Transnet engineer details McKinsey’s expensive ‘failure’ with locomotives deal

Former Transnet electrical engineer Francis Callard yesterday continued his testimony at the Commission of Inquiry into State Capture, revealing flaws in the state-owned enterprise (SOE) adjudication process in the acquisition of 100- and 1064-type locomotives and how Transnet engineering (TE) recommendations were not considered during the bidding.

Callard, a veteran engineer with several years’ service at Transnet, told Deputy Chief Justice Raymond Zondo how:

• The increase in the acceleration of the locomotive delivery had an impact on payments made by Transnet;
• The original business case submitted by the TE team was deliberately changed to escalate the total cost of the project; and
• An incorrect currency – the Japanese yen – was used to arrive at final calculations to justify an increase in the purchase of locomotives from the Gupta-linked China South Rail (CSR), at a much steeper price.

Explained Callard: “The delivery of locomotives was increased to 480 per year. Transnet Engineering did not agree with this number as it exposed Transnet to multiple risks.

“The bid adjudication process of the 1064 locomotive was flawed, with the increase in the acceleration of the locomotive delivery having had an impact at the rate of payment.

“By the end of December 2015, there was no delivery made.

“The Transnet Engineering team prepared a report to [former Transnet Freight Rail CEO, later promoted to group head] Mr Siyabonga Gama and [former group chief financial officer] Anoj Singh to highlight some of the challenges we faced as the result of the accelerated delivery.”

Based on the transaction cost, said Callard, the deal with CSR was approved by the minister of public enterprises in an official letter, which was silent on the magnitude of the costs absorbed by Transnet – estimated at R41 billion.

“An April 2012 presentation prepared by McKinsey – an international consultancy firm contracted by Transnet – showed the potential financial effects on foreign exchange hedging, forex and other price escalations, which were included in the estimated total cost of the project,” said Callard.

“McKinsey had a view that the business case for the 1064 loco procurement would result in 28,000 direct and indirect jobs in South Africa, through local content.

“But McKinsey failed in executing their mandate and focused on the restructuring and rewriting of the business case.”

Despite Callard having been part of the TE team that drafted the original business case for the locomotives purchase – arguing for the contract to be confined to the Japanese Matsui, which had previously supplied identical locomotives to Transnet at a cheaper rate – he was ignored by executives.

“The case that was ultimately presented to the board was significantly different to ours,” said Callard.

Hearings into the capture of Transnet continue.

– brians@citizen.co.za

3.55pm, Editor’s note: Since the original publication of this article, the headline was changed from “Transnet engineer details McKinsey’s expensive failures with locomotives deal”.

A minor headline change was effected after McKinsey’s representatives contacted The Citizen and argued that the original headline was “misleading, given that the article focuses on the increased cost of the locomotives due to the accelerated delivery, an aspect of the tender which did not involve McKinsey”.

“From your own recount of the testimony, McKinsey had in fact included the possibility of forex and escalation in its estimated costs, and while the working relationship between McKinsey and Transnet may have been difficult according to Callard, McKinsey was not responsible for the final costs of the locomotives.”

For more news your way, download The Citizen’s app for iOS and Android.