The Durban high court has interdicted the deal between Transnet and Philippines-based International Container Terminal Services Incorporated (ICTSI), which was intended to allow ICTSI to manage Durban Container Terminal Pier 2 (DCT2).
The ruling highlighted the process by which the state-owned freight and rail operator selected the company.
On Wednesday, judge Robin Mossop said he found it hard to believe that Transnet chose to ignore its own internal and expert advice, which indicated that it had erred in allowing ICTSI to use its market capitalisation to meet the tender’s solvency ratio requirements.
The legal challenge was brought by losing bidder APM Terminals (APMT), which argued that ICTSI should have been disqualified, as without using its market capitalisation to bolster its solvency, it failed to meet the tender’s requirements.
Business Day reported in September that Transnet ignored two opinions that it should not allow ICTSI to use its market value to meet the solvency thresholds. The opinions were from Transnet’s internal audit team and Mettle Specialised Solutions — sought by Transnet’s attorneys, ENSafrica.
ICTSI, listed on the Philippines Stock Exchange, was the only bidder that used its market capitalisation to prove it met Transnet solvency requirements for the tender. This led to ICTSI meeting the solvency ratio requirement of 0.4, while its actual solvency was recorded at 0.24 without its market capitalisation.
Mossop found Transnet wanting.
“Transnet required the solvency ratio calculation to be used. That being the case, the ratio calculated by the second respondent (ICTSI) was clearly non-responsive and can only be defended with considerable difficulty,” reads the judgment.
“Transnet, however, knew this to be the case. Notwithstanding its own knowledge of what it wanted, Transnet twice sought expert opinions on whether what the second respondent had done with the solvency ratio calculation was valid and acceptable.
“From this fact alone, it can be deduced that Transnet had not itself contemplated market capitalisation being an element of the solvency ratio calculation: if it had, it would not require third party opinions on whether its use amounted to a valid representation of the bidder’s solvency.”
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.
After consideration of these facts, it appears to me that the approach of Transnet in identifying the second respondent as the preferred bidder was potentially flawed and prima facie unfair to the other bidders
— Judge Robin Mossop
Transnet’s argument before court was that APMT, whose bid it ranked second to that of ICTSI, was not entitled to be appointed as the preferred bidder for the DCT2 project.
It argued that on a proper interpretation of the request for qualification it could not be said that each respondent was required to tick every box. One of Transnet’s arguments was that ICTSl’s financial offer was almost R2bn more than the next best offer made by APM.
ICTSI’s offer came in at $618m (R10.91bn), which would be paid to Transnet for a 50% share in DCT2, while APMT put on the table $515m (R9.09bn).
Mossop said the process followed by Transnet was flawed, handing down an interim interdict on the deal, which is government’s flagship private sector participation project.
“After consideration of these facts, it appears to me that the approach of Transnet in identifying the second respondent as the preferred bidder was potentially flawed and prima facie unfair to the other bidders. Different allowances were made for the second respondent that were not offered to other bidders,” he said.
“It appears that Transnet did not, as it said it would do in the RFQ, evaluate the second respondent’s bid in accordance with the criteria set out in part 5 of the RFQ, nor did it require the second respondent to meet the minimum financial criteria. Transnet permitted a bidder that had not established its financial credentials to proceed to the further stages of the tender in which financial capacity was a central requirement.
“To regularise what it had done, for it did not realise that the second respondent had not used the correct information in calculating the solvency ratio calculation, it then had to permit the ex post facto establishment of facts that ought to have been established at the commencement of the process. In other words, its position is now that the end justifies the means. In so doing, the second respondent was treated differently to the other bidders.”
Transnet had already extended the validation period of the tender to the end of March 25 2025, from the initial September 30.
DCT2 is Transnet’s biggest container terminal, handling 72% of the Port of Durban’s throughput and 46% of South Africa’s port traffic. The deal is a flagship public-private sector partnership that will demonstrate how the private sector can work with state-owned enterprises. It is critical to the economy and fiscus that Transnet’s performance improves fast.
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