How Brian Molefe created ‘fake emergencies’ at Transnet to fill McKinsey and CSR’s coffers

Large-scale confinement of tenders meant to benefit preferred bidders by Transnet former group CEO Brian Molefe ensured McKinsey Consulting and China South Rail (CSR) became big beneficiaries of multibillion-rand closed tenders at the state-owned enterprise (SOE).

This was in contravention of National Treasury regulations, according to Transnet’s executive manager for governance Peter Volmink.

In wrapping up his two-day testimony yesterday at the Commission of Inquiry into State Capture before Deputy Chief Justice Raymond Zondo, Volmink explained how Molefe had allegedly abused the application of confinement – a practice endorsed by the previous Transnet board – to create “a situation of urgency and emergency” in appointing external firms to fix a “crisis”, which was in reality nonexistent.

“He (Molefe) misquoted a rule in Transnet’s procurement procedures manual (PPM) on the clause dealing with a genuine urgency of a service or product.

“While the board was concerned about these self-created ‘urgencies’ and how confinement got easily invoked by senior officials to bypass procurement processes, the practice continued,” said Volmink.

Through a confinement tender process, McKinsey bagged eight contracts over a two-year period under Molefe as CEO, which were worth R2.1 billion – with some amendments made to the scope of the tender to ensure continuity.

McKinsey was brought to Transnet in what Molefe saw as “an urgent need for a strategy and implementation plan to address a declining Ebitda (earnings before interest, taxes and amortisation)” – said to have put the company “at a financial risk”.

Ebitda is the efficiency measurement that calculates a company’s operational profitability by including equipment costs and excluding financing costs. 

The company also had to improve efficiencies and performance in the iron ore, coal and manganese business operations. 

Said Volmink: “This practice went against the rules espoused in the PPM, which warned that Transnet’s procurement processes should not entrench monopolies.

“The misuse of confinement was also at odds with the government’s New Growth Path Policy that sought to broaden empowerment.

“Awarding McKinsey contracts eight times over such a short period, created a monopolistic situation, exposed Transnet to a risk of litigation by other bidders.

“For Mr Molefe to have claimed that Transnet’s Ebitda was at a risk of decline – something which affected delivery on the company’s market demand strategy –  is not something that could not have been unforeseen.”

Having previously consulted within Transnet, McKinsey was said to have had the knowledge of the company – “something that we referred to as paying the supplier school fees for knowing the organisation”.

Another concern on the McKinsey transaction was that “it was paid before the contract was even concluded”.

Email exchanges on 11 July 2014 between Transnet former group chief supply chain officer Edward Thomas and procurement manager Sandy Felix on the McKinsey deal lifted the lid on how juniors were bullied by the executive into submitting to wrongdoing.

Felix questioned Thomas’s text message instructing her to process the McKinsey payment without a required purchase order – a deviation from the PPM.

“I do not recommend that this be paid until contracts are concluded or we risk going ahead without a proper tender process,” Felix warned Thomas.

Despite her protest, Felix was bullied into processing the payment because Thomas argued that Transnet had entered into a confinement contract with McKinsey.

“Thomas was patently incorrect. Even if it was a confinement, it had to go through a rigorous process, which included the evaluation of the supplier.

“This was putting the cart before the horse. [But] the staff had made their point and had to comply under protest,” said Volmink.

Another challenge for the procurement staff at Transnet was that of high-value “confidential confinements” which originated from the executives right up to tender adjudication – with disregard for safeguards.

Remarked Zondo: “I find this a strange thing in a state-owned enterprise: someone saying certain contracts are confidential without any grounds spelt out – entailing a lot of taxpayers’ money.” 

“Thankfully that practice has now been removed by the current board led by Mr Popo Molefe,” responded Volmink.

The commission will take a two-day recess and reconvene on Wednesday to hear the evidence of Transnet acting group CEO Mohammed Mahomedy.

– brians@citizen.co.za

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