State-owned logistics group Transnet confirmed on Monday that it is initiating a legal review of the a R49-billion locomotive procurement contract, known as 10-64, having already declared the contracts irregular and unlawful.

Speaking at the release of the group’s interim results, acting CEO Mohammed Mahomedy said the board had sanctioned the legal strategy, which had also been outlined to the four original equipment manufacturers (OEMs) of the diesel and electric locomotives being supplied to Transnet Freight Rail.

Under the programme, which was concluded in 2015, General Electric and China North Rail (CNR) were awarded contracts to supply 233 and 232 diesel locomotives respectively, while China South Rail (CSR) and Bombardier Transportation had been contracted to supply 259 and 240 electric locomotives respectively.

By the end  of September, General Electric had completed delivery of its locomotives, while CSR had delivered 249 units, Bombardier Transportation 51 and CNR 21 to date.

“Right up front, we made this very clear to the OEMs, as well as to the public, that these contracts were deemed irregular and unlawful as they had not fulfilled certain procurement processes . . . the legality [of the contracts] is up to the counts,” Mahomedy said.

“That means that Transnet will have to go to court for a review application of these contracts. The next part of it remains in the hands of the OEMs and Transnet to come up with an amicable, just and equitable settlement suggestion to the courts. We have confirmed [our stance] with the OEMs and we will be seeking recourse through the legal processes.”

Describing the process as being at a “very sensitive stage” Mahomedy could not be drawn on what the settlement might mean for the outstanding locomotives, which are being built at factories in Pretoria and Durban.

He did confirm, however, that the steep fall in group capital expenditure (capex), from R12.8-billion to R7.9-billion period on period could be partly attributed to the fact that there had been fewer locomotives delivered during the six-months to September 30 than had been anticipated in its budget.

Capex would recover in time, with the group having pledged to invest R22.6-billion at the recent South Africa Investment Conference, where cumulative investment commitments of R363-billion were confirmed.

Transnet was also not concerned about securing funding for these investments, despite a recent decision by Moody’s to change its investment-grade outlook from stable to negative.

The recategorisation arose as a result of liquidity concerns, which arose after Transnet’s 2018/19 results were qualified by its auditors. The qualification triggered a “default event” involving debt worth R14-billion, but acting CFO Mark Gregg-Macdonald reported that all affected lenders had agreed to issue waivers.

On October 16, Transnet reopened its domestic bond programme and had since issued bonds valued at R900-million. Gregg-Macdonald reported, however, that the demand for Transnet bonds had exceeded R3-billion since the re-opening.

During the interim period, Transnet increased revenue by 2.9% to R38.7-billion, reported a 3.5% increase in profits to R2.9-billion and decreased gearing to 43.2%.

Transnet also expected to report an improvement in its financial performance for the year, which ends on March 31, 2020.