In a ruling with far-reaching implications for President Cyril Ramaphosa’s plan to revive state-owned enterprises (SOEs) and the economy, a court has put the brakes on Transnet’s R11bn deal with a Philippines-based group for the management of one of the busiest port terminals in Durban.
Durban high court judge Robin Mossop issued an interdict that highlights serious flaws in the procurement process, casting a shadow over the state-owned freight and rail operator’s decision-making that led to the selection of International Container Terminal Services Incorporated (ICTSI) to run the Durban Container Terminal Pier 2 (DCT2).
The crux of the issue — as reported by Business Day last month — lies in Transnet’s controversial move to allow ICTSI to use its market capitalisation to meet the tender’s solvency requirements. This decision, which inflated ICTSI’s solvency from 0.24 to the required 0.4, was made despite internal and expert advice warnings against it.
Mossop’s judgment highlighted this discrepancy, emphasising that such a short cut undermines the integrity of the tender process.
“Transnet required the solvency ratio calculation to be used. That being the case, the ratio calculated by the second respondent (ICTSI) was clearly nonresponsive and can only be defended with considerable difficulty,” said the judge.
“Transnet, however, knew this to be the case. Notwithstanding its own knowledge of what it wanted, Transnet twice sought expert opinions on whether what the second respondent had done with the solvency ratio calculation was valid and acceptable. From this fact alone, it can be deduced that Transnet had not itself contemplated market capitalisation being an element of the solvency ratio calculation: if it had, it would not require third-party opinions on whether its use amounted to a valid representation of the bidder’s solvency.”
Business Day reported in September that Transnet ignored two opinions that it should not allow ICTSI to use its market value to meet the solvency thresholds. The opinions were from Transnet’s internal audit team and Mettle Specialised Solutions — sought by Transnet’s attorneys, ENSafrica.
Losing bidder APM Terminals (APMT) brought the legal challenge, arguing that ICTSI should have been disqualified for not meeting the solvency criteria without relying on its market capitalisation.
The court’s agreement with this argument has stalled the deal and also raised broader concern about governance at Transnet, a vital artery in the economy because of its huge logistics infrastructure.
For the broader economy, the implications of this ruling are far-reaching.
The DCT2 project is the cornerstone of SA’s infrastructure, pivotal for economic stability and growth. DCT2 is Transnet’s biggest container terminal, handling 72% of the Port of Durban’s throughput and 46% of SA’s port traffic For Ramaphosa, who has been championing the involvement of the private sector in reviving SOEs and the economy, the ruling comes as a setback that highlights the need for adherence to governance standards to attract and retain private sector investment.
Mossop said the process followed by Transnet was flawed.
“After consideration of these facts, it appears to me that the approach of Transnet in identifying the second respondent as the preferred bidder was potentially flawed and prima facie unfair to the other bidders. Different allowances were made for the second respondent that were not offered to other bidders,” the judge said. Mossop also criticised Transnet for not evaluating ICTSI’s bid according to the specified criteria and for allowing it to bypass the minimum financial requirements.
The judge noted that Transnet let ICTSI proceed without proving its financial credentials, which were crucial to the tender. To cover this oversight, Transnet retroactively accepted information that should have been verified at the start.
“In other words, its position is now that the end justifies the means. In so doing, the second respondent was treated differently to the other bidders.”
Transnet’s lenders demand it maintain an equity ratio of 40%, which is 0.4. Transnet, as part of the procurement process, said that it considered it appropriate to apply the same benchmark to bidders.
Transnet’s argument before court was that APMT, whose bid it ranked second to that of ICTSI, was not entitled to be appointed as the preferred bidder for the DCT2 project. It argued that on a proper interpretation of the request for qualification, it could not be said that each respondent was required to tick every box.
One of Transnet’s arguments was that ICTSl’s financial offer was almost R2bn more than the next best offer made by APM.
ICTSI’s offer came in at $618m, which would be paid to Transnet for a 50% share in DCT2, while APM put $515m on the table.
Transnet has already extended the validation period of the tender to March 25 2025 from l September 30 initially.
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