Daily Maverick 11 August 2019

SCORPIO

The acting chief executive of SA’s cash-strapped train operator Prasa, Nkosinathi Sishi, is on the verge of signing an agreement that not only flouts all statutes governing the utility, but will also expose the firm to almost R5-billion of unauthorised and irregular expenditure.

Nkosinathi Sishi, who was seconded from the department of transport to take over the Passenger Rail Agency of SA (Prasa) from yet another departed interim chief executive, Sibusiso Sithole, in February 2019, immediately hit the ground running. He unilaterally and secretly negotiated an agreement that allows the Development Bank of Southern Africa (DBSA) to extract management fees in excess of R400-million for proposing and developing infrastructure projects for Prasa.

The board and the train operator’s executive committee seem to be in the dark about the project, the need for it and how it was developed. Insiders question the need for the project, and why Sishi, a newcomer with only two months at the company at the time, would commit a cash-strapped Prasa to such expenditure.

In an agreement that seems eerily similar to Eskom’s infamous agreement with global management consultancy McKinsey in 2016, the Prasa CEO first drafted a memorandum of agreement with DBSA, committing the cash-strapped train operator to a vague agreement in which DBSA will take over the development and maintenance of the railway operator’s infrastructure.

A similar agreement put together by McKinsey, Trillian Capital Partners, the purported BEE supplier development partner, and executives at Eskom cost the power utility at least R1.6-billion. Under public scrutiny, Eskom later admitted it had not derived any value from the work. (This was part of a bigger plan to extract more than R9-billion in fees from Eskom.) The contract was annulled by a high court in 2019, which ruled that Trillian must pay back its R600-million portion of the fees. Earlier in 2019, McKinsey paid back the R1-billion it had received from Eskom.

Not only is the Prasa’s agreement with DBSA in breach of the governance statutes regulating the train agency and all state-owned entities, but it specifically violates the most basic requirements of the Public Finance Management Act (PFMA), which insists on a competitive tender process for all major expenditures. The budgeted expenditure under the contract is three times the annual revenue of Prasa. Not only does that amount exceed the delegated authority of the CEO, but it also requires a resolution of the board of directors, which Sishi ignored.

In a letter to Patrick Dlamini, the DBSA chief executive officer, in April, Sishi writes that, “Following interactions with your organisation regarding the planning, implementation and delivery of infrastructure programmes for Prasa, we are pleased to advise you of your appointment as programme implementing agent for the 2019/20 and MET [medium expenditure term] period”. That covers the financial years ending in March 2022.

DBSA will be allocated billions for its help in “asset protection, fencing programme, station upgrade programme, depot modernisation, station improvement, and renewable energy programme.” The budgeted expenditure will be R1.17-billion in the first year ending March 2020, R1.65-billion the following year and R1.95-billion in financial 2022.

A separate memorandum drafted by Sishi on behalf of Prasa, and by Chuene Ramphele, DBSA’s executive for infrastructure delivery, shows DBSA will charge a minimum of R200-million on “funds under management”, which will increase to more than R400-million, or 9% of the total budget, according to a draft agreement seen by Daily Maverick.

Among other red flags, the agreement allows DBSA to propose investment projects, and then execute them for a fee, inducing fears of a conflict of interest. There is no oversight mechanism spelt out in the contract, which exposes Prasa to runaway expenditure. Other than mentioning “improvements” to 135 train stations, it is not clear what exactly is the need for the agreement.

Prasa ignored 16 questions sent by Daily Maverick on 6 August 2019, as well as follow-up emails.

“I did forward the email to the executive, but there has been no response,” spokesperson Nana Zenani said in a telephone call on 8 August.

Although the DBSA admitted it had had discussions with Prasa on the matter, it pleaded ignorance of the details contained in the agreement that would net it more than R400-million in three years.

“Although the DBSA has had discussions with Prasa, we are unaware of the details that you put forward in your email such as a pending appointment or contract and the terms thereof. We therefore recommend that you direct those questions to Prasa as they are best positioned to respond,” said spokesperson Sebolelo Matsoso in an email on 8 August.

Asked if the organisation possessed any capacity to implement railway infrastructure, the DBSA said:

“In terms of the services that the DBSA provides, the DBSA is a development finance institution that operates across the whole infrastructure value chain. In addition to financing, we offer planning, project preparation as well as infrastructure delivery and implementation support through the bank’s Infrastructure Delivery division. The DBSA is an organ of state and listed in Schedule 2 of the PFMA, 1999 as a major public entity.”

Some of the members of the Prasa executive committee claim they have no knowledge of how this proposed agreement came about. One insider said Prasa executives found out about the proposed appointment only after Sishi gave a copy of his letter to DBSA’s CEO to the train operator’s legal head, Martha Ngoye, for legal clearance.

Benedict Khumalo, a senior manager in the legal department was tasked with dealing with the correspondence. Khumalo’s responding memo on 6 May was scathing of Sishi’s letter:

“The correspondence between the chief executives suggests that there was no procurement process followed that resulted in the draft agreement. If there was a procurement process it has not been shared with the legal department for the purposes of advice,” wrote Khumalo, adding that there is nothing that allows Prasa “to dispense with the procurement requirements in terms of the PFMA and the Constitution”.

Such deviations are permissible only in an emergency. “A three-year contract cannot be said to be an emergency, nor can DBSA be a single-source supplier,” advised Khumalo. Given the amounts involved in the project, said Khumalo, the process to enter into such an agreement should have been an open and competitive tender process.

Sishi’s letter binding Prasa to outsource all its infrastructure work to DBSA raised more questions than it provided answers.

Among the shortcomings identified in the document were its vague nature about the status of current Prasa contractors already doing some of the work now being outsourced to the DBSA.

“In essence, the DBSA will carry out work similar to

[what]

is normal[ly] performed by consultants. Will the current contracts be terminated? If so, how is the risk of obvious litigation on damages and loss of profit claims mitigated? How is the potential duplication of fees mitigated?” asked Khumalo.

As the agreement envisaged that DBSA would appoint all contractors to service Prasa’s requirements over the three years, it was not clear how existing contractors would be treated. Further, as the contract was worth billions of rand, Khumalo said the fees payable to DBSA alone would “at least exceed [a] hundred million during the term of the agreement”.

As such, the value of the contract agreement would be in excess of the executive delegation of authority. Thus it would require the approval of the board of directors.

“I have not been furnished with any board resolution authorising that the agreement be entered into,” said Khumalo. “If the board has not approved this agreement it can be said to be irregular based on the delegated authority in terms of value.”

Khumalo had other concerns regarding the proposed agreement: “Taken overall, the effect of the agreement will be that all Prasa employees with the project space may be rendered redundant. Most will be reduced to administration at the very least.”

Ngoye, in her capacity as legal head, risk and compliance, declined to clear the letter to DBSA. Soon after Sishi received this advice from the legal department, Ngoye was put on special leave, together with Tiro Holele, an executive responsible for strategy in the chief executive’s office.  Sources close to Prasa say the two were placed on special leave to remove them from office in order to clear the way for Sishi and some board members to conclude transactions whose only purpose is to illegally divert funds to individuals at the expense of Prasa. 

Almost three months later, they have not been charged with any offence, and remain on full pay.

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