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#StateCaptureInquiry Now #Transnet @follow_transnet Acting CEO Mohammed Mahomedy resumes his evidence @StateCaptureCom. Advocate Phillip Mokoena asks Mahomedy about the cost of locomotives from China South Rail (CSR).
#StateCaptureInquiry Mahomedy has listed the price-per-locomotive in three CSR contracts. They are:
• R28.2-million each in the 95 locomotives contract
• R44-million each in the 100 locomotives contract
• R50-million each for 359 of the locomotives in the 1,064 contract
#StateCaptureInquiry Mahomedy has testified that over a two-year period the price for *similar* locomotives from CSR, with some modifications between the locomotives in each of the three contracts, rose from ±R28-million per locomotive to R50-million per locomotive.
#StateCaptureInquiry Mokoena introduces interest rate swaps, which Mahomedy is set to discuss today in relation to loans #Transnet acquired, including for the acquisition of locomotives.
#StateCaptureInquiry Mahomedy says all the loans to Transnet he listed earlier "were linked to an index" (in other words, interest was based on floating rates). He mentions the ZAR Club loan, which was for R12-billion. It was a loan for Transnet with money coming from five banks.
Mahomedy raises concerns over the rising fees for the 1,064 locomotive advisory contract, which increased from R35.2-million to R267-million. McKinsey was initially tipped to provide advisory services, but then it was effectively ceded - though not contractually - to Regiments.
#StateCaptureInquiry On interest rate swaps: Mahomedy describes how different swaps occurred. In relation to certain loans for money to buy locomotives, Transnet swapped its interest on certain loans from floating rates (linked to an index) to fixed rates.
#StateCaptureInquiry In such interest rate swaps a financial institution takes on the floating rate (and risk) and then charges a higher interest rate to Transnet, but the interest rate is fixed. Swaps of this type, says Mahomedy, are intended to effect "derisking for Transnet".
[BACKGROUND] #StateCaptureInquiry Here follows a definition of swapping interest rates from floating to fixed, according to @Investopedia. Mahomedy has listed four instances of such interest rate swaps at #Transnet.
The @Investopedia entry reads as follows, "A company that does not have access to a fixed-rate loan may borrow at a floating rate and enter into a swap to achieve a fixed rate."
"The floating-rate tenor, reset and payment dates on the loan are mirrored on the swap and netted. The fixed-rate leg of the swap becomes the company's borrowing rate," continues the @Investopedia entry on a floating to fixed interest rate swap.
#StateCaptureInquiry Mahomedy cites an email from someone at Transnet who did not approve of changing the R12-billion ZAR Club loan from a floating to fixed interest rate. Yet, the next day an email is sent by another person to the Acting Group CFO recommending the change.
#StateCaptureInquiry According to Mahomedy, Transnet Group Treasury official Danie Smit authored an email discouraging Transnet from conducting the interest rate swap, citing the increase in interest Transnet would pay per year on the ZAR Club loan if the interest rate was fixed.
#StateCaptureInquiry Mahomedy reports Smit highlighted Transnet would pay an estimated R200-million additional interest in connection with the ZAR Club loan for R12-billion to buy locomotives if the interest rate swap from floating to fixed rates occurred.
A subsequent email in December 2015 to the Acting Group CFO recommends the swap. Mahomedy notes that even though the email recommends Regiments, the firm had no mandate in connection with the interest rate swap. He says Transnet has no evidence a procurement process was followed.
#StateCaptureInquiry Mahomedy says that Eric Wood of Regiments was "quite present at the Transnet offices" at the time and this may have given the impression Regiments had a mandate to execute the ZAR Club loan interest rate swap, while he says it did not.
#StateCaptureInquiry Mahomedy says events over a three day period in December 2015 in relation to the interest rate swap give the impression that the change was rushed. He says this is an interesting observation.
#StateCaptureInquiry Mahomedy cites an email from Moss Brickman at Nedbank to Phetolo Ramosebudi at Transnet on the topic of supporting documents for the swap. The email is date around 13:00 on 16 March 2016, which is post the transaction executed in December the year before.
#StateCaptureInquiry "This request came in post the executions of the transactions," says Mahomedy of the request from Nedbank for proof of authority from Ramosebudi at Transnet. In the March 2016 mail Brickman lists the kind of message he seeks from Ramosebudi.
#StateCaptureInquiry Some hours later Ramosebudi responds to Brickman include a “copy paste” of a segment of the preceding email.
#StateCaptureInquiry So, in March 2016 Nedbank’s Brickman asks Ramosebudi to provide authority for the swap (already executed) and an authority from Transnet to say the pricing was - or had been - acceptable.
#StateCaptureInquiry Mahomedy says this is important, because the mid-market fixed interest rate was 11.24% and the rate billed to Transnet was going to be 95 basis points higher. He says the 95 basis points was outside market conditions. "It was too high," says Mahomedy.
Mahomedy moves from the (a.) interest rate swap with Nedbank in connection with the R12-billion loan with the ZAR Club to (b.) another R11-billion loan and a related interest rate swap with a Transnet pension fund even though the fund did not qualify as an approved counter party.
#StateCaptureInquiry Mahomedy uses the term “commission” loosely and says Regiments acted as an intermediary in relation to both interest rate swaps.
Mahomedy says changing from floating to fixed interest rates caused a “realised lost” which was calculated to be the following as at 25 February 2019:
• R785-million additional interest for the Nedbank swap
• R696-million additional interest for the Transnet pension fund swap
#StateCaptureInquiry “These contracts end in 2030,” says Mahomedy. Proceedings adjourn until 11:30.
Proceedings resume. Mahomedy says the change from floating to fixed interest rates in relation to the two swaps mentioned earlier cost Transnet a total R1.4-billion. The Chairperson asks if Mahomedy can say if this was someone getting it horribly wrong or something else.
#StateCaptureInquiry Mahomedy says Transnet had not executed an interest rate swap for many years, “Which begs the question: why this one? Why suddenly?” He suggests it was done in order to benefit Regiments, based on the reviews Transnet has undertaken.
#StateCaptureInquiry Mahomedy highlights that the contracts were to run for 15 years and any thorough consideration on interest rate swaps would need to be diligently considered and take into account the long-term duration of the contracts.
#StateCaptureInquiry You infer that the person who made this decision did so to benefit Regiments,” says Deputy Chief Justice Raymond Zondo. “Yes,” replies Mahomedy. “Even to the detriment of Transnet,” adds Zondo. Mahomedy say that is correct from his perspective.
#StateCaptureInquiry Mahomedy says the short period of time between executing the loan and the swap, “One has to question why we did not elect to enter a fixed interest loan up front [...] it should also form part of your strategy. From the beginning you should have a strategy.”
#StateCaptureInquiry “It questions the entire process,” says Mahomedy. Zondo summarises Mahomedy’s latest point. “The question is: what changed?” says Mahomedy.
#StateCaptureInquiry “What information was available to whom?” asks Mahomedy. He notes the loans were finalised around September, October 2015 and in December 2015 within days of receiving the money the interest rate swap is initiated. He questions the decision and timing.
[PARAPHRASED] #StateCaptureInquiry Mahomedy says the Transnet Treasury team had and still has the expertise to assess and execute the interest rate swaps which are “vanilla” transactions. It begs the question why Regiments was involved as an intermediary.
#StateCaptureInquiry “That seems to say, don’t bother us you [in Transnet’s Treasury division] don’t matter. Is that a fair interpretation?” says Zondo. Mahomedy says Transnet’s dealing room was effectively moved to Regiments.
#StateCaptureInquiry Mahomedy reports Transnet notifying McKinsey that Nedbank sought to exit a consortium over a possible conflict of interest. He says Nedbank had essentially entered a bid in partnership with McKinsey, then Nedbank’s work was effectively ceded to Regiments.
[PARAPHRASED] #StateCaptureInquiry Mahomedy says Regiments was, in his view, conflicted in many of its interactions with Transnet and others, like Nedbank and McKinsey.
#StateCaptureInquiry Mahomedy returns to the 1,064 locomotives contract and says a number of large upfront payments had affect Transnet’s liquidity situation. He says Garry Pita, then Transnet Group CFO, contacted Mahomedy’s office about pushing back a certain deadline.
#StateCaptureInquiry Mahomedy says the anticipated cost of postponing the delivery deadline for the 1,064 locomotives was calculated. He says one estimate from Regiments in early 2016 forecast the deferral would cost R13-billion, in addition to the R54-billion for the contract.
#StateCaptureInquiry Mahomedy says he instructed McKinsey to work out its own forecast estimated cost of deferral. He testifies there was no need for such expenditure and it did not occurred. My takeaway: Regiments tried to lump on R13-billion for deferral, Transnet didn’t bite.
#StateCaptureInquiry Mahomedy describes an email he says he received in the evening on 25 February 2016 from Fahima Badat who notified recipients that her email address was changing from a Regiments email address to a TCP one due to the establishment of Trillian Capital Partners.
#StateCaptureInquiry Mahomedy says that he forwarded Badat’s email to some colleagues working on two “SWAT” contracts at Transnet. He says Transnet had no contracts with Trillian and as at the date of the email Transnet had no prior encounters or dealings with Trillian.
#StateCaptureInquiry Mahomedy says he was informed on 1 March 2016 that McKinsey was holding discussion about replacing Regiments with Trillian. He says in May 2016 a Transnet tender committee met to discuss cession of certain contracts from Regiments to Trillian.
#StateCaptureInquiry Mahomedy says it was not just one session, it was in his opinion two cessions: one by head of agreement Regiments to Trillian and another by head of agreement McKinsey which supported to be ceded to Trillian.
#StateCaptureInquiry Mahomedy says this became, essentially, for want of a better phrase “a confidential, confined cession” which came out of nowhere. He says so in relation to Trillian obtaining work with Transnet which was initially between Trillian and other heads of agreement
#StateCaptureInquiry Zondo repeats a question he asked Peter Volmink and says he is increasingly of the opinion that cession and tender process with proper procurement in line with Section 217 of the Constitution are incompatible.
#StateCaptureInquiry Mahomedy responds saying he is in agreement with some of Zondo’s views. He says it would not be compatible to have cessions as they expose one to risk. He suggests cessions are fundamentally flawed. Proceedings adjourn until 14:00.
#StateCaptureInquiry @Bowmans_Law is currently attending @StateCaptureCom hearings on a watching brief but who for remains a mystery.
#StateCaptureInquiry Proceedings resume. Mokoena introduces a message, the memorandum from Smit discouraging Transnet from agreeing to interest rate swaps, and dated 2 December 2015.
As per an unsigned memorandum Mahomedy says was attached to Smit’s email to Ramosebudi. In the memo, Smit warns “swaps will come at a cost that need to be determined in the market” and the cost of swapping to of the ZAR Club loan interest from floating to fixed is not recommended
#StateCaptureInquiry “We know that about, what, to days later [...] there should be a swap,” says Zondo. He asks Mahomedy if he can say whether or not the one that Ramosebudi sent to Pita reflects that he had an answer for Smit’s arguments against an interest rate swap.
MT: #StateCaptureInquiry Mahomedy says the peculiar thing is: if you look at the two memos, which have contradictory views on interest rate swaps, they include a “copy and paste” of input in one memo to the other.
#StateCaptureInquiry Smit asserts a fixed interest rate should have been finalised during the loan agreement phase, a fixed interest rate will require huge credit lines from banks not easily available, swaps are risky, and Mahomedy says these concerns aren’t really addressed.
#StateCaptureInquiry Mokoena refers Mahomedy to mention in his statement of payments made to Trillian. Mahomedy says some of the payments listed were done in light with the purported cession.
#StateCaptureInquiry Mahomedy says on payments to Trillian:
• R41-million invoice from Transnet property
• R23.94-million invoice from general freight business
• R11.4-million invoice from Transnet engineering
• R93-million including VAT in connection with the ZAR Club loan
#StateCaptureInquiry Mahomedy says of Trillian there is “no evidence as far as we have reviewed or requested that any work was done for the ZAR Club loan” and yet Transnet paid Trillian a whopping R93-million.
#StateCaptureInquiry Mahomedy says Trillian did no work on the group capitalisation integration phase and yet Transnet invoiced Trillian, the firm was paid. Zondo notes invoices included in Mahomedy’s submission relevant to this evidence seem to be signed by the same two people.
#StateCaptureInquiry The two signatories are Transnet’s Edward Thomas and Garry Pita. Mahomedy says invoices he’s listed from Transnet to Trillian are missing the signature of a “process owner” who is a person authorised to sign off invoicing for a particular service or product.
#StateCaptureInquiry Mahomedy says the absence of a third signature from a cost centre manager and, or process owner in the relevant Transnet invoices to Trillian shows, he argues, that this process was irregular.
“It appears that there was just blatant disregard for procedures and processes,” says Zondo noting this may be so unless someone can give a reasonable explanation for what happened. Mahomedy says none of these processes are complex or difficult to follow; they are standard.
#StateCaptureInquiry Mahomedy says, “All the payments to Trillian are at best questionable, Chair.” He then cites Trillian paying a refund to Transnet (the payment was the subject of a dispute with Regiments laying claim to it) as something unusual.
#StateCaptureInquiry Mahomedy now moves on to Transnet’s work with Nkonki. He says Nkonki was a service provider to Transnet. Nkonki won an initial five-year contract through open process worth R500-million and beginning August 2013.
#StateCaptureInquiry Mahomedy says Transnet’s internal auditing contract with Nkonki was terminated earlier than the five-year contract deadline in April 2018, after pronouncements from the Auditor General and negative press linking Nkonki to the Gupta family.
Mahomedy says after the termination of the Nkonki contract, Transnet conducted an investigation. He says the 2013 internal auditing contract included a provision for non-auditing work up to certain financial limit. He describes Nkonki approaching Transnet with an unsolicited bid.
#StateCaptureInquiry Mahomedy says the unsolicited bid identified three focus areas other companies were already working on for Transnet:
1. Streamlining procurement processes;
2. Optimising the coal line; and,
3. Optimising the iron ore line (increasing volumes and tariffs).
#StateCaptureInquiry Mahomedy cites @TreasuryRSA regulations on unsolicited bids. He says the existing 2013 contract was set to increase by 100% and this contradicts National Treasury regulations.
#StateCaptureInquiry Mahomedy says, “This was piggybacking on a contract already existence [...] we were going to double the contract without any proper process.”
#StateCaptureInquiry Mahomedy continues on the unsolicited Nkonki bid and an attempt to “piggyback” additional services onto an existing contract with Transnet, “Chair I just want to clarify we did not spend this money...”
#StateCaptureInquiry Now for the case of the phantom computers. Transnet and T-Systems enter an agreement to lease some computers. The computers are delivered to Transnet but some of them go missing and Transnet continues to pay because the devices are being leased.
#StateCaptureInquiry “They can’t just disappear,” says Zondo of the leased computers that disappeared from a division at Transnet around 2016. He later adds, “Where did they go?” He says the incident must speak to weak systems at Transnet.
#StateCaptureInquiry Mahomedy says some people were suspended and the missing computers were reported to Transnet’s forensics department. He says that division has undergone significant management changes since 2016.
#StateCaptureInquiry Zondo says, “It is horrifying. It is horrifying and it is taxpayers’ money.”
#StateCaptureInquiry Mahomedy moves on to a Neotel contract with Transnet. I’ll be signing off to do some other work, but you can monitor proceedings now on #eNCA403’s website.…
#StateCaptureInquiry Tomorrow, the @StateCaptureCom will hear from former #Transnet electrical engineer Francis Callard. He willl be the fourth witness to speak in this chapter on Transnet. Proceedings begin at 09:30.
@StateCaptureCom [CORRECTION] Please note a correction on what I said in an earlier interview on #eNCA403. Per Mohammed Mahomedy then supply chain officer Gary Thomas and then CFO Garry Pita signed the four Trillian invoices. Dr Brian Molefe did NOT sign them. My sincere apologies for my error.
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