Big hurdle for Transnet tender

• Spotlight on bidder’s use of its market capitalisation to boost solvency ratio

Transnet ignored two opinions that it erred in allowing Philippines-based International Container Terminal Services Incorporated (ICTSI) to calculate its solvency ratio using its market capitalisation in its successful bid to win a 25-year contract to develop and manage the key Durban Pier 2 Terminal (DCT2).

DCT2 is Transnet’s biggest container terminal, handling 72% of the Port of Durban’s throughput and 46% of SA’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.

The methodology used to calculate ICTSI’s solvency and whether it met the tender requirements will take centre stage next week when losing bidder APM Terminals squares off with Transnet and ICTSI at the high court in Durban, seeking to set the contract aside.

Expert opinions sought by Transnet and seen by Business Day, including its own internal auditing report, warned ICTSI’s use of market capitalisation to shore up its solvency ratio fell short of the tender’s requirements. Transnet sought the opinions after APM Terminals, a subsidiary of Danish logistics major AP Moller-Maersk challenged the parastatal to show cause why it allowed ICTSI to pass the first hurdle of the tender, the request for qualifications which demanded a solvency ratio of 0.4, when ICTSI’s solvency came in at 0.24 according to its annual financial statements for the 2021 financial year.

The pushback by APM came after Transnet announced in July last year it had selected ICTSI as the preferred bidder to concession DCT2. APM contends that ICTSI’s bid should have failed at the request for qualifications stage and not proceeded to the request for proposal stage.

ICTSI, listed on the Philippines Stock Exchange, was the only tenderer to use its market capitalisation to prove it met Transnet solvency requirements to qualify for the tender, which saw it comfortably pass the solvency requirement.

APM says the request for qualifications demanded that the solvency criterion was to be satisfied with reference to annual financial statements, not market capitalisation.

The request for qualifications issued in February 2022 stated that a bidder would be “deemed to have sufficient financial capacity” if they met three financial criteria: solvency ratio, liquidity ratio, and had positive profit, earnings before interest, taxes, depreciation and amortisation and operational free cash flow each of the past five years.

Transnet lawyers, ENSafrica, wrote to the group in September 2023 telling it that an opinion from Mettle Specialised Solutions was that it was unacceptable for a company’s market capitalisation to be used as “total equity” to calculate a company’s solvency ratio.

This was followed by a Transnet internal audit finding that ICTSI’s solvency ratio during the bidding process fell way short of the requirements.

“ICTSI submitted financial statements for the years ending 2017, 2018, 2019, 2020 and 2021. Consequently, the latest financial year end for ICTSI at the time of the bid response would be December 31 2021,” says Transnet’s internal audit in its report, dated November 17, to Transnet’s top brass.

“The solvency ratio, based on December 31 2021 financial statements, is 0.24, which is less than 0.4. As a result, ICTSI should not have passed the solvency minimum financial criterion.”

Transnet’s internal audit report, together with Mettle Specialised Solutions opinion, saw a change in heart from Transnet with ENSafrica in November issuing a notice of possible disqualification.

“ICTSI relies on market capitalisation to represent its ‘total equity’, in the calculation of its solvency ratio ... Transnet is of the view that this metric is inaccurate, inappropriate for the purpose for which it was used, misleading and an inadequate reflection of ICTSI’s ability to meet its financial obligations.

“Under clause 47 of the request for proposal, Transnet has the right to disqualify ICTSI because it does not meet the minimum financial criteria to qualify as an eligible shareholder in the project.”

ICTSI pushed back against the notice, telling Transnet the request for qualifications never provided any definition for total equity that bidders had to use.

“In the absence of any such definition, there is again no rational basis for your client to insist on a definition that is put forward by a losing and disgruntled bidder rather than to allow our client to conform with the only approach to testing for solvency and liquidity that is available in the SA Companies Act,” ICTSI said in its letter, also dated November.

The stalemate saw Transnet CEO Michelle Phillips on December 12 inform ICTSI in a letter that the group had decided to appoint an entity called Growthstone to assess whether ICTSI had sufficient financial capacity to attract the required funding for the project.

Growthstone then produced a report affirming ICTSI’s financial standing. The report said ICTSI’s market capitalisation of $8.9bn at end-2023, together with its net cash position of $665m at the end of 2023, and high credit scores among institutional lenders, put the company in a solid financial position.

“Based on the financial due diligence review, ICTSI is expected to be a robust participant in the Durban Container Terminal Pier 2 private sector participation project. From the financial risk standpoint, the company is in a very strong position to add value to the project,” says the report dated December 29 2023.

Transnet also got letters from Citi, HSBC and Standard Chartered confirming the credit facilities that the company has with the lenders. APM said in its affidavit that the Growthstone report overreached and did not cure the alleged noncompliance of ICTSI bid as it relates to its solvency position.

“The special treatment afforded only to ICTSI to depart from the requirements of the tender and to be ‘engaged’ on its departure, among other things, for over six months, was plainly unfair to the other bidders,” APM said in its affidavit.

“It was not transparent, as the more than six months ‘engagement’ between Transnet and ICTSI was not public. Also, the ‘acceptable’ use of market capitalisation to calculate solvency ratio was not disclosed by Transnet.

“Finally, it was not competitive, fair, transparent and/or cost-effective as other potential bidders who also did not have a solvency ratio of at least 0.4 reflected in their latest financial statements may have simply decided not to tender.”

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.

To bolster its case APM has roped in Harvey Wainer, visiting professor at Wits School of Accounting, and member of the JSE securities exchange issuer regulation advisory committee.

“In SA there is no recognised solvency ratio in financial analysis, for any normal purpose that relies on market capitalisation as being the total equity amount. I have never encountered any assessment of solvency which is based on the market capitalisation of the company,” Wainer said in his affidavit.

ICTSI has roped in Wits accounting expert professor Warren Maroun, who argues that market capitalisation may indicate an organisation’s ability to attract additional funding or refinance its existing debt. “There is no single authoritative basis for computing solvency ratios. Care should be taken to avoid creating the impression that there is only one way to compute and present a solvency (or other) ratio.”

ICTSI, in its papers, said it was well within its rights to incorporate its market capitalisation in calculating its solvency ratio, stating that such was not kept a secret to Transnet.

The Manila-based company said it rejected the notion that using market capitalisation as an input into the calculation of the solvency ratio was not permitted under the tender.

“Transnet did not prescribe a definition for ‘total equity’ in the calculation of solvency and did not require that in performing this test the value for total equity would only be taken from one section of the annual financial statements. Any such a prescription would have been arbitrary and irrational,” ICTSI said in its affidavit. “Using market capitalisation to determine ‘total equity’ is not only appropriate and reasonable but conforms with SA law.”

The infrastructure and design of DCT2 has remained the same since 1963. Over the past 20 years, congestion at the terminal due to shipping traffic and limited operational capacity have led to backlogs at the Port of Durban.

Transnet in its court papers said APM, whose bid it ranked second to that of ICTSI, was not entitled to be appointed as the preferred bidder for the DCT2 project.

It said on a proper interpretation of the request for qualification it could not be said that each respondent was required to tick every box.

“Once it was established through an independent expert that the use of market capitalisation in the solvency ratio was inappropriate, Transnet established (through consideration of

THE SOLVENCY RATIO … IS LESS THAN 0.4. AS A RESULT, ICTSI SHOULD NOT HAVE PASSED THE SOLVENCY MINIMUM FINANCIAL CRITERION

ICTSL’S NONCOMPLIANCE WITH THE SOLVENCY RATIO OF 0.4 WAS NOT MATERIAL IN THE SENSE REQUIRED TO DISQUALIFY ICTSI

all relevant facts, submissions from all affected parties and both internal and external experts) that ICTSI had demonstrated sufficient financial capacity to secure the required funding,” it said.

“The due diligence report [Growthstone report] established that ICTSI has sufficient financial capacity to attract the required funding for the project.

“As a result, ICTSl’s noncompliance with the solvency ratio of 0.4 was not material in the sense required to disqualify ICTSI.”

The entity added that ICTSl’s financial offer was almost R2bn more than the next best offer made by APM.

ICTSI’s offer came in at $618m, which would be paid to Transnet for a 50% share in DCT2, while APM put on the table $515m.

“ICTSl’s business case indicates an intention to spend R1.5bn in capital expenditure and on infrastructure maintenance, equipment, overhaul and refurbishment and new equipment. The total spent by ICTSI over 25 years is R9.4bn.”