Transnet’s preferred bidder to operate its Durban Container Terminal Pier 2 (DCT2), International Container Terminal Services (ICTSI), will on Wednesday tell the high court in Durban that the interdict placed on its private-public partnership deal with the state-owned entity is harming the economy, with inefficiencies at the terminal costing SA R1bn a day.
The Filipino ports giant led by billionaire Enrique Razon is looking for leave to appeal against the court’s October decision which interdicted the project pending a legal challenge by losing bidder APM Terminals, the port operating company for Danish logistics major AP Moller-Maersk.
Transnet in July 2023 declared ICTSI as the preferred bidder for the 25-year joint venture to develop and operate DCT2. 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.
In its court papers, ICTSI lists several grounds why it believes the interdict granted by Judge Robin Mossop in October highlighted flaws in Transnet’s procurement process.
ICTSI, listed on the Philippines stock exchange, will argue the interdict is appealable based on interest of justice, with APM’s main challenge to the tender likely to take years.
The company also says Mossop made adverse findings against it and Transnet without supporting evidence.
“The order has indefinitely halted execution of a major infrastructure project in furtherance of government policy.
“The infrastructure project is, on common cause facts, desperately needed for the benefit of the Durban Port and the SA economy, which suffer losses of R1bn a day arising from the present state of the port,” ICTSI’s court papers state.
“Such an order constitutes an effective indefinite restraint on fundamental government policy. The temporary restraint order has an immediate and substantial effect. Harm flowing from it is serious, immediate, ongoing and irreparable.”
For President Cyril Ramaphosa, who has been championing the involvement of the private sector in reviving state-owned enterprises and the economy, the interdict comes as a setback that highlights the need for adherence to governance standards to attract and retain investment.
APM Terminals has argued ICTSI was unduly favoured by the state-owned freight and rail group.
At the heart of the legal challenge is that Transnet erred in allowing ICTSI to calculate its solvency ratio using its market capitalisation to secure the 25-year contract to develop and manage the Durban container port. This decision, which inflated ICTSI’s solvency from 0.24 to the required 0.4, was made despite internal and expert advice warning against it.
ICTSI was the only bidder to use its market capitalisation to prove it met Transnet’s solvency requirements to qualify for the tender, which saw it comfortably pass the solvency condition.
In its papers, ICTSI said it was not a secret to Transnet that it had used its market capitalisation to calculate the solvency ratio and it was well within its rights to do so as the tender documents did not specify how to calculate the ratio.
“With respect, the conclusion reached by the court... misses the point and contention that the market capitalisation is not an “alternative”, but one among a variety of reasonable and possible options which a bidder was entitled to adopt in the absence of a prescription or definition in the tender.
“The reasonableness of this interpretation is supported by the contradicted evidence that numerous fundamentally sound companies with clear financial capacity, such as the world’s largest company, Apple, would not meet the solvency test if total equity is determined solely on the basis of financial statements and not market capitalisation.”
Expert opinions sought by Transnet and seen by Business Day, including its own internal auditing report, warned that ICTSI’s use of market capitalisation to shore up its solvency ratio fell short of the tender’s requirements.
Transnet’s lenders demand it maintains an equity ratio of 40%, which is 0.4. Transnet, as part of the procurement process, said it considered it appropriate to apply the same benchmark to bidders.
ICTSI’s bid of R11bn is R2bn off better than that of second runner-up, APM Terminals, which argues this is immaterial as ICTSI should not have got off the starting blocks based on its solvency ratio.
“The court did not have regard in the judgment to the extensive financial arrangements which have been put in place by the second respondent [ICTSI] in reliance on the preferred bidder decision, including having immediately started preparations for making a $618m purchase price, including the $3m a month cost of funds,” ICTSI said.
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