Advisory firm Regiments Capital earned an ‘excessive’ R265.5m from Transnet to facilitate loan transactions for the state freight and rail entity to finance its 1 064 locomotive project, the Zondo Commission of Inquiry into State Capture heard on Friday.

A Fin24 report notes that according to testimony by Jonathan Bloom, of MNS Attorneys – which was asked to probe allegations of fraud and irregularities by Transnet's former board and produced six investigative reports – Transnet could not afford to pay immediately for the locomotives it bought from China, so it had to borrow money.

Initially Transnet was to borrow $2.5bn offshore. But it was later decided it would only borrow $1.5bn from China Development Bank and it would source R12bn from a club loan.

Transnet had acquired the expertise of Regiments Capital to facilitate this process, notes the report.

Bloom explained that Regiments was solely responsible for the transaction, and as the firm’s role slowly expanded so did the fees payable to the advisory. ‘The contract value increased from R35.2m in December 2012, to R41.2m in February 2014,’ he said. Fees further increased to R78.4m by April 2014 and eventually – in July 2015 – the fees payable to Regiments was R265.5m.

These amounts exclude VAT or tax,’ Bloom noted.

Commission chair, Deputy Chief Justice Raymond Zondo, asked by what percentage the fees increased. It was revealed by Advocate Paul Pretorius to be an increase of 754%. Bloom explained that Regiments' role was to advise on the loans and other financial instruments to mitigate risks associated with the transaction.

Bloom described the fee as ‘excessive’.

He added that Transnet's treasury – regarded as world class at the time – was more than capable of facilitating the loans, and that an advisory firm like Regiments was not needed. ‘One wonders why this particular situation was allowed to occur,’ he said.

Full Fin24 report

Transnet ended up paying more than R647m for a project originally billed to cost R9.7m – without justifying how the costs of relocating the manufacturing of locomotives from Gauteng to KZN had ballooned.

According to a Weekend Argus report, Zondo asked Mncedisi Ndlovu and Sedumedi Attorneys’ MD Thobani Mnyandu if – during the law firm’s investigation into dodgy deals – it found evidence of the initial R9.7m offer being considered.

We have not been able to see anything that either speaks to either a critique of the final proposal or final amount or justifies or details support the final amount which is being requested,’ Mnyandu responded.

Zondo persisted: ‘The fact that there is a budget for an item is no justification for paying a certain amount for it. You must still check whether that amount is justifiable. I haven’t seen that here on this memorandum.’

Mnyandu said no other document spoke to the budgeted amount. According to Zondo, nothing shows that the R647m was a reasonable amount to spend on relocation costs. He said the ‘so-called relocation’ was approved by very senior people without any of them asking the very critical question: would it be justified.

The China North Rail relocation of manufacturing of locomotives to Durban was approved by former Transnet chief executive Siyabonga Gama in July 2015 following recommendation by another former executive Lindiwe Mdletshe. Zondo also took issue with the fact that nowhere in the memorandum is the first amount R9.7m quotation mentioned. Transnet received the R9.7m offer through former chief financial officer Garry Pita and Mdletshe, Mnyandu testified.

Earlier testimony suggested the move was done under the guise of transferring skills to Transnet’s staff in Durban.

Full Weekend Argus report (subscription needed)