Bombardier Inc. deliberately inflated its cost estimates to gain an unjustified payment of about US$60-million from South Africa’s state-owned freight company, a senior official has testified at a public inquiry into state corruption.
Popo Molefe, chairman of the board of state-owned Transnet, told the inquiry on Tuesday that an investigation found evidence that Bombardier and a Chinese rail supplier “inflated intentionally” their estimates of the costs of a purported relocation of their rail manufacturing plants to the city of Durban.
Bombardier denied any inflated costs or any other wrongdoing and said it plans to appear at the inquiry to dispute the allegations. In a statement to The Globe and Mail on Wednesday, it said Mr. Molefe’s comments were “disappointing but not surprising” because they were based on “incomplete reports” commissioned by Transnet.
Mr. Molefe testified on Tuesday that Bombardier and the Chinese supplier persuaded Transnet to give them improper and unjustified lump-sum payments of about US$60-million each, even though in reality there was no relocation. The companies had earlier estimated the “relocation” would cost less than US$1-million each, he said.
The inflated estimates were based on a calculation by an advisory company called BEX, he said.
South African media have reported BEX was a front company for a close associate of the Gupta brothers, the business family at the heart of the corruption scandal that led to the appointment of the inquiry into state corruption.
The Guptas were business partners of a son of former South African president Jacob Zuma, who resigned under pressure last year. They are now the subject of criminal investigations and have fled the country.
The Chinese locomotive supplier, China North Rail, hired BEX as its adviser to provide an estimate of the purported relocation costs, Mr. Molefe testified.
“Once they had given their figures for China North Rail, somehow, in a way I’m unable to explain here … the figure of around 600 million rand [about US$60-million at the time] was then applied to Bombardier as well,” the Transnet chairman said.
Transnet has been a central player in the Gupta-linked corruption scandal in South Africa. The company was a “horror show” of looting and corruption until new managers were appointed last year, Mr. Molefe said.
This week, for the first time since hearings began in August, the public inquiry began a detailed examination of Transnet, including the massive US$5-billion locomotive contract it awarded to Bombardier and three other suppliers in 2014, at a time when Gupta-connected executives and board members held strong influence over Transnet. The cost of the project, one of the biggest in South African history, was almost 40 per cent higher than Transnet’s experts had estimated just a few months earlier.
As part of the rail project, Bombardier received US$1.2-billion to produce 240 locomotives for Transnet. The deal was financed with a US$450-million loan from the federal export bank, Export Development Canada, which announced last year that it was investigating the transaction.
Transnet’s contracts with the four locomotive suppliers were “irregular” and “unlawful,” Mr. Molefe testified.
Mr. Molefe said Transnet had appointed a railway logistics company, Loliwe Rail Solutions, to investigate the “relocation” fees Transnet paid to Bombardier and China North Rail after the two suppliers agreed to base their local manufacturing plants in Durban. But the suppliers had not established their plants anywhere else before Durban was chosen, Mr. Molefe said.
“The finding of Loliwe was that there was no relocation of either Bombardier or China North Rail,” he testified. “I think to call it a relocation was a misnomer.”
The investigators found that the cost estimates “were inflated intentionally by the OEMs [original equipment manufacturers] and inadequately evaluated by Transnet,” he told the inquiry.
The investigators from Loliwe also found “no justification for either the direct or indirect costs presented by Bombardier and China North Rail” and that “it was improper of Transnet to have agreed to lump sums for the relocation,” he said.
They also found that “the approval of the direct and indirect costs was done without the representation of valid and substantiated documentation,” Mr. Molefe said.
Lawyers for Bombardier have already made written submissions to the public inquiry, and these submissions will be discussed by expert witnesses – and ideally by the Montreal-based multinational itself – during public testimony, according to Paul Pretorius, head of the inquiry’s legal team.
Transnet is meeting with Bombardier and its other locomotive suppliers to discuss a possible suspension of the contracts or a refund of some of Transnet’s payments, Mr. Molefe said.
South Africa’s parliament could accuse Transnet of “breaking the law” if it continued its payments to Bombardier and the other suppliers, especially since they had failed to produce the required number of locomotives by the contract deadline, he said.
“All of us have got to move rapidly and close this major problem for Transnet and the country,” he testified.
“This is a matter that is very serious and urgent. We now all know about the irregularities. Somebody might try to dispute it and play legal technicalities, but … we must look at the impact on the country and the impact on the institutions that financed this program.”
In its statement to The Globe on Wednesday, Bombardier said the company has done a “detailed review” of the Transnet allegations and found that Bombardier had acted “in full compliance” with all laws and contractual obligations.
A Bombardier spokesman, vice-president Olivier Marcil, said the Transnet consultant Loliwe had never contacted Bombardier to test its findings or to request explanations.
He said Bombardier will present evidence to the inquiry to prove that its costs were “fully justified” and that there were no overpayments or inflated costs.
“The moving of the locomotive production and assembly line, as well as the production of the bogies, from Koedoespoort to Durban, was not a result of decisions made by Bombardier, but due to an instruction given by Transnet that came after the initial contract was signed,” Mr. Marcil said.
“Bombardier has never interacted with nor been advised by BEX or China North Rail regarding the costs and issues faced in relation to the change of facility. Unfortunate associations of Bombardier with any potential wrongdoings by other companies are simply wrong.”