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World Montreal supplier IEC Holden faces losses, layoffs in South Africa amid controversial Bombardier locomotive deal

Workers manufacture traction motors destined for Bombardier locomotives at an IEC Holden-owned factory in Johannesburg.

IEC Holden

It was one of the most ambitious projects in South African history: a huge locomotive purchase that aimed to create 30,000 jobs and transform the freight sector, with Bombardier Inc. winning a quarter of the US$5-billion deal and a Canadian agency providing a big chunk of the financing.

Four years later, the project is in disarray. Bombardier has completed only 13 of the 240 locomotives that it was originally scheduled to have provided by now. A Canadian supplier is laying off 150 workers in Johannesburg and bracing for losses that threaten his company’s survival. And the entire deal is under investigation for corruption and soaring costs.

“Honestly, if we had known any of this going in, there’s not a chance we would have invested,” said Rob Briscoe, president and chief executive of Montreal-based IEC Holden Inc., which had opened a factory in Johannesburg to produce traction motors for Bombardier’s locomotives in the South African project.

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Because of the lengthy delays in the project, he is issuing layoff notices to the entire force of 150 workers at his Johannesburg factory on Friday. He expects a loss of US$20-million to US$25-million as a result of the delays and turmoil.

“That absolutely destroys our balance sheet and puts at risk our company globally,” he told The Globe and Mail in an interview.

“I’m not sure we can survive that kind of loss. That’s the cost of corruption and political uncertainty. It’s terrible. If we had known there would be any doubt about corruption or the validity of the contract, we would have stayed away from this.”

Canada’s federal export agency, Export Development Canada, provided US$450-million in financing to support Bombardier’s US$1.2-billion share of the project. The agency says it is “following developments closely” in the locomotive project.

Bombardier is asking IEC Holden to stop producing motors for the locomotives for up to a year, because the project is so far behind schedule, Mr. Briscoe said. “We’re caught in the crossfire and we’ll be collateral damage in all of this,” he said.

He is hoping that South Africa’s state-owned freight company Transnet, which awarded the locomotive contracts in 2014, will step into the breach and ask his company to keep producing the motors for the project. If not, he says, the losses and layoffs will damage South Africa’s reputation as a foreign investment destination.

The prolonged delays in the project are partly due to South Africa’s attempt to create jobs and expertise at a Durban-based Transnet subsidiary. The manufacturers were asked to do the final assembly of their locomotives at the relatively inexperienced Durban facility, instead of a more experienced Pretoria factory.

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“That move to do this in Durban has just been absolutely killing the program,” Mr. Briscoe said. “It was a flaw in the contract.”

But the project has also faced new uncertainty because of mounting political questions about corruption allegations and rising costs. An internal investigation by a law firm hired by Transnet has called for the suspension of the locomotive project, including Bombardier’s contract.

The project was originally estimated to cost 38 billion rand in 2013, but the cost soared to 54 billion rand (about US$5-billion at the time) when the contracts were awarded in March, 2014.

Internal investigations and media reports have raised questions about suspected bribery in the locomotive project. One of the four manufacturers, China South Rail, paid about US$320-million in “consulting fees” to a company controlled by the politically connected Gupta family, according to leaked e-mails.

Under the original contract schedule, Bombardier should have produced its 240 locomotives by March of this year.

Olivier Marcil, vice-president of external relations at Bombardier, confirmed that Bombardier has completed 13 locomotives so far.

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“Bombardier Transportation and IEC Holden are both committed to minimizing the impact of the current delays,” Mr. Marcil told The Globe in an e-mail.

“We are confident that we will find a solution to the current contractual issues, that serves to protect jobs and capability within South Africa, and we look forward to successfully delivering the project for our customer. Bombardier and IEC Holden have a positive commercial relationship.”

The delays have nothing to do with the South African government’s current review of the locomotive contract, Mr. Marcil said.

A spokesman for South Africa’s department of public enterprises, which is responsible for Transnet and other state-owned companies, said the department was unable to comment on the layoffs caused by the delays in the Bombardier contract.

Under the terms of its contract, Bombardier had promised that 60 per cent of its components would be purchased in South Africa. As part of that promise, it ordered motors from Mr. Briscoe’s factory in Johannesburg – the first in Africa to make electric locomotive motors. The factory has provided much-needed jobs and technical training for 150 workers, while helping Bombardier meet its localization targets.

But if the project delays continue, the factory will begin a shutdown process within the next 10 days, Mr. Briscoe said.

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“We have a world-class operation with incredible skills transfer and great people, and to lose that would be an absolute shame.”

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