Active Mixed AidData Chinese Aid

China Development Bank provides $1.5 billion buyer's credit loan for Locomotive Equipment Acquisition Project (Linked to Record ID#58603, #70774)

$1.5M USD

Funder	China Development Bank (CDB)
Recipient Organization	Transnet SOC Ltd
Country	South Africa
Start Date	Jun 04, 2015
End Date	Feb 04, 2028
Duration	4,628 days
Number of Grantees	1
Roles	Recipient
Data Source	AidData Chinese Aid
Grant ID	`58599`

Grant Description

China Development Bank provides $1.5 billion buyer's credit loan for Locomotive Equipment Acquisition Project In 2013, Transnet launched its Market Demand Strategy (MDS), a ZAR 337 billion ($24.6 billion) investment program that included a plan to expand its fleet by 1064 locomotives.

Then, in December 2014, President of South Africa Jacob Zuma and President of China Xi Jinping signed a Memorandum of Understanding, which included a pledge that China Development Bank (CDB) would provide a $2.5 billion loan to Transnet SOC Ltd (or “Transnet”), a South African state-owned railway company (Transnet老旧机车升级计划).

Transnet reportedly considered the pricing of the CDB loan to be too expensive, and after 12 months of negotiations, it announced that it planned to borrow only $1.5 billion from CDB and supplement the loan with a separate R12 billion loan from a group of South African banks.

Then, on April 16, 2015, a senior Transnet official concluded a ‘mandate letter’ for a CDB loan related to the acquisition of 232 diesel and 459 electric locomotives from China South Rail (CSR) Corporation and China North Rail (CNR) Corporation.

Then, on June 4, 2015, Transnet and CDB signed a $1.5 billion term (loan) facility agreement (Contract No.: 4110201501100000685) with the option of accessing an additional, ZAR-denominated 'standby facility' (worth ZAR 3 billion or $1 billion).

The agreement was signed by Siyabonga Gama, the Acting Group Chief Executive of Transnet, and Li Gang, a Vice President of CDB.

📋 Loan / Grant Terms

💰 Loan Amountcarried the following terms: a 15 year maturity

📅 Maturity15 years

⏳ Grace Period4.5 years

It was backed by two sources of collateral: a first fixed legal mortgage and a first fixed and floating charge ranking security over the locomotives procured from CNR and CSR. The borrower also reportedly purchased a buyer’s credit insurance policy from Sinosure.

Under the terms of the facility agreement, Transnet is allowed use the proceeds of the loan to finance up to 85% (eighty five percent) of three commercial contracts: (1) a March 17, 2014 commercial contract that it signed with CSR E-Loco Supply Proprietary Limited (CSR) for the design, manufacture, test and supply of up to 359 new dual voltage electric locomotives (“electric locomotives"); (2) a March 17, 2014 commercial contract that it signed with CSR for the design, manufacture, test and supply of up to 100 new class 20E locomotives; and (3) a March 17, 2014 commercial contract that it signed with CNR for the design, manufacture, test and supply of 232 diesel locomotives.

CSR and CNR reportedly complied with the minimum local content criteria for a rolling stock of 60% for electric locomotives and 55% for diesel locomotives.

On June 4, 2015, Transnet reported that it planned to draw down on the first $1.5 billion tranche of the loan over the next four years. Loan disbursements amounted to $464 million in 2016, $667 million in 2017, and $317 million in 2019. By the end of 2019, the $1.5 billion loan had achieved a 98.66% disbursement rate ($1.48 billion out of $1.5 billion).

The borrower is responsible for repaying the loan in 43, equal, quarterly installments on March 12, June 12, September 12, and December 12 of each year. The purpose of the project was to acquire 232 diesel and 459 electric locomotives from CSR and CNR. As of 2016, Transnet had procured 591 of these locomotives.

However, the project was plagued by controversy and allegations that Transnet agreed to overpay CSR and CNR for their equipment in exchange for kickbacks to businesses owned by the wealthy Gupta family.

On September 9, 2021, Reuters reported the South African Special Investigating Unit (SIU) froze $296.84 million belonging to CRRC E-Loco Supply Ltd., a local unit of CRRC Corporation Limited. SIU and the current management of Transnet asked for permanent confiscation of the funds.

The action appeared to be in response to a long-running bribery scandal linked to former president Jacob Zuma and his business associates who allegedly received kickbacks for major infrastructure tenders in the country.

According to SIU investigators, China South Rail (CSR) Corporation and China North Rail (CNR) Corporation, which later merged into CRRC Corporation, paid approximately 20 percent of the total amount of its deal with Transnet to a front company, Century General Trading, owned by the Gupta family, who were among Zuma’s business associates and who have been sanctioned by the U.S.

Treasury Department.

In its 2022 financial statements, Transnet noted that it was 'working closely with the SIU in recovering losses suffered as a result of wrongdoing.

Following a report from the SIU about the conduct of a previous [Transnet] Group Executive, Transnet dismissed the Group Executive and successfully litigated with the SIU in the SIU Special Tribunal obtaining a judgment on 31 August 2021 in terms of which the previous executive was ordered to pay back to Transnet [ZAR 26.4] million for disgorgement of secret profits he earned while employed by Transnet.

Transnet and the SIU also launched proceedings in the SIU Special Tribunal for the seizure and forfeiture of funds held by CRRC E-Locomotive Supply (previously known as China South Rail, one of the OEMs contracted to deliver locomotives in terms of the 1,064 locomotive supply agreements).

Transnet and the SIU obtained an ex parte order against funds of CRRC held in various South African bank accounts and a final judgement in the matter is pending.

Transnet is preparing legal papers to pursue further civil recovery in respect of parties implicated in SIU investigations and the findings of the Zondo Commission Report.'

📋 Staff Comments

In 2015, CNR and CSR merged to form China Railway Rolling Stock Corporation (CRRC).
AidData has recorded the loan’s borrowing terms as they were reported in 2014, one year before the loan contract was finalized. Borrowing terms from the final loan contract are not available, but one source ('Guptas siphoned R100m-plus from China loan, evidence shows”) indicates that the final face value of the loan was lower but the borrowing terms did not change.
The term sheet for the loan notes that ‘[t]he Lenders' security package shall include, but not be limited to the following: (a) a security agreement granting a first fixed legal mortgage and a first fixed and floating charge ranking security over the Locomotives in [favor] of the Security Agent (acting on behalf of the Finance Parties) on and from the transfer of title of such Locomotives and each part thereof to the Borrower.’ Also, in a 2019 deposition, Mohammed Suleman Mahomedy, the former CFO and acting CEO Transnet referred to the CDB facility as a ‘securitised loan, meaning that the locomotives that are procured from CNR and CSR are taken as a bond.’ Elaborating on this point, he said that ‘like a lease HP, higher purchase agreement where the vehicle is always owned by the lender until it’s fully paid off and that’s the current situation with the CDB loan.’ 4. No sources explicitly state that this is a buyer's credit loan. However, AidData has coded it as such for the following reasons: (a) the loan is provided to a foreign borrower, (b) the loan is denominated in USD, (c) the loan is insured by Sinosure, which provides export credit insurance, (d) the proceeds of the loan are earmarked for the acquisition of equipment from Chinese companies.
CDB agreed to participate in a cross-currency swap transaction in order to convert the USD based loan to a local currency ZAR loan. The purpose of the cross-currency swap was to allow Transnet to service the loan in local currency (ZAR).
This CDB loan is also linked to Record ID#58603 and Record ID#70774, which record two tranches of a ZAR 3 billion loan from Bank of China for the same project.
A draft version of the CDB term sheet (from 2014) can be accessed in its entirety via https://outa.co.za/web/content/132931.
For loan and debt rescheduling records with variable interest rates, AidData calculates the all-in interest rate at T0 based on the reference rate (such as LIBOR or EURIBOR) on the loan start date, plus any known margin. Please see the methodology for additional details.
The 2015 term (loan) facility agreement (Contract No.: 4110201501100000685) between CDB and Transnet can be accessed in its entirety via https://www.dropbox.com/s/qs5ar54evvo10sp/South%20Africa%202015%20CDB%20Transnet%20Term%20Facility%20Agreement%20for%20Locomotive%20Acquisition%20Project.pdf?dl=010. The locomotive mortgage agreement is included in Schedule 8 of the 2015 term (loan) facility agreement. A direct link to the mortgage agreement can be found here: https://docs.aiddata.org/ad4/pdfs/how-china-lends-2/ZAF_2015_182.pdf.
The 2015 term (loan) facility agreement defines that 'locomotive mortgage' as 'each special notarial mortgage to be registered by the Borrower in favour of the Lender over the locomotives as described in and delivered pursuant to the terms of the Commercial Contracts and owned by the Borrower as security for the obligations of the Borrower to the Lender under the Transaction Finance Documents substantially in form of Schedule 8 (Locomotive Mortgage Agreement).'12. A cross-currency swap was necessary to hedge Transnet's liability to repay the loan in the currency in which it was received. A cross-currency swap is an off balance sheet (over the counter) transaction in which two parties exchange principal (principal portion of the loan) in different currencies. The hedge takes the liquidity risk out of the equation. The CDB loan was arranged as a floating rate loan denominated in USD with periodic drawdowns that occurred to pay either CNR or CSR in respect of the 1064 locomotive procurement. The locomotive supply agreements between Transnet and CNR and CSR provided for payments to be made in ZAR. Consequently, the CDB (loan) facility needed to be swapped from USD to ZAR at each drawdown. Transnet accordingly entered into hedging transactions with JP Morgan in the form of a series of cross-currency swaps. JP Morgan in this case acted as the sole hedge counterparty to lead and underwrite the equivalent ZAR amount for a loan of $1.5 billion.
Ashurst was a legal adviser for the transaction

📚 Sources & References

SOUTH AFRICA WELCOMES AFRICAN UNION SUMMIT
AFFIDAVIT (IN TERMS OF SECTION 27 OF THE NATIONAL PROSECUTING AUTHORITY ACT 32 OF 1998)
Annual Financial Statements 2019
CDB Transnet Facility Agreement Email Transmission
CHAPTER I: FINAL REPORT: FORENSIC INVESTIGATION INTO VARIOUS ALLEGATIONS AT TRANSNET
CHAPTER II: MCKINSEY
TRILLIAN AND REGIMENTS
CHAPTER III: REPORT RELATING TO ESKOM INVESTIGATIONS
China Development Bank 2015 Annual Report
China Loans to Africa
Chinese Loans to Africa Database
EXHIBIT BB 8(d) - PRESENTATION ON MNS REPORT VOLUME 2(b)
Guptas siphoned R100m-plus from China loan, evidence shows
INDICATIVE TERMS FOR TERM LOAN FACILITY ARRANGED BY CHINA DEVELOPMENT BANK CORPORATION FOR TRANSNET SOC LTD FOR THE ACQUISITION OF LOCOMOTIVES
Infrastructure Financing Trends in Africa - 2015
Infrastructure Financing Trends in Africa - 2015
Infrastructure Financing Trends in Africa – 2017
Judicial Commission Of Inquiry into State Capture Report: Part 2 Vol.1: Transnet
Meeting: Transnet SOC Limited and China Development (CDB)
PRESENTATION TO THE STANDING COMMITTEE ON PUBLIC ACCOUNTS (SCOPA)
Proceedings on 1 5 M AY 2 0 1 9
Rolling Stock Procurement of Transnet
South Africa
SCHEDULE 8: LOCOMOTIVE MORTGAGE AGREEMENT
SETTLEMENT AGREEMENT between TRANSNET SOC LTD and REGIMENTS CAPITAL (PTY) LTD
Singh says he did not understand pricing on inflated locomotive deal
Speech by Lynne Brown at the China Development Bank Loan Announcement, 4 June
Speech by the Minister of Public Enterprises
Ms. Lynne Brown at the China Development Bank Loan announcement
Transnet Agrees to $2.5 Billion Loan From China Development Bank
TRANSNET AND SIU LAUNCH REVIEW APPLICATION ON 1 064 LOCOMOTIVE TRANSACTION
Transnet arrests 7 years after the crime: Better late than never
Transnet bags R30 billion funding for locomotives
Transnet secures ‘club loan’ deal
Transnet signs R12bn loan to fund loco programme
Transnet wants court to set aside R54bn contract for 1,064 locomotives
US$1,500,000,000 Term Facility Agreement for Locomotive Acquisition Project
南非Transnet国营有限公司铁路机车采购项目
国开行向南非国家交通运输集团提供300亿兰特贷款 Loan applications and disbursements are still being received and processed as the projects continue to evolve. Ongoing monitoring and evaluation are in place to ensure project continuity.