the local arm of the CRRC, has been charged.
Multibillion-rand tax debt
But the South African Revenue Service (SARS) has attempted to hold the CRRC accountable for its role in State Capture. SARS found that CRRC E-Loco overstated the price of its locomotives sold to Transnet and that the company has a tax debt of more than R3.6-billion.
The CRRC challenged the tax debt in the high court in Pretoria but lost the case.
In its case, SARS argued that it was entitled to instruct the CRRC to pay over the money because it was dealing with a “dishonest taxpayer”, given the evidence of “large-scale corruption” committed by the Chinese firm in its dealings with Transnet.
It is because of this that the relationship between the South African company and the CRRC has broken down.
The CRRC retaliates
Transnet has taken delivery of the 1,064 new locomotives from the CRRC and other suppliers. But 300 or so stand idle because the maker has refused to provide Transnet with spare parts and components to run them.
In January 2023, the CRRC withdrew from an in-principle agreement to provide the spare parts to Transnet, which said the Chinese firm refused to cooperate with authorities in South Africa, including SARS. The CRRC is an original equipment manufacturer and only it has the technical knowhow to fix and maintain the locomotives.
Without the CRRC’s assistance, the locomotives cannot run, and Transnet cannot increase its rail volumes or generate money. The economy is also held to ransom.
Transnet’s solution was to buy more locomotives from another company. It planned to procure more locomotives, which would be a costly exercise.
It is understood by that Gordhan wants Transnet to resolve its dispute with the CRRC and use the locomotives it already has in its possession rather than buy more.
One of Gordhan’s priorities when he meets CRRC executives in China is to get the firm to help Transnet and service the locomotives. But a big hurdle before it does so would be for Gordhan to convince the firm to cooperate with the authorities in South Africa, including SARS.