In South Africa, Bombardier caught in controversy over 'black-empowerment' rail contracts

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After winning a $1-billion (U.S.) rail contract from a South African freight company, Bombardier Inc. says it is confident of a bigger breakthrough in the emerging African market – but first it must weather a storm of controversy over its local partners in the deal.

The contract to provide 240 locomotives for the South African government's freight transport company, Transnet, could pave the way for bigger deals on the African continent, Bombardier says. Politicians, however, are calling for an investigation into the contract after it was revealed that Bombardier's partners are a stationery supplier, a cleaning company and a taxi service.

The controversy has put the spotlight on South Africa's policies of black economic empowerment.

The economic policies are intended to reverse the unfair advantages that were enjoyed by white-owned businesses during the apartheid era, but the regulations can often be complex and cumbersome, sometimes encouraging foreign investors to form partnerships with black-owned companies that are of questionable legitimacy.

"Companies are placed in an impossible position, where they have to do dodgy deals to comply with the regulations by hook or by crook," said Anton Alberts, an opposition MP in South Africa's parliament who is calling for an investigation into the Bombardier contract.

Mr. Alberts wants the investigation to find out if Bombardier engaged in "fronting" – an illegal practice of using fraudulent "front" companies to comply with the black-empowerment policies.

Bombardier strongly denies the "fronting" allegation. But it also acknowledges that it was unable to find any black-owned manufacturing companies to participate in the Transnet contract before it was awarded – a problem that it hopes to rectify soon.

When Transnet awarded the locomotive contract of about $1-billion to Bombardier on March 17, it announced that Bombardier's partners were a group of its employees and three of its local suppliers: Jabatha Stationers, Masana Hygiene Services and Sadiphiri Transport Services. The announcement raised eyebrows because the three companies were small and little known.

The owner of the stationery company told a South African newspaper that he wasn't even aware of his role in the locomotive contract and knew nothing about it before the deal was publicly announced.

To comply with the black-empowerment policy, Bombardier's local subsidiary in 2012 had given a 26-per-cent share of its equity to a trust, whose shares were to be owned by current and future employees and black-owned suppliers. But the company acknowledges it didn't inform the suppliers about their share in the Transnet deal, saying that the details were kept quiet at Transnet's request until the announcement on March 17.

"There were some gaps and confusion arising from this announcement," said Aubrey Lekwane, chief representative for Bombardier Transportation in South and Southern Africa. "The customer chose this approach for the announcement, and it overtook our own internal procedures."

Before the locomotive contract was announced, many employees and manufacturing companies were uninterested in the trust and reluctant to take shares in it, especially after Bombardier lost an earlier bid for a $5.8-billion passenger train contract, Mr. Lekwane said. "They were asking, 'What's it worth to me?' " he said. "It was a real challenge. I wasn't sure if we were going to get there."

But with the locomotive contract now under its belt, Bombardier hopes that 10 or 12 black-owned manufacturing companies will take ownership units in the trust, he said. "There's a real excitement about these units now," he said. "For the first time, they are worth something."

Mr. Alberts, economic affairs critic for the Freedom Front Plus party, says he sympathizes with any foreign investor trying to comply with the black-empowerment policies. But the Bombardier deal and the trust partners should still be put "under a microscope" by investigators, he said. "They need to probe beyond the legal shield."

Bombardier has won acclaim in South Africa for its leading role in building a popular high-speed train between Johannesburg and Pretoria, a contract worth about $2-billion to the company. But the operation has been criticized for requiring an annual operating subsidy from the local government. Bombardier also faced controversy when it was revealed that the company had paid $35-million to a shadowy Tunisian middleman in its efforts to win the train contract in 2005.

The latest locomotive contract could be a crucial step toward broader success in the African market, Mr. Lekwane said. "It's a significant opportunity for Bombardier to establish a footprint in South Africa and the region."

Bombardier is interested in bidding on several potential rail contracts in South Africa, he said, including a planned expansion of the Johannesburg-Pretoria high-speed train, a proposed rail link between Durban's new airport and nearby cities, a new railway to bring coal to the Richards Bay port, and a railway line between Johannesburg and Durban. The company is also interested in a proposed north-south rail corridor between Durban and Tanzania along the Indian Ocean seaboard, he said.