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Probe questions payments to Bombardier, Chinese firm
South African law firm report says 'vast and peculiar' advances made for locomotives

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Monday, June 11, 2018 – Page B1

JOHANNESBURG -- An investigation by a South African law firm has found that a state-owned freight company made "vast and peculiar" payments to Bombardier Inc. and a Chinese supplier for hundreds of locomotives that still have not been delivered.

The advance payments, which were later questioned by the company's auditors, were cited by the law firm as examples of apparent "impropriety" and illegality in the locomotive contracts. It says the government should consider suspending the contracts.

Bombardier says it cannot comment on specific details in the report, but it says the report did not find any wrongdoing by Bombardier.

So far it has delivered 13 of the 240 locomotives that were required under the four-year-old contract.

The freight monopoly, Transnet, awarded a US$1.2-billion contract to Bombardier in 2014 to produce 240 electric locomotives within four years. The contract was supported by US$450-million in financing from the Canadian government's export bank, Export Development Canada.

Shelley Maclean, an EDC spokeswoman, would not comment on the law firm's report, but she said EDC is now "actively reviewing" its financing agreement with Transnet.

By March of last year, Bombardier had been paid 38 per cent of the contract amount (about US$450-million) but had not delivered a single locomotive, according to an audit obtained by The Globe and Mail.

The audit by KPMG is an annex to a confidential report by the Werksmans law firm, which was retained by Transnet to investigate allegations of corruption and waste in the controversial US$5-billion locomotive project, the biggest in South African history.

The project was divided among Bombardier, General Electric, China North Rail and China South Rail.

South African media have reported that the two Chinese suppliers made payments to littleknown consulting firms that had close connections to the Gupta brothers, business partners of the son of former president Jacob Zuma, who resigned in February as corruption allegations swirled around him. The Guptas, now the targets of arrest warrants and police raids, were central players in South Africa's biggest postapartheid corruption scandal.

The Guptas gained heavy influence over the management of Transnet in the years leading up to the locomotive contract. An official investigation by South Africa's anti-corruption ombudsperson found evidence of dozens of phone calls between the Guptas and Transnet's chief executive officer, who presided over the locomotive deal.

The Guptas also obtained US$41-million in financing from EDC to purchase a luxury jet from Bombardier, in a sale that Bombardier approved just weeks before the locomotive contract was announced. EDC cancelled the airplane financing deal this year and is now embroiled in a court case against the Guptas to recover the jet.

When the locomotive project was announced in early 2014, it was nearly 40 per cent more expensive than the amount estimated by Transnet's own experts just a few months earlier.

"There is support for a conclusion that the transaction is cloaked in corrupt and reckless activity," the Werksmans report says in its conclusion about the US$5-billion project.

"An appropriately empowered judicial inquiry is required to be instigated by Transnet to properly investigate the various suggestions of bribery and similar unlawful conduct."

The Werksmans report has not been officially released, but The Globe has obtained a copy of the report and the nearly 1,600 pages of documents in its annexes.

The Werksmans report calls for a police investigation to find the reasons for the mysterious increase in the project's cost and to help recover any unlawful payments.

Much of the cost increase "appears inexplicable, unreasonable and excessive," the report says. It cited "various instances of suspicious conduct suggesting at the very least wasteful expenditure or a wilful disregard for the interest of Transnet and a cavalier waste of vast sums of money."

The Werksmans report and the KPMG audit found that the advance payments to Bombardier over the past four years were larger than the original contract had specified. Bombardier's contract had authorized an advance payment of 27 per cent, compared with the 38-per-cent advance payment that it had received by March of last year, the reports said.

Among the payments questioned by the Werksmans investigators was a payment of about US$60-million to Bombardier to compensate it for relocating its locomotive assembly to a Transnet factory in Durban, instead of the earlier planned Transnet factory in Pretoria. A similar payment of about US$60-million was made to China North Rail (CNR) for its own relocation to Durban.

These payments were never verified or approved by Transnet's auditors, the Werksmans report says. An official of CNR had earlier suggested that the relocation cost would be less than US$1-million, the report said.

The audit by KPMG last year warned that Bombardier might need a further payment of about US$200-million because of its "financial difficulty" with the relocation to Durban.

Another Transnet auditor told Werksmans last year that it had identified several "red-flag" items in the relocation cost estimates, supporting the suggestion that the estimates were "not sound." Minority shareholders of CNR told Werksmans that the Chinese company had "significantly misrepresented" the cost of the relocation.

Olivier Marcil, vice-president of external relations at Bombardier, says the company will not comment on the Werksmans investigation because Transnet has not publicly released the report.

"Bombardier was not contacted by Werksmans nor asked by Transnet to participate in any manner," he told The Globe.

"Based on what has been reported in the media, we understand that the report does not suggest any wrongdoing by Bombardier," Mr. Marcil said. "Nevertheless, Bombardier stands ready to assist with any formal inquiry into the project, and we stand behind the integrity of our work."

The rising cost of the locomotive project was "aligned with our client's own choices and requirements," he said.

"The advanced payment structure is a standard practice across the industry, especially in contracts of this type that require critical investments in human capital, tooling and infrastructure from the manufacturer." Bombardier delivered its first locomotive under the contract last December and today has delivered 13 of the planned 240 locomotives, with another 15 in production, the company says.

South Africa's new president, Cyril Ramaphosa, who replaced Mr. Zuma, has vowed a clean-up of corruption in state-owned companies. His minister of public enterprises, Pravin Gordhan, replaced the entire board of directors of Transnet for failing to act on the Werksmans report.

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

Gordhan said. "At Transnet, governance structures were repurposed to enable corruption and rent-seeking," he said.

In the locomotive project, the corruption allegations have largely focused on China South Rail, one of the two Chinese manufacturers (now merged) that won contracts. China South Rail paid about US$320-million in "consulting fees" to a Guptacontrolled company in Hong Kong to help it win the locomotive contract, according to leaked e-mails reported in South African media.

The Werksmans report found a copy of the consulting contract between a China South Rail affiliate and the Gupta-linked company, signed by a senior Gupta business partner. It concluded that there was enough evidence of bribery in the China South Rail contract to warrant a full investigation.

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