Transnet's dealing room transferred to Gupta-linked Regiments Capital, inquiry hears

An interest rate swap transaction for a Transnet loan which was facilitated by Regiments Capital was meant to benefit the Gupta-linked fund manager, the state capture inquiry heard.

Transnet's acting group CEO, Mohammed Mahomedy, on Thursday continued his testimony before the judicial commission of inquiry into state capture. The commission of inquiry has been investigating allegations of state capture, corruption and fraud since August 2018.

He detailed how funds at the state freight and rail company were plundered in loan agreements through interest rate swaps.

Mahomedy detailed how, in December 2015, former Transnet Treasurer Phetolo Ramosebudi recommended to former acting chief financial officer Garry Pita to approve an interest rate swap on a R12bn club loan relating to a 2014 contract for 1064 locomotives.

The controversial locomotives contract has come under scrutiny after costs ballooned from R38.6bn to eventually cost Transnet R54.5bn.

Mahomedy said that Transnet had favoured floating interest rates on its loans. This is an interest rate which is linked to an index and can vary depending on different factors. If for example, the Johannesburg Interbank Rate Index increases, then the interest rate will increase and the opposite is true, Mahomedy explained to the commission.

Mahomedy said that for a long-term loan the floating rate is favourable, because a fixed rate is normally higher as banks or financial institutions issuing loans want to protect themselves against unforeseen risks given the lengthy time period of the loan.

Transnet could also opt for an interest rate swap – this is when the floating interest rate is swapped for a fixed rate – as a derisking mechanism for the borrower and the lender. That is to say, it protects the borrower (Transnet) in the event the interest rate increases too much and to protect the lender (the bank or financial institution) if the interest rate decreases too low. The swap should not affect the loan transaction, Mahomedy said.

But many factors must be considered before going though with this transaction, Mahomedy said. In this particular case, the swap was for a multi-billion rand transaction and it was concluded in just three days. Mahomedy said it gave the impression the process was rushed through, given the magnitude of values being handled.  

Mahomedy also noted that Transnet had for many years not opted for an interest rate swap, and questioned why this particular transaction was selected. He suggested it was to benefit Regiments, which charged Transnet fees for facilitating the swap.

He explained for a business the size of Transnet, and the significant role it plays in the public funding space, it would be expected that multiple opinions would have been sought before the interest rate swap was authorised.

Not advisable

At the time the swap was authorised by Pita in December 2014, Ramosebudi's subordinate – deputy treasurer Danie Smith had advised against the swap, Mahomedy told the inquiry. According to Smith, the swap would cost Transnet R200m more per year, he expressed these views in a memo to Ramosebudi and Pita, to which Pita responded that the explanations for the swap was "well written" and that he understood the logic behind the decision.

Mahomedy said that Regiments would be paid commission for overseeing the swap. Mahomedy also clarified to Zondo that the size of Regiments' commission would be influenced by the value of the transaction being handled. 

Mahomedy explained that the interest rate swap was not handled internally at Transnet even though its treasury team was more than capable of facilitating the swap, suggesting Regiments services were not necessarily needed.

"Transnet's treasury team has the capabilities to handle the transactions, vanilla transactions. These are stock standard transactions," he said.

"Transnet treasury officials who raised this as a concern were told things like: 'We will work around you, work above you and we will work through you.' Those are the statements that were made when people made objections against certain transactions," he said.

"Regiments never got access to the dealing room. The dealing room was just transferred to Regiments. And individuals in the dealing room were not consulted in any shape or form," he said.

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