South African minister demands freeze on Bombardier payments after corruption probe

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A senior South African cabinet minister has called for a halt in payments to Bombardier Inc. and three other manufacturers after investigations found evidence of corruption in a US$5-billion locomotive contract.

The move could affect more than US$700-million in payments to Bombardier. The Montreal-based company has strongly denied any wrongdoing in the contract awarded to it in 2014 by Transnet, the state-owned freight company that has been embroiled in corruption allegations linked to the Gupta business family and the son of former president Jacob Zuma.

A Bombardier spokesman, Olivier Marcil, told The Globe and Mail last week that it has received no indication that its locomotive payments will be halted. He said the company received a payment under the contract as recently as mid-September. The company declined to comment specifically on the minister’s statements about halting the payments.

The locomotive project, one of the biggest state projects in South African history, was "cloaked in corrupt and reckless activity,” according to an investigation by the Werksmans law firm earlier this year.

When the contracts were awarded in early 2014, the project was nearly 40 per cent more expensive than the amount estimated by Transnet’s own experts just a few months earlier.

Bombardier was awarded a US$1.2-billion contract to produce 240 locomotives, about one-quarter of the 1,064 locomotives in the project. Investigations commissioned by Transnet and the national treasury show that Bombardier had produced only 13 of the 240 locomotives by the contract deadline in the spring of this year, although it had been paid about 35 per cent of the contract amount by then.

Bombardier’s contract was supported by a US$450-million loan to Transnet from the Canadian government’s export bank, Export Development Canada. An EDC spokeswoman, Shelley Maclean, told The Globe that the agency is continuing to investigate the transaction. Its review has been under way for several months. "These investigations take time,” she said.

South Africa’s minister of public enterprises, Pravin Gordhan, is a widely respected anti-corruption campaigner who has embarked on a cleanup at Transnet since his appointment to cabinet in February, after Mr. Zuma’s resignation. He has sacked or suspended many of Transnet’s directors and executives because of their role in the inflated locomotive contract.

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In a recent court affidavit, Mr. Gordhan says he has asked the Transnet board to stop the "bleeding of finances” by halting all further payments to the four manufacturers, including Bombardier.

Mr. Gordhan said the former Transnet board had a responsibility to "immediately take proactive steps to deal with the substantial losses suffered by Transnet through malfeasance” but failed to do so. The board should have told Transnet to "set aside the irregular contracts or, at the very least, to halt further payments being made to the four entities” under the locomotive contract, he said.

Adrian Lackay, a spokesman for Mr. Gordhan, said the affidavit was submitted to court under oath. He told The Globe that the affidavit "confirms Minister Gordhan’s position that the existing contracts for the 1,064 locomotives tender must be reviewed by the Transnet board, that further payments must be stopped and that the company should endeavour to recover potential losses due to non-performance or non-delivery by some service providers who were awarded contracts by Transnet.”

A judge of South Africa’s High Court cited Mr. Gordhan’s affidavit in a ruling on Sept. 18, in which the judge rejected a former Transnet director’s attempt to challenge his dismissal.

The corruption allegations in the locomotive project have primarily focused on China South Rail, one of two Chinese manufacturers (now merged) that won contracts for the project. General Electric was the fourth company awarded a contract.

China South Rail paid about US$320-million in "consulting fees” to a Gupta-linked company in Hong Kong to help it win the contract, according to leaked e-mails reported in South African media. The investigations commissioned by Transnet this year found evidence to support those reports, including a copy of the contract between a China South Rail affiliate and the Gupta-linked company.

Bombardier’s role in the project has received less scrutiny. The investigations have questioned, however, the substantial advance payments that were given to Bombardier before it delivered any locomotives. They also questioned Bombardier’s decision to charge US$60-million for relocating its production site. One investigation called this "excessive and unjustifiable” and "extremely suspicious.” A separate investigation also questioned Transnet’s failure to impose any late-delivery penalties against Bombardier.

Mr. Marcil, vice-president of external relations at Bombardier, said the company denies any allegation of wrongdoing in the locomotive contract. "We support, and stand ready to co-operate with, any investigation commissioned by government,” he told The Globe in a statement last week.

"I can confirm that, as we speak, our client continues to honour the payments for the locomotives we deliver and have no reason to believe that this will cease,” he said.

“We’re keeping our focus, and working with our local suppliers, to ensure the delivery of the top quality locomotives needed to support the South African economy as quickly as possible.”

Meanwhile, a report in a South African newspaper on Sunday said Transnet is preparing to file lawsuits against two of its former Gupta-linked executives who were instrumental in hiking the cost of the locomotive contract.

The report in City Press, a weekly newspaper, said Transnet will seek to recover some of its losses on the locomotive deal by suing its former chief executive, Brian Molefe, and its former chief financial officer, Anoj Singh. Both had connections to the Guptas, according to evidence uncovered in several investigations.

An investigation by South Africa’s anti-corruption ombudsperson found evidence of 58 phone calls between Mr. Molefe and one of the Gupta brothers during a seven-month period.

South African police investigators are also probing the locomotive project for possible charges of fraud, corruption and money laundering.

In a separate transaction in 2014, just a few weeks before the locomotive contract was announced, Bombardier sold a US$52-million luxury jet to the Guptas. About 80 per cent of the cost was financed by a loan from EDC to the Guptas.

In a lengthy court battle this year, EDC has been attempting to recover the Bombardier jet, accusing the Guptas of defaulting on the loan.