C O M M I S S I O N O F I N Q U I RY I N T O S TAT E C A P T U R E H E L D AT PA R K T O W N , J O H A N N E S B U R G 10 27 NOVEMBER 2019 D AY 1 9 4 FINAL 20 27 NOVEMBER 2019 – DAY 194 PROCEEDINGS RESUME ON 27 NOVEMBER 2019 ADV MAHLAPE SELLO: The computers were giving technical problems this morning but we believe we have sorted it out. C H A I R P E R S O N : O k a y. A D V M A H L A P E S E L L O : A n d a r e a b l e t o a p p r o a c h M r C h a b i ’s e v i d e n c e in the manner that we had originally envisaged. C H A I R P E R S O N : J a o k a y. A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. C H A I R P E R S O N : O k a y. 10 ADV MAHLAPE SELLO: Chair you will recall ...(intervenes). CHAIRPERSON: I guess we will – I guess we will have to start afresh with his evidence. A D V M A H L A P E S E L L O : Ye s I a m g o i n g t o m a k e a s u g g e s t i o n i n t h a t regard. C H A I R P E R S O N : Ye s . A D V M A H L A P E S E L L O : S u b j e c t o f c o u r s e t o w h a t t h e C h a i r. CHAIRPERSON: Ja, ja. ADV MAHLAPE SELLO: How the Chair views that. CHAIRPERSON: Ja. 20 ADV MAHLAPE SELLO: Just to place on record for whoever will be reading this transcript in time to come mister – we presented Mr Chabi for the first time on the 29th of May 2019. And at the end of that day h i s t e s t i m o n y w a s p o s t p o n e d t o a l a t e r d a t e a n d t h a t d a t e i n e ff e c t i s t o d a y. A t t h e p o i n t o f p r e s e n t i n g M r C h a b i h e t e n d e r e d a c e r t a i n s e t o f slides and with the leave of the Chair these were marked Exhibit BB8B. Page 2 of 173 27 NOVEMBER 2019 – DAY 194 BB8B, the slides, admitted into evidence are in respect of two t r a n s a c t i o n s 1 0 6 4 a n d t r a n s a c t i o n 1 0 0 r e s p e c t i v e l y. There are two separate sets of slides. Following a request by the Chair for statements Mr Chabi has since now prepared a statement in each case for 1064 and 100 consistent with the slides to the extent possible and these are b e i n g s u b m i t t e d t o d a y. Chair we have placed before you a file. Because the statements directly relate to the exhibit we have sought to find a way to link the statements to the exhibit. We suggest therefore that the file also has – be marked Exhibit 8B except we suggest each 10 statement in 10B – BB8B1 and BB8B2. And the file before the Chair should have both statements. They are divided – there is a divider in the file. The first divider would be marked 1 and that relates to the 1064 transaction. The second divider is marked 2 and that would be in respect of the 100 transaction. CHAIRPERSON: Is 2 – does 2 have a yellow divider? A D V M A H L A P E S E L L O : Ye s , y e s . I t h a s a . . . ( i n t e r v e n e s ) . CHAIRPERSON: Oh no not on mine. ADV MAHLAPE SELLO: Not on yours? C H A I R P E R S O N : Ye s . T h e y m u s t m a k e s u r e w h a t I h a v e i s e x a c t l y t h e 20 same as what you have and what the witness has is exactly the same. ADV MAHLAPE SELLO: Sometimes they run out of ...(intervenes). CHAIRPERSON: Because you should – you should be able to say it is a w h i t e , y e l l o w, b l u e d i v i d e r. A D V M A H L A P E S E L L O : D i v i d e r. C H A I R P E R S O N : A n d w h e n I g o t h e r e I m u s t f i n d t h a t c o l o u r. Yo u m u s t Page 3 of 173 27 NOVEMBER 2019 – DAY 194 n o t h a v e a y e l l o w d i v i d e r a n d I h a v e a g r e e n d i v i d e r. ADV MAHLAPE SELLO: A g r e e n d i v i d e r. We will bring that to the a t t e n t i o n C h a i r. CHAIRPERSON: So it just makes things easy because you see for e x a m p l e n o w I s a w t h a t t h e f i r s t d i v i d e r n u m b e r 1 i s y e l l o w. So I am looking for another yellow that has got 2. ADV MAHLAPE SELLO: Oh. CHAIRPERSON: Because that is how normally it goes. But actually you probably have a yellow number 2 and I got a green number 2. 10 ADV MAHLAPE SELLO: And it gets more interesting than that because I have a green number 1 and a yellow number 2. C H A I R P E R S O N : Yo u s e e . A D V M A H L A P E S E L L O : Ye s C h a i r. CHAIRPERSON: But the people who do these things might not appreciate the importance of these things. So they need to be told that the files must be exactly the same so that when we are looking for any document we have exactly the same thing. A D V M A H L A P E S E L L O : N o w e a p p r e c i a t e t h a t C h a i r. CHAIRPERSON: Ja. 20 MR CHABI: And we definitely will be communicating. So this mistake will not happen again. C H A I R P E R S O N : J a o k a y. ADV MAHLAPE SELLO: For purposes of today the – and we will u p d a t e y o u r f i l e a c c o r d i n g l y. C H A I R P E R S O N : Ye s . Page 4 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: But most importantly you have got two dividers there one marked 1 and the other marked 2. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: So insofar as 1 is concerned if the Chair could just recall that is in respect of 1064. And 2 is in respect of 100. C H A I R P E R S O N : J a o k a y. ADV MAHLAPE SELLO: And we will deal with each transaction in turn. C H A I R P E R S O N : Ye s o k a y, o k a y. ADV MAHLAPE SELLO: Getting back then to the issue that the Chair 10 raised at the beginning of our presentation about how we intend to approach this. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: On the 29th of May when Mr Chabi first appeared he dealt with a preliminaries about himself, introduced himself, his background, professional qualifications and experience and he had started some of his actual evidence. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: If the Chair has regard to BB8B1. CHAIRPERSON: H’mm. 20 ADV MAHLAPE SELLO: At page 1 that is where the statement starts. CHAIRPERSON: H’mm. MR CHABI: Those aspects are dealt with until page 5. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: Although he had started on his actual testimony – evidence before you. Page 5 of 173 27 NOVEMBER 2019 – DAY 194 C H A I R P E R S O N : Ye s . ADV MAHLAPE SELLO: We suggest the following that it is not necessary for Mr Chabi to replace his qualifications and those issues on record as they already are on record. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: But we restart his actual evidence. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: Just so it is in a single transcript. CHAIRPERSON: 10 Ja. Ye s n o , n o t h a t i s f i n e . That is fine. I – the qualifications are already there. A D V M A H L A P E S E L L O : Ye s C h a i r. CHAIRPERSON: So I am quite happy with him starting afresh in regard to the evidence. ADV MAHLAPE SELLO: In regard to the evidence. CHAIRPERSON: Ja. Ja. A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. A n d w e p r o p o s e t o d o s o . C H A I R P E R S O N : J a o k a y. ADV MAHLAPE SELLO: Just lastly Chair as it is custom perhaps you must admit the file into evidence with the proposed marking. 20 CHAIRPERSON: Ye s . The file – lever arch file containing the statement by Mr Alister Ouemakoua Chabi is going to be admitted as Exhibit BB8 and what falls under 1 are his statement and certain annexures, is that right? ADV MAHLAPE SELLO: Under 1 is statement and annexures in respect of 1064. Page 6 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: Ja. And under 2? ADV MAHLAPE SELLO: And under 2 if his statement and relevant annexures in respect of 100. C H A I R P E R S O N : Ye s o k a y. T h e n h i s s t a t e m e n t a p p e a r i n g f r o m p a g e 1 under divider 1 and the annexures that come after that but before divider 2 will be admitted as Exhibit BB8B1. A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. CHAIRPERSON: And his statement under divider 2 and the annexures thereto will be admitted as Exhibit BB8B2. 10 A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. CHAIRPERSON: Did we get it right? ADV MAHLAPE SELLO: We got it right. CHAIRPERSON: Okay alright. A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. I f I m a y j u s t m e n t i o n t h e n for the benefit of those who will read subsequently to distinguish the numbering. CHAIRPERSON: H’mm. A D V M A H L A P E S E L L O : 1 0 6 4 i s n u m b e r e d A O C 1 0 6 4 a n d p a g e n u m b e r. And that is then a bit to distinguish it from 100 which is numbered the 20 red numbering range there is AOC which are his initial 1001. C H A I R P E R S O N : Ye s r e m e m b e r . . . ( i n t e r v e n e s ) . A D V M A H L A P E S E L L O : S o t h e r e i s a m i d d l e n u m b e r. CHAIRPERSON: Ye s . 1064 being the – being a reference to 1064 locomotives. ADV MAHLAPE SELLO: Indeed. Page 7 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: Ja. ADV MAHLAPE SELLO: And 100 as well. CHAIRPERSON: Ja. A D V M A H L A P E S E L L O : Ye s C h a i r. CHAIRPERSON: Okay thank you. A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. S t a r t i n g t h e n w i t h 1 0 6 4 . CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: Before we do so we have not sworn in this – the witness. 10 C H A I R P E R S O N : Ye s w e l l . . . ( i n t e r v e n e s ) . ADV MAHLAPE SELLO: If I may request that the witness be sworn in? C H A I R P E R S O N : W e m u s t a d m i n i s t e r t h e o a t h o r a ff i r m a t i o n f i r s t . A D V M A H L A P E S E L L O : . Ye s . REGISTRAR: Please state your full names for the record? MR CHABI: My full name is Alister Ouemakoua Chabi. REGISTRAR: Do you have any objection to taking the prescribed oath? MR CHABI: I do not. REGISTRAR: Do you consider the oath to be binding on your conscience? 20 MR CHABI: I do. CHAIRPERSON: Do you swear that the evidence you will give will be the truth; the whole truth and nothing but the truth; if so please raise y o u r r i g h t h a n d a n d s a y, s o h e l p m e G o d . MR CHABI: So help me God. A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. Page 8 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: Now Ms Sello I want us to begin this evidence in a c e r t a i n w a y. A D V M A H L A P E S E L L O : Ye s C h a i r. CHAIRPERSON: Which I think will help me. ADV MAHLAPE SELLO: Indeed. C H A I R P E R S O N : I d o n o t k n o w a b o u t y o u . Yo u m i g h t b e a n e x p e r t o n t h i s t h i n g a l r e a d y. A D V M A H L A P E S E L L O : T h a t w o u l d b e t h e d a y. CHAIRPERSON: So Mr Chabi I want you to listen to what I am say – I 10 a m g o i n g t o s a y. M s S e l l o i s a l s o l i s t e n i n g . I a m g o i n g t o t e l l y o u h o w I would like us to start with your evidence and you can tell me if you think we can do it that way from your point of view and Ms Sello will say something if she wants to say something also. This is not so easy t o f o l l o w s t u ff . I am sure you are saying but this is nothing. It is simple. It is a – it is – it has got its complexities for somebody who is not in this field. Certainly for me but I would like to follow it. Now what would help me is if were to start with you telling me what the general principles are that apply when you do what you were asked to do generally speaking. 20 To s a y g e n e r a l l y t h e s e a r e t h e p r i n c i p l e s t h a t would be applicable in this field if you are going to do this. This is what this principle means, this is what this principle means, this is what this principle means. And then once I understand the general principles then when you go to the application of those principles to what was before you – to what is before us then I would follow much b e t t e r. Now in your statement there are certain things that I see as Page 9 of 173 27 NOVEMBER 2019 – DAY 194 possibly principles. p o i n t o f v i e w. S o l e t m e m a k e y o u a n e x a m p l e f r o m a l a w y e r ’s Let me make an example about employment or any contract. There would be two parties and the contract would talk about what they have agreed. Who will do what, who will do what, what are the rights and obligations of the parties. When do you have a breach of the contract and if there is a breach of the contract what does the other party – what rights does the other party have? What remedies does it have? When is there a breach, where is there no breach? Let me make an example in regard to the contract. 10 The lawyers in the room will understand this but you will understand the two. For example in the law of contract there is a principle which is the principle of reciprocity which means that in regard to certain matters in a contract if you are supposed to do something – a certain thing before I have to do something else or if you must do something for me before I can do something for you. If you do not do your part I am under no obligation t o d o m y p a r t . Yo u u n d e r s t a n d t h a t ? So you cannot not fulfil your obligation but expect me to fulfil my obligation. If you do not fulfil your part you are in breach but I am not in breach by not doing my part because I am only in breach if you have done your part. 20 Yo u understand that? Let me make you another example with contracts. If we have a contract and I want to terminate the contract there are two possibilities. I can terminate the contract by giving you a notice that says for example, I will terminate this contract on such and such a date and I give you about a month or three months depending what the contract says. That is the notice period. But I may also terminate the Page 10 of 173 27 NOVEMBER 2019 – DAY 194 c o n t r a c t s u m m a r i l y w i t h o u t g i v i n g y o u n o t i c e a n d s a y, w i t h i m m e d i a t e e ff e c t t h i s c o n t r a c t i s c a n c e l l e d . If as a general principle you are in breach – in a serious breach of the contract – call it a repudiation of the contract I can summarily cancel it. But if you are not in breach of t h e c o n t r a c t I m u s t g i v e y o u n o t i c e . Yo u u n d e r s t a n d ? S o i f y o u l o o k a t it from – if you look at – if I explained this to somebody who is not a lawyer then having explained this I can then say well let us go to the facts of this case. Okay was there a breach? No there was no breach so therefore there is supposed to have been a notice before the 10 contract was cancelled. Was there a breach? there was no obligation to give notice. If there was a breach It could be cancelled i m m e d i a t e l y. S o i f I u n d e r s t a n d t h o s e p r i n c i p l e s i t i s e a s i e r t o t h e n g o and say okay what happened here? How does it fit into the general principles? And there may be exceptions that this is a general principle but there are exceptions. Now I do not know whether within your field it is possible to explain things like that but I would imagine that it ought t o b e p o s s i b l e . B u t I a m n o t a n a c t u a r y s o I d o n o t k n o w. S o t e l l m e i s t h i s g o i n g t o b e e a s y o r i s i t d i ff i c u l t o r w h a t d o y o u t h i n k ? MR CHABI: 20 Okay Chair so I am trying to marry I think the principles you have just mentioned to what sort of consequences ...(intervenes). ADV MAHLAPE SELLO: Sorry Mr Chabi please put the microphone closer towards you. CHAIRPERSON: Ja I do not know what is happening I – maybe bring it c l o s e r. ADV MAHLAPE SELLO: It is not ...(intervenes). Page 11 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: So I can hear you. ADV MAHLAPE SELLO: Thank you. MR CHABI: Is that? ADV MAHLAPE SELLO: Ja. M R C H A B I : O k a y g r e a t . O k a y. S o I t r i e d t o f o l l o w a s y o u w e n t a l o n g and tried to jot down notes. Would I be asking for much I asked about some of the terms you did not understand so I can go through that at a high level? CHAIRPERSON: Well certainly one of things that I would like you to do 10 i s t o s a y, h e r e a r e t e r m s t h a t I w i l l b e u s i n g i n m y e v i d e n c e w h i c h a r e important to understand. M R C H A B I : O k a y. CHAIRPERSON: In order to follow the evidence. I mean like in my example of a contract and talking about repudiation I would explain what repudiation means and I would explain what summary termination of a contract means. That kind of thing. So if we have the ex – and explanation of those important terms then it helps also to understand because one can – as the evidence proceeds one can go back and say okay this is what this one means. 20 MR CHABI: O k a y. Okay Chair that is – I think I understand you. I h a v e o ff t h e t o p o f m y h e a d p i c k e d u p a f e w t e r m s t h a t I t h i n k w i l l b e pertinent in this submission and I think some of them are ETC. C H A I R P E R S O N : Ye s . A D V M A H L A P E S E L L O : C h a i r. MR CHABI: One of the main ...(intervenes). Page 12 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: If I may? CHAIRPERSON: Ye s , y e s . What is your input here? Give me your input? ADV MAHLAPE SELLO: It is not so much input. One thing I still have to make – to do. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: Place on record Mr Chabi has to confirm that this is his statement. C H A I R P E R S O N : Ye s . 10 ADV MAHLAPE SELLO: And that he stands by it because now we have gone into the statement itself. C H A I R P E R S O N : Ye s . ADV MAHLAPE SELLO: That is the one aspect we had not done. C H A I R P E R S O N : Ye s , n o , n o I d o n o t w a n t h i m t o g o t h e r e . I w a s j u s t ...(intervenes). ADV MAHLAPE SELLO: Because he was beginning to answer you – to a n s w e r. CHAIRPERSON: Ja ja I do not want you to start explaining any terms. M R C H A B I : O k a y. 20 CHAIRPERSON: I just wanted to find out whether having heard what I have said you think for you it would be easy to do that or not, that is what I wanted. Then once we are done then we can start. A D V M A H L A P E S E L L O : Ye s . MR CHABI: I think I can explain a few of the terms used in the b u s i n e s s i n t h e s u b m i s s i o n y e s I c a n C h a i r. Page 13 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: It is doable? MR CHABI: It is doable. CHAIRPERSON: Okay alright. And how do you feel about it? ADV MAHLAPE SELLO: Chair it may ...(intervenes). CHAIRPERSON: Oh you think we are in actuary 101 and you are already in 103. ADV MAHLAPE SELLO: Or 001. CHAIRPERSON: I am 0. ADV MAHLAPE SELLO: Chair I think the structure of the statement we 10 have attempted to capture in part what the Chair is suggesting and – and perhaps as I speak Mr Chabi may apply his mind to it. We are going to work through his evidence in two ways. We are going to work through the slides which summarise the key parts of his evidence. And then with the slide up on the screen we then work through the detail of what is on the screen item by item. We have in the statement set out what his mandate was. What he understood his mandate to be and t h e n w e h a v e s a i d – t h a t i s f o l l o w e d b y a f a i r l y d e t a i l e d m e t h o d o l o g y. My view is that in dealing with those two issues him – he would begin to develop this glossary of terms that will be important and will 20 consistently applied throughout the statement. So that is why I say somewhere between. The statement and what the Chair is suggesting m i g h t j u s t a n s w e r t h e C h a i r ’s q u e s t i o n o r c o n c e r n . C H A I R P E R S O N : Ye s . N o t h a t i s f i n e . B u t t h a t e x p l a n a t i o n o f i m p o r t a n t terms at the beginning is important even before you go into much. Just – it may be that it will not be. It does not have to be all the terms that Page 14 of 173 27 NOVEMBER 2019 – DAY 194 we will come across during the course of your evidence but certain important ones and then when – we move on. ADV MAHLAPE SELLO: And I think Chair Ms Molefe will keep a running list for us here. C H A I R P E R S O N : Ye s . ADV MAHLAPE SELLO: Of the terms and how Mr Chabi defines them. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: And we will type them out and in time update t h e C h a i r ’s f i l e . 10 CHAIRPERSON: Ja. ADV MAHLAPE SELLO: With this glossary of terms. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: So as we go along then perhaps as we come across a term. C H A I R P E R S O N : Ye s . ADV MAHLAPE SELLO: Then we will help define it before we deal with it. CHAIRPERSON: Ja. No that is fine. As long as the important ones you start with that and deal with them after you have confirmed give me 20 those and then the list will not be exhaustive as you would go on and more come up then you can deal with them and explain them as we go along. But certain important ones I think it is important for us to do it t h a t w a y. ADV MAHLAPE SELLO: Indeed C h a i r. ...(intervenes). Page 15 of 173 Now if I may then 27 NOVEMBER 2019 – DAY 194 C H A I R P E R S O N : O k a y. M a y b e b y – m a y b e i f y o u a r e a g o o d t e a c h e r Mr Chabi by the end of today we will be ready for actuary 103. ADV MAHLAPE SELLO: We will be. Just to check with Mr Chabi through you Chair? CHAIRPERSON: Ja. ADV MAHLAPE SELLO: Whether he understood the request regarding t h e p r i n c i p l e s a p p l i c a b l e ? W o u l d y o u b e a b l e o ff t h e t o p o f y o u r h e a d before we go into the detail of 1064 and 100 to deal at – in high level with those principles for the Chair? 10 MR CHABI: I picked up a few pertinent ones. A D V M A H L A P E S E L L O : O k a y. MR CHABI: I thought were pertinent. I can list them and then you can ...(intervenes). A D V M A H L A P E S E L L O : Yo u w i l l b e a b l e t o d e a l w i t h t h e m . M R C H A B I : Te l l m e i f t h e y a r e s u ff i c i e n t . A D V M A H L A P E S E L L O : O k a y. N o t h e n w e w i l l . C H A I R P E R S O N : O k a y. L e t t h e m s w i t c h o ff t h e a i r c o n d i t i o n e r. W h e n you speak. ADV MAHLAPE SELLO: His voice. 20 CHAIRPERSON: I do not hear you as clearly as I should and I do not k n o w i f i t i s t h e a i r c o n d i t i o n e r. S o b u t t h e y w i l l s w i t c h i t f o r n o w. ADV MAHLAPE SELLO: May I suggest – there are some files to your left Mr Chabi please take one and put the microphone on the file then p e r h a p s w e r a i s e t h e m i c r o p h o n e t h a t m i g h t i m p r o v e a u d i b i l i t y. I am not promising it will. And then raise the microphone such that at least Page 16 of 173 27 NOVEMBER 2019 – DAY 194 – pull it closer to you – raise it. MR CHABI: Am I audible now? ADV MAHLAPE SELLO: Not as much. CHAIRPERSON: Just say something again? MR CHABI: Hello. ADV MAHLAPE SELLO: Can I – may I enquire from the technicians whether there is something we can ...(intervenes). CHAIRPERSON: Ja let – can the technicians – do the technicians know if everything is perfect. 10 ADV MAHLAPE SELLO: The technicians ...(intervenes). C H A I R P E R S O N : T h e y s a y e v e r y t h i n g i s p e r f e c t t e c h n i c a l l y. ADV MAHLAPE SELLO: I think this is the best they can do. So perhaps Mr Chabi from time to time I will request you to raise your voice. M R C H A B I : O k a y. ADV MAHLAPE SELLO: And you – I think you can pull the microphone c l o s e r t o y o u a s w e l l . Yo u n e e d t o b e c o m f o r t a b l e . Yo u a r e g o i n g t o b e in that chair for quite some time. C H A I R P E R S O N : Ye s . 20 MR CHABI: Does that work better? ADV MAHLAPE SELLO: Ja. CHAIRPERSON: I think move it a little – away a little bit. I think it is too close. MR CHABI: A bit more. And now? C H A I R P E R S O N : I t h i n k t h a t s e e m s b e t t e r. Page 17 of 173 27 NOVEMBER 2019 – DAY 194 M R C H A B I : O k a y. ADV MAHLAPE SELLO: The message we get back from the technicians is that the air conditioning is interfering with the sound so p e r h a p s i t i s b e t t e r s w i t c h e d o ff . C H A I R P E R S O N : W e l l I a s k e d t h e m t o s w i t c h i t o ff . ADV MAHLAPE SELLO: Should it become unbearably hot we will switch it on again. CHAIRPERSON: Ja. A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. 10 CHAIRPERSON: Okay alright. ADV MAHLAPE SELLO: Now we are ready to start. Mr Chabi you have to your left a file. If you look at the spine it is written Exhibit BB8B1 And Exhibit BB8B2. Right? MR CHABI: Correct. ADV MAHLAPE SELLO: Now you heard my discussion with the Chair that file is divided in two parts. The first part is under tab 1 and the second part is under tab 2. Now let us start with tab 1. CHAIRPERSON: Ms Sello I just want to say this because I have been reminded of it. 20 A D V M A H L A P E S E L L O : Ye s C h a i r. C H A I R P E R S O N : Yo u k n o w I t h i n k t h e L e g a l Te a m s h o u l d t r y a n d m a k e sure that all files – lever arch files that we – that are handed up on the outside – on the spine. ADV MAHLAPE SELLO: They identify the transaction. CHAIRPERSON: They are written what work stream. Page 18 of 173 Like this one 27 NOVEMBER 2019 – DAY 194 s h o u l d h a v e Tr a n s n e t . S o w h e n t h e r e a r e 5 0 f i l e s I c a n k n o w t h e s e a r e Tr a n s n e t ’s s o I d o n o t h a v e t o l o o k a t a n y o n e o f t h e m i f I a m l o o k i n g for Denel file. ADV MAHLAPE SELLO: Indeed. CHAIRPERSON: A Denel file. S o Tr a n s n e t , D e n e l , E s k o m . Ja because otherwise sometimes I might not remember that Mr Chabi gave e v i d e n c e i n r e g a r d t o Tr a n s n e t m a n y m o n t h s f r o m n o w. A D V M A H L A P E S E L L O : I n d e e d C h a i r. N o w e f u l l y u n d e r s t a n d . CHAIRPERSON: Ja. 10 ADV MAHLAPE SELLO: We will update the spine. C H A I R P E R S O N : A n d s h a r e t h e i n f o r m a t i o n w i t h t h e L e g a l Te a m . A D V M A H L A P E S E L L O : Ye s a n d I w i l l – w e w i l l . C H A I R P E R S O N : O k a y. ADV MAHLAPE SELLO: Circulate that Chair thank you. Now at tab 1 there is a pile of documents there. If you turn to page 1 under that tab. Do you find it? There is a document that runs up to page 50. Now you – do you confirm that that is the statement you preferred? CHAIRPERSON: Please switch on your microphone. ADV MAHLAPE SELLO: Oh yes. 20 CHAIRPERSON: Ja. ADV MAHLAPE SELLO: And before I forget you can keep your microphone on it does not interfere with the other microphones. MR CHABI: Thank you. ADV MAHLAPE SELLO: Ye s . So it runs up to page 50. confirm that is the statement you prepared for the Commission? Page 19 of 173 Do you 27 NOVEMBER 2019 – DAY 194 MR CHABI: I do. ADV MAHLAPE SELLO: O k a y. A n d t h e s i g n a t u r e a p p e a r i n g a t 5 0 i s our signature? MR CHABI: It is. ADV MAHLAPE SELLO: That statement has got five annexures to it and that will run to just before tab 2. They are flagged 1 to 5. C H A I R P E R S O N : A c t u a l l y t h e s t a t e m e n t i f a n a ff i d a v i t I s e e a t t h e e n d . ADV MAHLAPE SELLO: Correct so. C H A I R P E R S O N : Ye s . 10 ADV MAHLAPE SELLO: It has been commissioned. It is an actual a ff i d a v i t . C H A I R P E R S O N : Ye s , y e s . J a . H ’ m m . A D V M A H L A P E S E L L O : Ye s . M R C H A B I : H a p p y. ADV MAHLAPE SELLO: And you confirm that those are the annexures to your statement? MR CHABI: I do. A D V M A H L A P E S E L L O : Yo u s t a n d b y w h a t i s s t a t e d i n t h e s t a t e m e n t ? MR CHABI: I do. 20 ADV MAHLAPE SELLO: Are there any changes – significant amendments and changes you would like to make to the statement at this time before it is fully admitted or are you happy with it barring perhaps a typographical error here or? MR CHABI: At this point no. ADV MAHLAPE SELLO: Yo u a r e h a p p y w i t h t h e s t a t e m e n t ? Page 20 of 173 O k a y. 27 NOVEMBER 2019 – DAY 194 Then with that confirmation the Chair permitted that you do not deal with matters set out in paragraphs 1.1 to 1.14. This speaks to your qualifications, your experience and the like because those had – you p r e v i o u s l y p l a c e d o n r e c o r d w h e n y o u a p p e a r e d o n t h e 2 9 t h o f M a y, y o u recall that? MR CHABI: I do. ADV MAHLAPE SELLO: So by right our plan was to start from page 5 u n d e r i t e m 2 a n d t h e h e a d i n g i s M a n d a t e . O k a y. B u t b e f o r e w e d o s o the Chair has made a request to you. The first is to highlight the key 10 principles that are applicable in the exercise that you conducted and the second would be to identify those key terms that are relevant to our d i s c u s s i o n t o d a y. S o l e t u s s t a r t w i t h t h e p r i n c i p l e s . M R C H A B I : O k a y. T h a n k s A d v o c a t e . S o C h a i r j u s t a f e w w o r d s I h a v e picked up for purposes of definition are ETC. ETC I think that occurs a number of times within the statement. NPV and ...(intervenes). CHAIRPERSON: ETC? MR CHABI: ETC. C H A I R P E R S O N : Ye s . J a . MR CHABI: It appears 20 ADV MAHLAPE SELLO: May I just interject. I had said we start with principles it sounds like you are dealing with terms. M R C H A B I : Te r m s C o r r e c t . ADV MAHLAPE SELLO: Okay I am happy that you do so just for the r e c o r d t o b e c l e a r. C H A I R P E R S O N : Ye s . Page 21 of 173 27 NOVEMBER 2019 – DAY 194 M R C H A B I : Yo u a r e f i r s t d e a l i n g w i t h t e r m s . CHAIRPERSON: Ja. A D V M A H L A P E S E L L O : T h e n w e w i l l g e t t o t h e p r i n c i p l e s t h e r e a f t e r. C H A I R P E R S O N : O k a y. MR CHABI: Well I took terms to be ...(intervenes). ADV MAHLAPE SELLO: The principles. M R C H A B I : T h e p r i n c i p l e s i n t h i s i n s t a n c e y e s . A n d t h e C h a i r. CHAIRPERSON: I do not know whether it is your voice. May it is not t h e – m a y b e i t i s y o u r v o i c e . M a y b e y o u n e e d t o s p e a k a l i t t l e s l o w e r. 10 I a m n o t s u r e a n d a l i t t l e l o u d e r. M a y b e t h i s m i c r o p h o n e d o e s n o t w a n t m e t o h e a r w h a t y o u h a v e t o s a y. M R C H A B I : O k a y. CHAIRPERSON: So let – ja. Let – try – let us see how it goes. M R C H A B I : H o w i t g o e s . O k a y. CHAIRPERSON: Ja. MR CHABI: So I took terms to mean principles in this instance, b e c a u s e a s t o m y u n d e r s t a n d i n g I t h i n k t h e d i ff i c u l t y i s a r o u n d t h e terms used in the business case. What do these terms actually mean? CHAIRPERSON: 20 Well you need to explain the essential important terms, but I also would like you to say these are the principles and it may be that the terms that are important to understand are linked to certain principles and if that is the case. It is – you are welcome to say w e l l E T C t h i s i s w h a t i t s t a n d s f o r. There are some – there is some principle or a principle that is connected with it and this is what I will – what it is and so on. So how Page 22 of 173 27 NOVEMBER 2019 – DAY 194 y o u d e a l w i t h i t I w a n t t o g i v e y o u f l e x i b i l i t y. A s l o n g a s i n t h e e n d I have got that. M R C H A B I : O k a y. CHAIRPERSON: Ja. MR CHABI: So I hope the principles come out as I define the terms. A D V M A H L A P E S E L L O : O k a y. M R C H A B I : H o p e f u l l y w i l l . O k a y. S o t h e t e r m s I h a v e p i c k e d u p a r e ETC. N P V b e i n g N e t P r e s e n t Va l u e . Escalation. That appears also quite a number of times in the document. Forex Hedging. So foreign 10 c u r r e n c y r i s k h e d g i n g . I t h i n k … ( i n d i s t i n c t ) m a y b e a n o t h e r. A D V M A H L A P E S E L L O : O k a y. T h e n j u s t b r i e f l y s p e a k t o e a c h o n e o f them. M R C H A B I : O k a y. ADV MAHLAPE SELLO: Starting with ETC. MR CHABI: O k a y. I like to mention that as we carry on with the statement I will continue to emphasise the definition. CHAIRPERSON: Ye s . Well what – whatever you have done now is w o r k i n g , b e c a u s e I c a n h e a r y o u q u i t e w e l l n o w. M R C H A B I : O k a y. 20 CHAIRPERSON: So stick to it. MR CHABI: A l r i g h t C h a i r. O k a y. S o s t a r t i n g o ff w i t h E T C . What is E T C ? I t s t a n d s f o r E s t i m a t e d To t a l C o s t . I n v e r y s i m p l e t e r m s a n d o n e of the slides speak to it. It is the summation ...(intervenes). C H A I R P E R S O N : S o r r y. E s t i m a t e d . . . ( i n t e r v e n e s ) . M R C H A B I : To t a l . . . ( i n t e r v e n e s ) . Page 23 of 173 27 NOVEMBER 2019 – DAY 194 C H A I R P E R S O N : To t a l C o s t . MR CHABI: Cost. C H A I R P E R S O N : Ye s . MR CHABI: It is the total or the sum of the cost of acquiring locomotives in each of the years over the delivery period. It could be five, six, seven years. seven years. In this instance in the business case it was So each year in those seven years there was a cost to requiring locomotives. ETC simply takes the summation of those costs. CHAIRPERSON: If the locomotives were to be acquired all at the same 10 time is the position that you would not have ETC, because you would not have to estimate anything. Yo u w o u l d h a v e t o t a l c o s t a n d y o u would know what they are, because you are talking about acquiring the l o c o m o t i v e s . Yo u k n o w h o w m a n y t h e r e a r e . Yo u k n o w h o w m u c h e a c h i s . Yo u k n o w o n w h a t d a t e y o u w i l l r e c e i v e t h e m . D e l i v e r y w i l l h a p p e n . Yo u k n o w w h a t t h e t r a n s p o r t c o s t s will be for them to be transported from China or wherever to South Africa. Therefore you will know total – the total cost and not an estimated cost. Is it – would that be correct to understand it that way? M R C H A B I : O k a y. S o i f t h e l o c o m o t i v e s h a d t o b e a c q u i r e d a l l a t t h e 20 same time you would still have ETC. Reason being in the business case assumptions had to be made about the price of the diesel and the electric locomotive. would charge. T h a t t h e a s s u m p t i o n s o n t h e p r i c e t h e O E M ’s OEM in this instance being Oral Equipment M a n u f a c t u r e r. S o i t i s s t i l l a n e s t i m a t e b e c a u s e y o u d o n o t k n o w a t t h e time of writing the business case what the manufacturers would charge Page 24 of 173 27 NOVEMBER 2019 – DAY 194 you for the locomotives. CHAIRPERSON: Because there is the process of manufacturing? MR CHABI: Not because they in the process of manufacturing, but because you – they have not given you a price for the locomotives. So you would only know at contract stage. I w o u l d s a y. What they are actually charging you per locomotive. CHAIRPERSON: If – but ETC would not apply to something that you can go and buy and take delivery of immediately? MR CHABI: It should not. No. 10 CHAIRPERSON: It should not? MR CHABI: Yo u w o u l d k n o w a c o s t i f y o u c a n a c t u a l l y g o o u t ...(intervenes). CHAIRPERSON: Ja, because you look and you see what the ...(intervenes). MR CHABI: The cost is. CHAIRPERSON: What the cost – the price is. Maybe it is something that will require you to hire a certain mode of transport to take you to y o u r f a c t o r y o r h o m e . Yo u t h e n k n o w w h a t t h e c o s t o f t a k i n g t h a t w i l l be and if that were to be the case would that come under total cost as 20 well or would total cost be limited to the purchase price? MR CHABI: Purchase price. CHAIRPERSON: H’mm. MR CHABI: It will be limited to the purchase price. C H A I R P E R S O N : Yo u w o u l d i n c l u d e i t ? M R C H A B I : N o . N o . To t a l c o s t i n t h i s i n s t a n c e . . . ( i n t e r v e n e s ) . Page 25 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: Ja. MR CHABI: Would be limited to the purchase price. C H A I R P E R S O N : O h . O k a y. O k a y. O k a y. MR CHABI: So we actually cover those details as you look through the model. C H A I R P E R S O N : Ye s . MR CHABI: Looking at where ETC actually falls in the whole list of costs. C H A I R P E R S O N : Ye s . I t m a y b e t h a t I a m t h i n k i n g o f s o m e t h i n g e l s e i n 10 your statement. I think which has got ownership costs ...(intervenes). MR CHABI: Right. CHAIRPERSON: And so on. M R C H A B I : To t a l C o s t O w n e r s h i p . Ye s . CHAIRPERSON: Ja. MR CHABI: That is ETC ...(intervenes). C H A I R P E R S O N : Ye s . MR CHABI: Including other costs. C H A I R P E R S O N : O k a y, b e c a u s e m a y b e w h e n w e c o m e t o t h a t a n d y o u talk about that at the right time. As I was thinking about it if I have to 20 go and buy a certain article which requires me to hire a special vehicle t h a t m u s t t a k e i t t o m y f a c t o r y. T h e n i n o r d e r f o r m e t o o w n t h a t a r t i c l e and be able to use it I have to incur the transport cost to take it from where I bought it to where I need to use it. MR CHABI: Correct. So the cost of operationalising ...(intervenes). CHAIRPERSON: Ja. Page 26 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: The equipment. CHAIRPERSON: Ja. MR CHABI: Does not form part of the ETC. C H A I R P E R S O N : O h . O k a y. M R C H A B I : Ye s . C H A I R P E R S O N : N o . T h a n k y o u . Ye s . Yo u m a y c o n t i n u e . M R C H A B I : O k a y. A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. Yo u m a y c o n t i n u e M r C h a b i a n d p e r h a p s a t t h i s j u n c t u r e f o l l o w i n g o n t h e C h a i r ’s q u e s t i o n s . 10 Yo u might want to very briefly tabulate those factors that make up ETC. M R C H A B I : O k a y. S o E T C a s w e w i l l d i s c u s s a s w e l l a g a i n l a t e r – i s the purchase price of the locomotive. Inflation on the price. CHAIRPERSON: What on the price? MR CHABI: Inflation on the price. C H A I R P E R S O N : O k a y. MR CHABI: In fact that is what we refer to as escalation in the statement. O k a y. So escalation is synonymous with inflation in this instance. Foreign currency hedging costs and contingencies. essentially those four items make up ETC. 20 have a 2% localisation premium. So In the business case you That is included as part of the locomotive price. A D V M A H L A P E S E L L O : O k a y. T h a n k y o u . S o n o w y o u h a v e d e f i n e d ETC. MR CHABI: And in part escalation I suppose – inflation. ADV MAHLAPE SELLO: Okay and you have said your next was Page 27 of 173 27 NOVEMBER 2019 – DAY 194 escalation which you said that is synonymous with inflation? C H A I R P E R S O N : Ye s . MR CHABI: Correct, it is probably just inflation on the price that would h a v e b e e n q u o t e d e a r l i e r. C H A I R P E R S O N : Ye s . MR CHABI: So the price today is not the price a year from today ...(intervenes). C H A I R P E R S O N : Ye s . MR CHABI: 10 A n d t h a t d i ff e r e n c e i s w h a t w e r e f e r t o a s i n f l a t i o n . In most instances we get price increases and not price decreases. A D V M A H L A P E S E L L O : Yo u m e n t i o n e d N P V. MR CHABI: N P V a n d I t h i n k b e f o r e I g o i n t o N P V. It is important to d i s c u s s w h a t P V i s . W h i c h i s s i m p l y P r e s e n t Va l u e . I t i s t h e v a l u e – i t is the current value. T h e v a l u e i n t o d a y ’s t e r m s . As I mentioned e a r l i e r t h e p r i c e t o d a y i s n o t t h e p r i c e i n a y e a r ’s t i m e . However the p r i c e i n a y e a r ’s t i m e c a n b e d i s c o u n t e d t o g i v e y o u a p r i c e t o d a y. If that makes sense and it is discounted at a certain rate. That rate is termed the discount rate and normally with projects it is determined from a detailed risk assessment of the project. 20 So you assess the risk within the project and you arrive as a discount rate to quantify that risk and that discount which is then used to bring your cash flows back to current terms. In the case of the business – in the instance of the business case it is 18 April 2013. CHAIRPERSON: H’mm. MR CHABI: S o i f w e t a l k a b o u t P r e s e n t Va l u e i n t h e c o n t e x t o f t h e Page 28 of 173 27 NOVEMBER 2019 – DAY 194 business case. We are referring to 18 April 2013. C H A I R P E R S O N : H ’ m m . H ’ m m . O k a y. ADV MAHLAPE SELLO: And when we talk of the NPV and please state what NPV stands for in full. MR CHABI: O k a y. S o N P V s t a n d s f o r N e t P r e s e n t Va l u e . In very simple terms it is – gives an idea of the profit you are likely to make on the project. So you value your income or shall I say your revenue in t o d a y ’s t e r m s a n d s o t h a t i s t h e P r e s e n t Va l u e o f e v e r y t h i n g y o u e x p e c t t o r e c e i v e f r o m t h e p r o j e c t . O k a y. A l l c a s h f l o w t h a t i s c o m i n g i n . Yo u a l s o v a l u e y o u r e x p e n s e s i n p r e s e n t v a l u e t e r m s a n d b y 10 P r e s e n t Va l u e t e r m s I m e a n 1 8 A p r i l 2 0 1 3 i n t h e c o s t o f t h e b u s i n e s s case. T h e d i ff e r e n c e b e t w e e n t h e t w o g i v e s y o u r N e t P r e s e n t Va l u e . So it is essentially the present value of your revenue net the Present Va l u e o f y o u r c o s t s a n d i t g i v e s a n i d e a o f y o u r p r o f i t . ADV MAHLAPE SELLO: O k a y. Then you made mention of Forex Hedging. MR CHABI: O k a y. So hedging essentially is a transaction you undertake to eliminate risk. I can then also talk about partial e l i m i n a t i o n a n d s o f o r t h , b u t i n t h e c o n t e x t o f Tr a n s n e t . 20 CHAIRPERSON: I am sorry Mr Chabi. Can you speak a little away from the ...(intervenes). MR CHABI: The mic. CHAIRPERSON: The mic. M R C H A B I : O k a y. CHAIRPERSON: I want to see when it is that I hear you quite well and Page 29 of 173 27 NOVEMBER 2019 – DAY 194 when it is that I cannot ...(intervenes). M R C H A B I : Yo u c a n n o t h e a r m e . CHAIRPERSON: Hear you so well. MR CHABI: Is it better now? C H A I R P E R S O N : J u s t s i t t i n g f r o m t h a t d i s t a n c e . L e t m e h e a r. MR CHABI: Is it better now? C H A I R P E R S O N : I t h i n k i t i s b e t t e r. J a . M R C H A B I : I t i s b e t t e r. O k a y. CHAIRPERSON: Ja. 10 M R C H A B I : A l r i g h t . I t h i n k I w a s o n F o r e i g n C u r r e n c y H e d g i n g . O k a y. So hedging essentially allows you to eliminate ...(intervenes). CHAIRPERSON: Ja. T h a t i s c e r t a i n l y b e t t e r, y o u c a n l e a v e t h a t distance. Ja. MR CHABI: So hedging simply implies elimination of risk. In the cost – c o n t e x t o f Tr a n s n e t i t i s e l i m i n a t i o n o f r i s k a n d n o w w e a r e t a l k i n g about foreign currency risk hedging. eliminate foreign currency risk. So a transaction undertaken to In the sense that you do not want to subject yourselves to fluctuations in the foreign currency in the future. S o y o u w a n t t o b e – s o r r y. 20 CHAIRPERSON: So it is protection against risk? MR CHABI: Correct. It is insurance. C H A I R P E R S O N : J a . O k a y. ADV MAHLAPE SELLO: Against fluctuation in foreign – in exchange rate? MR CHABI: In exchange rate risk. So you know today what you are Page 30 of 173 27 NOVEMBER 2019 – DAY 194 g o i n g t o p a y f o r t h a t c u r r e n c y i n a y e a r ’s t i m e i n t w o y e a r s ’ t i m e i n three years’ time and so forth. That is the point of hedging. So if you hedge you are getting rid of your upside. In other words if the currency does well you do not benefit from it. If it does poorly you also do not s u ff e r f r o m i t . ADV MAHLAPE SELLO: Alright. So the – so far we have got the four definitions. Any other term you can think of currently that perhaps you might want to highlight? MR CHABI: 10 I think at this point not, but as we carry on if they come up. C H A I R P E R S O N : Ye s . O k a y. MR CHABI: Then we can deal with them. C H A I R P E R S O N : O k a y. T h a t i s f i n e . ADV MAHLAPE SELLO: C h a i r n o w t u r n i n g t o y o u i f I m a y. I do not know whether what we have just done in part answers the question the issue of principles that the Chair posed or perhaps those will be clarified as we go along. CHAIRPERSON: I suspect it does not, because it is just an explanation of the terms. 20 A D V M A H L A P E S E L L O : Ye s . CHAIRPERSON: Without saying it comes about because there is this principle or this term arises because of this problem and the principle that applies in regard to this problem is the following. So – but I do not w a n t t o m a k e a n y t h i n g d i ff i c u l t . If from your point of view you think there are some principles that you can deal with now or it is easy to Page 31 of 173 27 NOVEMBER 2019 – DAY 194 deal with them as we go along. That is fine. What – how do you feel? MR CHABI: So I will opt with then for dealing along – well ...(intervenes). C H A I R P E R S O N : Ye s . MR CHABI: Dealing with them as we go along. C H A I R P E R S O N : O k a y. A l r i g h t . M R C H A B I : T h a t i s f i n e C h a i r. ADV MAHLAPE SELLO: Then I would suggest Chair with your leave that we deal with the mandate and the methodology and we take stock 10 thereafter ...(intervenes). C H A I R P E R S O N : Ye s . O k a y. ADV MAHLAPE SELLO: And see whether we have been able to ...(intervenes). CHAIRPERSON: Ja. ADV MAHLAPE SELLO: Clarify any pertinent ...(intervenes). C H A I R P E R S O N : Ye s . Ye s . O k a y. ADV MAHLAPE SELLO: For that purpose Chair I would request that you turn to page 5 of the statement at paragraph 2 and have open next to you if you may Chair the presentation, slide 2. 20 CHAIRPERSON: Is that going to be here? A D V M A H L A P E S E L L O : Ye s . I t i s B B 8 B . CHAIRPERSON: Did I not confuse things when I was admitting this. ADV MAHLAPE SELLO: We indicated that BB8B are the slides. C H A I R P E R S O N : O h . O k a y. ADV MAHLAPE SELLO: Then we have ...(intervenes). Page 32 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: This is one and two. ADV MAHLAPE SELLO: One and two. C H A I R P E R S O N : Ye s . O k a y, b u t h a s t h i s b e e n a d m i t t e d p r e v i o u s l y ? ADV MAHLAPE SELLO: It was admitted ...(intervenes). CHAIRPERSON: Oh. A D V M A H L A P E S E L L O : O n t h e 2 9 t h o f M a y. C H A I R P E R S O N : O k a y. O k a y. S o I g o t o p a g e 5 o f t h e s t a t e m e n t , b u t I have available to me – I have to look at what page of ...(intervenes). ADV MAHLAPE SELLO: Ja. We will be working ...(intervenes). 10 CHAIRPERSON: Slides. ADV MAHLAPE SELLO: But currently what is at ...(intervenes). C H A I R P E R S O N : Tw o ? ADV MAHLAPE SELLO: Page – what is at page 5 of the statement paragraph 2 is the mandate. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: And perhaps as we speak through the mandate we might be able to clarify some of the principles. Please h a v e r e g a r d t o y o u r p a r a g r a p h 2 a t p a g e 5 M r C h a b i . Yo u s e t o u t u n d e r paragraph 2 the mandate that you had obtained with MNS. Can we deal 20 with what specifically you were required to do and we do in respect of each issue you were requested to look into? MR CHABI: Certainly Advocate. A D V M A H L A P E S E L L O : Ye s . MR CHABI: Shall I take you through the mandate? A D V M A H L A P E S E L L O : Ye s p l e a s e . L e t u s t a l k o f y o u r m a n d a t e . W e Page 33 of 173 27 NOVEMBER 2019 – DAY 194 can cross refer to your original mandate, which is also an annexure to your statement, but let us just talk about the mandate. What were you – what was required of you to do? MR CHABI: O k a y. So maybe some context I suppose is ...(intervenes). A D V M A H L A P E S E L L O : Ye s . MR CHABI: I m p o r t a n t h e r e a n d w e w i l l d e a l w i t h i t a b i t l a t e r. I suppose when we look at the increase in ETC. So a memorandum was p r e s e n t e d t o t h e Tr a n s n e t B o a r d o f D i r e c t o r s o n t h e 2 3 r d o f M a y 2 0 1 4 . 10 In justifying or requesting an increase in the ETC from 38.6 billion to 54.5 billion. S o t h e r e w e r e r e a s o n s s e t o u t a n d q u a n t u m ’s l a i d o u t n e x t t o those reasons to explain – to justify the R15.9 billion increase in ETC. So MNS in the course of its investigations asked all five holdings to look through the reasons put forward. Assess those reasons for r e a s o n a b i l i t y. L o o k t h r o u g h t h e q u a n t u m ’s s e t o u t n e x t t o t h e r e a s o n s . Also assess those quanta for reasonability and not only that. To g o back to that 38.6 billion and determine ...(intervenes). CHAIRPERSON: 20 Just raise your voice again and move – maybe you can move the mic a little bit further from you. I know we said you must b r i n g i t c l o s e r, b u t e a c h t i m e I a m g a g i n g w h e n I c a n n o t h e a r y o u w e l l . So – ja. I f y o u c a n t h e n j u s t s p e a k a l i t t l e b i t a w a y, b u t r a i s e y o u r voice again. M R C H A B I : O k a y. S o j u s t c a r r y i n g o n . M N S t h e n a s k e d u s i n a d d i t i o n t o t h e r e a s o n s p u t f o r w a r d f o r t h e i n c r e a s e a n d t h e q u a n t u m ’s p u t – s e t Page 34 of 173 27 NOVEMBER 2019 – DAY 194 out next to those reasons to go back to the 38.6 billion. So that was – that is 30 – the initial ETC presented to the board and assess – well determine if that ETC of 30.6 billion is reasonable – is justifiable. So in other words looking through the variables. Looking through the assumptions and I suppose at this point I should explain what variables and assumptions are. A variable is any quantity that can take any – that varies. Actually it is pretty much that. So in this instance when you are looking at revenue. Revenue is set in s u b c o m p o n e n t s . Yo u h a v e t o m a k e a s s u m p t i o n s o n t h o s e c o m p o n e n t s . 10 F o r e x a m p l e t h e t a r i ff . W e w i l l s p e a k t o t h a t a b i t l a t e r. T h a t is a variable, because that number can be anything. from year to year as we will see. In fact it varies The volumes are also a variable. T h e y c h a n g e f r o m y e a r t o y e a r. O k a y. S o w h e n w e t a l k a b o u t v a r i a b l e s we talk about those line items. O k a y. So we look at revenue and revenue has its own set of variables. Costs also have their own sets of variables. also a variable in this instance. Escalation is Forex Hedging is also a variable, because Forex hedge changes depending when you actually contract or decide to hedge. I think that is a better term. So the mandate was to 20 go and look at those variables within the 38.6 billion business case. Well the business case relating to that ETC. A s s e s s t h o s e v a r i a b l e s f o r r e a s o n a b i l i t y. T h e a s s u m p t i o n i s the value you assign to the variable. So inflation being a variable. The assumption is the rate that you plug into that variable. 5% would be the assumption in this instance if five percent is the rate that you Page 35 of 173 27 NOVEMBER 2019 – DAY 194 assigned to inflation. S o t h a t i s t h e d i ff e r e n c e b e t w e e n v a r i a b l e a n d assumption in this instance. So we are required to assess both. ADV MAHLAPE SELLO: So then you are informed and are given supporting documentation that the board approved 38.6 billion ETC? MR CHABI: Correct Advocate. ADV MAHLAPE SELLO: Yo u a r e r e q u e s t e d t o e v a l u a t e t h a t E T C ...(intervenes). MR CHABI: Correct. ADV MAHLAPE SELLO: And you test the reasonability of the variables 10 and the assumptions of the 38.6 billion? MR CHABI: Correct. ADV MAHLAPE SELLO: To c o n f i r m o r o t h e r w i s e t h a t t h e v a l u e s attached to every factor that make up 38.6 billion are reasonable and are correct? MR CHABI: Correct. ADV MAHLAPE SELLO: Having done that you are then requested to compare that 38.6 billion ETC with the newly approved ETC of 54 billion? MR CHABI: Correct. 20 ADV MAHLAPE SELLO: And conduct the same exercise in respect of 54 billion? MR CHABI: Correct. ADV MAHLAPE SELLO: As you did with the 36 – 38.6 billion ETC and e x p r e s s a v i e w t h e r e f o r e w h e t h e r t h e d i ff e r e n c e b e i n g 1 5 . 4 b i l l i o n w a s justified - 15.9 billion was justified in the circumstances? Page 36 of 173 27 NOVEMBER 2019 – DAY 194 M R C H A B I : B i l l i o n . Ye s . ADV MAHLAPE SELLO: Thank you. That was your mandate? M R C H A B I : T h a t w a s t h e m a n d a t e . Ye s . ADV MAHLAPE SELLO: Now at paragraph 2.2 overleaf at page 6 you t h e n i n t r o d u c e a n o t h e r t r a n s a c t i o n a n d t h i s i s t h e 1 0 0 . Yo u d o c o n f i r m that Annexure AC1 is your written mandate from MNS and your AC1 will appear at page 51? MR CHABI: Correct Advocate. ADV MAHLAPE SELLO: Now a reading of AC1 would seem to indicate 10 that that particular written mandate is in respect of 1064 only? MR CHABI: Correct. ADV MAHLAPE SELLO: Now at your paragraph 2.2 you now speak of ...(intervenes). C H A I R P E R S O N : I a m s o r r y. I a m s o r r y. A D V M A H L A P E S E L L O : Ye s C h a i r. CHAIRPERSON: When you said AC1. It is ...(intervenes). ADV MAHLAPE SELLO: It is Annexure AC1. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: Apologies. Annexure AC1. 20 CHAIRPERSON: Later on you said when you read AC1. It sounded like 81. So I was wondering ADV MAHLAPE SELLO: I should remember to say ...(intervenes). C H A I R P E R S O N : T h e p a g e i s 5 2 . O k a y. ADV MAHLAPE SELLO: Annexure AC1 at page ...(intervenes). CHAIRPERSON: I d o n o t w h a t t h e t e c h n o l o g y i s d o i n g t o u s t o d a y. Page 37 of 173 27 NOVEMBER 2019 – DAY 194 Ye s . O k a y. Ye s . ADV MAHLAPE SELLO: And that is at page 52. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: As the Chair points out. C H A I R P E R S O N : O k a y. ADV MAHLAPE SELLO: The point I was making to Mr Chabi is that Annexure AC1 that written mandate is specific to the 1064 transaction. At his statement paragraph 2.2 he however introduces the other transaction and I would like him to explain ...(intervenes). 10 CHAIRPERSON: Ja. ADV MAHLAPE SELLO: What he would like the Chair to understand by ...(intervenes). CHAIRPERSON: Ja. ADV MAHLAPE SELLO: What is set out in paragraph 2.2? MR CHABI: locomotive O k a y. transaction So during MNS’ investigation of the 1064 they came across the transaction. If that is the right ...(intervenes). CHAIRPERSON: Has it become ...(intervenes). ADV MAHLAPE SELLO: Inaudible again. 20 MR CHABI: Horrible. CHAIRPERSON: Hot? Is it hot? MR CHABI: It is getting hot. CHAIRPERSON: Is that so? M R C H A B I : I t i s o k a y. I t i s f i n e . C H A I R P E R S O N : W i t h y o u r j a c k e t o ff i t i s m a n a g e a b l e . Page 38 of 173 100 locomotive 27 NOVEMBER 2019 – DAY 194 M R C H A B I : I t s h o u l d b e f i n e . Ye s . C H A I R P E R S O N : O k a y. A l r i g h t . J a . N o . I t i s j u s t t h a t w h e n t h e a i r conditioner is on. It makes ...(intervenes). MR CHABI: It interferes with the ...(intervenes). C H A I R P E R S O N : I t i s m o r e d i ff i c u l t t o h e a r y o u . M R C H A B I : O k a y. CHAIRPERSON: But we see as we go if it becomes too hot for everyone. A D V M A H L A P E S E L L O : C h a i r i t w o u l d a p p e a r i t i s o k a y f o r e v e r y b o d y. 10 It must have something to do with that seat. MR CHABI: It is the seat. C H A I R P E R S O N : Ye s . MR CHABI: O k a y. So during MNS’ investigation of the 1064 locomotives transaction they came across the 100 and I think that was a d d e d o n t o t h e i r m a n d a t e f r o m Tr a n s n e t . T h e y t h e n a s k e d u s a s A L L 5 Holding to looking into the 100 with the same mandate from the 1064. However the validation of the initial ETC was not part of the mandate – of the 100 locomotives mandate. So if I can clarify that. With the 1064 locomotives we had to 20 validate the 38.6 billion and then look at the increase. With the 100 the mandate was to look at the increase and not validate the initial 3.8 billion. ADV MAHLAPE SELLO: And this you call the extension of the mandate and it is correct to say that that was – that extension was not in writing? Page 39 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: It was not. ADV MAHLAPE SELLO: It was verbal. Communicated directly to you? MR CHABI: Correct. ADV MAHLAPE SELLO: By a partner of MNS? MR CHABI: Correct. ADV MAHLAPE SELLO: And you confirm that you understood the mandate correctly? MR CHABI: I believe I do. ADV MAHLAPE SELLO: And you have since ...(intervenes). 10 M R C H A B I : I d i d . S o r r y. A D V M A H L A P E S E L L O : Yo u h a v e s i n c e s u b m i t t e d a r e p o r t s p e c i f i c t o that mandate? MR CHABI: I did. ADV MAHLAPE SELLO: Thank you. Yo u p r o c e e d t h e n a n d y o u suggest that you will deal with each transaction in turn at your paragraph 2.3. Now we are dealing specifically with 1064. We will c o m e b a c k a t a l a t e r p o i n t t o c o m e d e a l w i t h 1 0 0 . Yo u h a v e s e t o u t i n very brief terms the methodology that you employed in this investigation or in both investigations in fact and this you set out in 20 your paragraph 3. Without necessarily reading everything that you set o u t i n p a r a g r a p h 3 p l e a s e h i g h l i g h t t h e k e y a s p e c t s o f t h e m e t h o d o l o g y. MR CHABI: So methodology here simply refers to the information that we used to assist us in the investigation and the exercises that we conducted to test our own analysis of the work that we undertook. So we got a range of documents from MNS to assist us with this financial Page 40 of 173 27 NOVEMBER 2019 – DAY 194 i n v e s t i g a t i o n . S o m e o f t h e m b e i n g t h e b e s t a n d f i n a l o ff e r p r i c e l e t t e r s . The various memoranda that appear – memorandums that were relevant to the business case – the various business cases as w e l l a n d o t h e r r e p o r t s p r o d u c e d b y t h e Tr a n s n e t O ff i c i a l s w h i l e a s s e s s i n g t h e t r a n s a c t i o n w i t h t h e O E M ’s . We also had to source i n f o r m a t i o n o f c o u r s e o u t s i d e o f M N S a n d Tr a n s n e t t o v a l i d a t e t h e assumptions to the variables applied within the business case and some of those – well the sides from which you sourced information include the South African Reserve Bank. 10 I mean you have got the US Labour – Bureau for Labour S t a t i s t i c s b e i n g a n o t h e r. T h e O E C D w e b s i t e s a n d s o f o r t h . T h o m s o n R e u t e r s b e i n g a f i n a n c i a l d e p o s i t o r y. W e t h e n h a d t o – n o t h a d t o , b u t we then decided to benchmark. The approach taken to mauling the various components with what would normally be done in the industry to see if – to determine if our approach was actually correct and defendable. W e a l s o h a d t o h a v e o u r w o r k r e v i e w e d b y a n e x t e r n a l p a r t y. As is required by the profession. One of the standards speak to that. That your work gets reviewed by somebody you deem to have the 20 relevant knowledge, expertise, experience to review your work. Okay and we also had to conduct – we also approached the market particularly around the foreign currency hedging. So the Forex curve and we will look at that a little later to d e t e r m i n e w h e t h e r t h e c u r v e t h a t Tr a n s n e t a p p l i e d a t t h e t i m e w a s w h a t t h e m a r k e t w i l l h a v e o ff e r e d . S o i n o t h e r w o r d s w h e t h e r F o r e x H e d g i n g Page 41 of 173 27 NOVEMBER 2019 – DAY 194 was applied or not. ADV MAHLAPE SELLO: Now if I may ask you about benchmarking. Whose work did you benchmark. Is it your work or is it the business c a s e t h a t w a s d e v e l o p e d b y Tr a n s n e t ? What did you subject to benchmarking in this instance? MR CHABI: My work. A D V M A H L A P E S E L L O : Yo u r o w n w o r k ? MR CHABI: Correct. A D V M A H L A P E S E L L O : N o w – t h e n y o u m a d e m e n t i o n o f p e e r r e v i e w. 10 It – your statement does not state, but what was the outcome of that exercise – of that peer review? M R C H A B I : W e l l i t w a s s i g n e d o ff . T h e r e w e r e a f e w c h a n g e s f r o m t h e reviewer in the results that I obtained. None to the input. None to the m e t h o d o l o g y, b u t t h e r e s u l t s . Ye s . ADV MAHLAPE SELLO: So would it be correct to conclude that a sign o ff f o l l o w i n g a p e e r r e v i e w i s s u p p o r t f o r y o u r m e t h o d o l o g y a n d conclusions as contained in your documentation or in your report? MR CHABI: Correct. ADV MAHLAPE SELLO: 20 O k a y, y o u t h e n v e r y b r i e f l y b e f o r e y o u d e a l with the detail of the issues you were requested to investigate you provide a summary of findings, okay and that you deal with from your paragraph 4, because it is going to get a bit technical and at times hairy when you deal with the detail, it might be worth our while to look at your mandate, every aspect of your mandate and then we have a sense of what your findings were in relation to each mandate, then we Page 42 of 173 27 NOVEMBER 2019 – DAY 194 w i l l c o m e d e a l w i t h h o w y o u a r r i v e d a t t h a t f i n d i n g , o k a y. Now as we said your first mandate was as set-out at your paragraph 2.1.1 and you say it was to assist the reasonability of the variables and assumptions used in modelling the 18 April 2013 business case, you see that? Now what was your finding in that regard, in very brief terms? MR CHABI: Okay so we were happy with the variables and assumptions used within the business case, there were I suppose minor changes, we would have matched the model but those changes did not 10 invalidate the outcome of the business case, I guess the result would n o t h a v e b e e n m a t e r i a l l y d i ff e r e n t t o w h a t w a s p r e s e n t e d t o t h e B o a r d , so we were overall happy with the variables and assumptions. ADV MAHLAPE SELLO: And that finding – sorry – and that finding you make at paragraph 4.1.1. MR CHABI: Correct. ADV MAHLAPE SELLO: C o r r e c t , o k a y. Yo u r n e x t t h e n w a s t o a s s e s s the accuracy of the ETC of R38.6 billion, and what was the outcome of that? MR CHABI: 20 We were happy with the ETC of R38.6 billion. ADV MAHLAPE SELLO: So you satisfied yourself that the manner in which the ETC of R38.6 billion was calculated and computed was correct? MR CHABI: S o w e w e r e – g i v e n t h e d e f i n i t i o n o f w h a t E T C i s , i t ’s j u s t a summation of the costs for the various units we were happy that the ETC provided an acceptable price for Page 43 of 173 the acquisition of the 27 NOVEMBER 2019 – DAY 194 locomotives. ADV MAHLAPE SELLO: So the R38.6 billion therefore is a defensible E T C o r n u m b e r. MR CHABI: N u m b e r, E T C , c o r r e c t i t i s . ADV MAHLAPE SELLO: Okay and that you set out 4.1.2. Yo u t h e n state that your next was to identify the reasons for the increase in ETC from R38.6 billion to R54.4 billion and in doing so to test the possibility of the reasons put forward for the R15.9 billion increase in ETC and to opine on the reasonability of the increase in ETC, and what was your 10 finding in that regard? MR CHABI: Well there was a need to increase the ETC but not to the tune of R59.9 billion, so the R59.9 billion in its totality was not justifiable. ADV MAHLAPE SELLO: MR CHABI: Was not justifiable? In our view yes. ADV MAHLAPE SELLO: O k a y, y o u d e a l w i t h o t h e r a s p e c t s i n r e l a t i o n to this issue at 4.1.3 would you like to quickly highlight those? MR CHABI: Okay so we concluded an 80% increase in ETC, and that i s t a k i n g i n t o a c c o u n t Tr a n s n e t E n g i n e e r i n g s c o p e , o k a y w o u l d i t b e 20 more acceptable as opposed to the 41% increase that we see in the m e m o r a n d u m , t h a t 3 8 . 6 , t h e 1 5 . 9 b i l l i o n i s 4 1 % o f t h e 3 8 . 6 , o k a y, s o w e felt 41% was too large an increase, should we come to the conclusion t h a t Tr a n s n e t E n g i n e e r i n g S c o p e w a s i r r e g u l a r a n d a n 11 % i n c r e a s e would have been more acceptable. ADV MAHLAPE SELLO: So all in all then if we look at your mandate Page 44 of 173 27 NOVEMBER 2019 – DAY 194 and as you split it up, it was to look into three issues, insofar as reasonability of variables and assumptions were concerned you took no issue with the business case at R38.6 billion. MR CHABI: Correct. ADV MAHLAPE SELLO: O k a y, s e c o n d l y y o u t e s t e d t h e a c c u r a c y o f the ETC 38.6 billion and you considered it to be justifiable, or supportable? MR CHABI: Correct. ADV MAHLAPE SELLO: 10 The only thing you took issue with was the i n c r e a s e a ff e c t e d o n t h e 3 8 . 6 b i l l i o n t o c r e a t e a n e w E T C o f 5 4 . 9 billion. MR CHABI: Correct. ADV MAHLAPE SELLO: MR CHABI: If I might just quality something? ADV MAHLAPE SELLO: MR CHABI: S o t h a t i s t h e o n l y i s s u e y o u t a k e , o k a y. Ye s . S o i n t h e v a r i a b l e s a n d a s s u m p t i o n s , l e t ’s b e a r i n m i n d that the model did not just look at ETC, it looked at a number of other aspects, one of them being the market demand, in the market demand strategy and that was outside of our scope. We did however go through 20 the model by ourselves that we understood the mechanics behind the model, so in other words how the MDS, well the market demand was projected over the various years and so forth, so that said given that we did not interrogate the strategy we took the 1064 locomotives as given, as the number of locomotives required, we did not question that. ADV MAHLAPE SELLO: So you didn’t interrogate how the number of Page 45 of 173 27 NOVEMBER 2019 – DAY 194 1064 was arrived at? MR CHABI: No. ADV MAHLAPE SELLO: Yo u a c c e p t e d t h a t i t i s 1 0 6 4 t h a t i s i n t e n d e d to be acquired. MR CHABI: Correct. ADV MAHLAPE SELLO: And yours is to work out the appropriate ETC for the acquisition of the 1064. MR CHABI: Correct. ADV MAHLAPE SELLO: 10 O k a y. B e f o r e w e t h e n t a k e . . . ( i n t e r v e n e s ) . CHAIRPERSON: Would it be right to say that must be natural because you assume that the client knew what their needs were if they said 1 0 6 4 i t m u s t b e t h a t ’s w h a t t h e y w a n t o r w o u l d i t b e n o r m a l t o interrogate that even? MR CHABI: W e l l w e w o u l d h a v e l i k e d t o i n t e r r o g a t e t h e n u m b e r, however as I mentioned it was beyond our scope, as you mentioned the client knew what they wanted, 1064, so our departure point was 1064. C H A I R P E R S O N : O k a y. ADV MAHLAPE SELLO: T h a n k y o u C h a i r. In your statement we have now come to paragraph 5 where we are dealing with the financial 20 model, but before we do so and before we shortly break for tea, perhaps we should turn to the glossary of terms and introduce two new ones, and it is a business case and a financial model, because they will feature quite regularly going forward. What do you mean by business case? Yo u k e e p r e f e r e n c i n g t h e b u s i n e s s c a s e . MR CHABI: O k a y, t h e b u s i n e s s c a s e e s s e n t i a l l y t h e d o c u m e n t Page 46 of 173 27 NOVEMBER 2019 – DAY 194 attached I think it is in Annexure AC2. ADV MAHLAPE SELLO: MR CHABI: Ye s . And it is the document substantiating the need for this p r o j e c t , s o i t s p e a k s t o t h e E T C , i t s p e a k s t o t h e p r o f i t t h a t Tr a n s n e t would have expected to make at the time, in April 2013, it speaks to the n u m b e r, b o t h t h e o t h e r b e n e f i t s o u t s i d e o f 1 0 6 4 t h a t t h i s p r o j e c t w a s expected to bring, and I think it speaks to 68 000 new people employed and so forth so there were other strategic benefits that this project was e x p e c t e d t o b r i n g , I t h i n k n a t i o n a l l y, i f t h a t i s t h e r i g h t w o r d t o u s e . So the business case basically puts a case for this acquisition 10 of 1064 locomotives, it is essentially that. CHAIRPERSON: Well when you have to interrogate the business case wouldn’t that ordinarily mean in the context for example of 1064 that you would also interrogate the issue of has a case been made out for the need for 1064, which is the issue we dealt with earlier on, you said you didn’t go that far because it seems to me on the face of it that you ordinarily give, if you are going to interrogate the business case it should include whether there was a proper or justifiable need for that number? 20 MR CHABI: So I agree with you Chair I think interrogate the business case would mean look at every aspect of the business, in other words starting with the 1064 and determining if 1064 was the number of locomotives required. C H A I R P E R S O N : Ye s , w h a t I a m s a y i n g i s a s I u n d e r s t a n d t h e b u s i n e s s case for this what it means is you look at the justification that is Page 47 of 173 27 NOVEMBER 2019 – DAY 194 advanced, is that right, for the costs and the whole project? MR CHABI: Correct. C H A I R P E R S O N : Ye s , s o w h a t I a m s a y i n g i s o n t h e f a c e o f i t , i t s e e m s to me that one would expect that one of the things you would then interrogate is on what has been written in terms of the business case was there really a need or was there a case made out for 1064 as opposed to 500 for example? So I am just asking you whether am I right to say ordinarily one would expect that when you interrogate the business case that would include that issue and not exclude it, but 10 maybe in this case your mandate didn’t require you to go into it. MR CHABI: Yo u a r e c o r r e c t s o t h e m a n d a t e d i d n o t r e q u i r e u s t o g o into but ...(intervenes). C H A I R P E R S O N : Ye s , b u t i f t h e – i f i t d i d n ’ t r e s t r i c t y o u , y o u w o u l d g o into that? MR CHABI: Correct. C H A I R P E R S O N : O k a y. ADV MAHLAPE SELLO: And if I may then just complete that and in doing so that would require of you to interrogate the rationale behind the MDS? 20 MR CHABI: Correct, the projections made. ADV MAHLAPE SELLO: To t h e n d e t e r m i n e w h e t h e r 1 0 6 4 i s a reasonable number under the circumstances contemplated in the MDS? MR CHABI: Correct. ADV MAHLAPE SELLO: And only thereafter then you go into the business case which is to look at the cost of what the 1064 is expected Page 48 of 173 27 NOVEMBER 2019 – DAY 194 to cost. MR CHABI: Correct. ADV MAHLAPE SELLO: O k a y, C h a i r I t h i n k t h a t b r i n g s u s t o y o u r teatime. C H A I R P E R S O N : Ye s , w e w i l l t a k e t h e t e a a d j o u r n m e n t a n d r e s u m e a t 11 : 3 0 , w e a d j o u r n . REGISTRAR: All rise. I N Q U I RY A D J O U R N S I N Q U I RY R E S U M E S 10 CHAIRPERSON: Okay let us proceed. A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. M r C h a b i w h e n w e r o s e f o r tea we had just dealt with the concept of business case. We are now leading onto your paragraph 5 of your statement at page 8 where you propose to deal with the 1064 financial model. Now before we do that in detail that is another term. Can you talk to us about the financial model and you might as well indicate its role in this entire transaction? M R C H A B I : O k a y. S o t h e f i n a n c i a l m o d e l i s e s s e n t i a l l y a m o d e l b a s e d on an excel platform. case. 20 Okay it used to – that underpin the business Okay so it is the platform on which the projections were made and the discounting was done. The costs were modelled. So it will give you input on – it will give your information on what the MDS volumes were right through to 2014. CHAIRPERSON: Is it basically how it is proposed the project would be financed? MR CHABI: No. No not financed. Page 49 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: Ja. MR CHABI: But it details how the revenue ...(intervenes). CHAIRPERSON: That it will bring. MR CHABI: Would come in. CHAIRPERSON: H’mm. MR CHABI: How the costs would be incurred. CHAIRPERSON: H’mm. MR CHABI: Over the foreseeable lifetime of the project. In this instance it was about 36 years. 10 CHAIRPERSON: So it is about the revenue? MR CHABI: The revenue and the costs. C H A I R P E R S O N : Ye s . MR CHABI: The projection of those. C H A I R P E R S O N : Ye s . O k a y. O k a y. MR CHABI: And bring more of those. CHAIRPERSON: Not how it is financed is not part of the model? MR CHABI: No the – so the finance is ...(intervenes). CHAIRPERSON: That would be something else? MR CHABI: That is outside of this financial model. 20 C H A I R P E R S O N : O k a y. MR CHABI: B e c a u s e t h e b u s i n e s s g e t s i t s e l f o ff o f t h o s e n o t d e a l i n detail with how the project was going to be financed. In other words what portion – how the debt was going to be acquired? C H A I R P E R S O N : O k a y. ADV MAHLAPE SELLO: So then when you are requested to validate Page 50 of 173 27 NOVEMBER 2019 – DAY 194 the business case of 38.6 billion can you do so without knowledge of the particular financial model that is relevant to that business case? MR CHABI: The financial model is to a large extent the business case. A D V M A H L A P E S E L L O : Ye s s o w h e n y o u a r e g i v i n g t h e d o c u m e n t t h e business case which you said you have annexed as AC2 without the financial model are you able to validate that business case? M R C H A B I : Yo u c a n n o t . A D V M A H L A P E S E L L O : O k a y. O k a y t h e n w e a r e n o w i n t h e b u s i n e s s case itself relating to 1064. And you have indicated to the Chair as you 10 state at 5.2 that this is developed on a platform – common platform Microsoft Excel and you have that on your system and it is available to go on screen. MR CHABI: Correct. ADV MAHLAPE SELLO: Now can you tell us specifically about what you now – this model which you refer to as a workbook. How is it made up, what does it contain and how is it intended to be read? And perhaps it might assist if you show us that model? CHAIRPERSON: It helps Ms Sello if I know where about in the statement you are? 20 ADV MAHLAPE SELLO: 5.2 Chair at page 8. C H A I R P E R S O N : O h o k a y. ADV MAHLAPE SELLO: Where he – I say he indicates that it is developed on a common platform called Microsoft Excel. Thereafter you speak of the Excel based model, the workbook comprising of a certain number of worksheets and the modelling that is involved. Page 51 of 173 27 NOVEMBER 2019 – DAY 194 M R C H A B I : O k a y. ADV MAHLAPE SELLO: Would you like to talk to us about that? MR CHABI: I suppose it is easier to speak to it while projecting it. A D V M A H L A P E S E L L O : O k a y. O k a y w e h a v e i t o n t h e s c r e e n . MR CHABI: Okay so Chair what you have on screen is actually is what is termed the financial model. That is the Excel based workbook. It has a number of sheets and the sheets are actually represented by the tabs you see at the bottom. In fact we can actually go through some of t h e m . Yo u c a n s e e t h e f i r s t o n e t h e r e t i t l e d B a s e C a s e O u t p u t . T h a t i s 10 essentially the business case output. CHAIRPERSON: I am sorry what page is it on this? ADV MAHLAPE SELLO: Not on the screen. CHAIRPERSON: Or is it not here? ADV MAHLAPE SELLO: It will not be there Chair instead it is your annexure AC31. CHAIRPERSON: Which is at page? ADV MAHLAPE SELLO: At page 161 of the statement. CHAIRPERSON: Okay I have found it. ADV MAHLAPE SELLO: Now at AC31 we indicate that this – what we 20 have submitted into evidence is the flash disc. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: Containing this entire financial model. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: Overleaf at – no that is at 160 I apologise. At 161 we have given you a copy of what we call the first term of the Page 52 of 173 27 NOVEMBER 2019 – DAY 194 financial model which is similar to what you have on screen. C H A I R P E R S O N : Ye s . ADV MAHLAPE SELLO: It is best however at – to work with the version at 161 which is the A3 page and if you have reference to the A3 page you – as Mr Chabi intends to do you will be able to follow the various blocks in the Excel spreadsheet. Now at page 157 Chair of that statement there is a picture of a USB we did not have another way of presenting it to you. We say that is the USB we are tendering. CHAIRPERSON: H’mm. 10 ADV MAHLAPE SELLO: As annexure AC3. C H A I R P E R S O N : O k a y. ADV MAHLAPE SELLO: At page 157.1 overleaf we developed an index showing what is contained in that USB. And what is contained there is the actual business case which is the one document and the second document is now the financial model. CHAIRPERSON: Okay thank you. ADV MAHLAPE SELLO: Now at page 159. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: At 159 we have listed – let me just take a step 20 back. The whole of that model – financial model is referred to as workbook. The workbook is made up of a number of worksheets. And at page 159 we have identified each worksheet separately and what that worksheet contains. So that it is list – there are in total 55 of t h e m . Yo u h a v e i n c e r t a i n i n s t a n c e s l i k e t a b 1 , 2 , 5 , 6 , 7 , 2 0 . T h e y a r e h i g h l i g h t e d i n y e l l o w. T h o s e a r e h i d d e n w o r k s h e e t s . T h i s i s j u s t s o t o Page 53 of 173 27 NOVEMBER 2019 – DAY 194 understand what 59 – 159 is but we will not be getting into that detail. C H A I R P E R S O N : J a o k a y. ADV MAHLAPE SELLO: So that was just to give you a sense of the structure. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: Of this financial model. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: Now what Mr Chabi has on the screen if the Chair would have regard to page 161? 10 CHAIRPERSON: H’mm. A D V M A H L A P E S E L L O : T h e A 3 p a p e r. T h a t i s w h a t M r C h a b i h a s o n the screen. And if one has regard to what we have on the screen that i s t h e f i r s t t e r m u n d e r t h e h e a d i n g B a s e C a s e O u t p u t . O k a y. A f t e r t h e Base Case Output is followed by a number of purple and there is red other worksheets and that is what makes up the actual calculations in respect of each item that was calculated to arrive at the 38.6 billion. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: Okay we are now Mr Chabi at the Base Case Output and you have turned us to that. 20 M R C H A B I : O k a y. T h a n k s A d v o c a t e . S o B a s e C a s e O u t p u t a s y o u c a n see there Chair it is the first tab on that – on the workbook. A d v o c a t e m e n t i o n e d t h e r e a r e a n u m b e r o f t a b s t h e r e a f t e r. As the She has already spoken to this there are 55 of these tabs of which 6 are hidden. They are hidden because they actually do not feed into the model. Analysis were done on those sheets but they did not – the output of Page 54 of 173 27 NOVEMBER 2019 – DAY 194 those – there was no output from those sheets into this business case. So they are not relevant for purposes of this discussion. So we are looking at the first tab that which is Base Case Output which is short for business case. C H A I R P E R S O N : Yo u d o n o t h a v e s o m e t h i n g t h a t h e c a n u s e t o p o i n t . MR CHABI: Right. CHAIRPERSON: That we can M R C H A B I : W e l l I c a n h o v e r. CHAIRPERSON: So ...(intervenes). 10 A D V M A H L A P E S E L L O : Yo u r m o u s e i f o n y o u c a n u s e y o u r m o u s e t o o . C H A I R P E R S O N : J a t o s a y t h i s i s w h a t y o u a r e o n n o w. A D V M A H L A P E S E L L O : To p o i n t w h e r e y o u a r e o n t h e s c r e e n . MR CHABI: Right. A D V M A H L A P E S E L L O : Ye s . MR CHABI: There we go Chair are you. ADV MAHLAPE SELLO: If you move slower perhaps. MR CHABI: Are you able to pick up mouse Chair? O k a y. So my mouse is there. That is Base Case Output I have got it right where you have got the tab titled. 20 CHAIRPERSON: Well it is very small. ADV MAHLAPE SELLO: I do not know if it is possible to ...(intervenes). CHAIRPERSON: I guess there is nothing we can do about it. ADV MAHLAPE SELLO: Enlarge the mouse. Is it possible? CHAIRPERSON: Okay we will just do the best we can with what we Page 55 of 173 27 NOVEMBER 2019 – DAY 194 h a v e . I t i s o k a y. M R C H A B I : O k a y. ADV MAHLAPE SELLO: Are you able when dealing with any aspect of t h a t s p r e a d s h e e t t o p e r h a p s h i g h l i g h t i t ? Yo u c a n y o u d o t h a t ? A s y o u deal with it so we know where exactly you are on the spreadsheet? MR CHABI: Where I am on the spreadsheet I can select. ADV MAHLAPE SELLO: Ja. MR CHABI: I am not sure if the Chair can follow as I select. CHAIRPERSON: Ja. 10 MR CHABI: Are you able to follow the ADV MAHLAPE SELLO: The green line. MR CHABI: The green ...(intervenes). CHAIRPERSON: It is just that it would be better if as you say it could highlighted or something but if it cannot be done we will make do with h a t s m a l l a r r o w. M R C H A B I : T h e a r r o w. CHAIRPERSON: H’mm. MR CHABI: I guess this is – any suggestions? ADV MAHLAPE SELLO: 20 w a y. We are trying to see if there is a technical B u t t h e s e a r e t w o l a w y e r s a d v i s i n g e a c h o t h e r. It is very dangerous. CHAIRPERSON: Well maybe we can do with fresh ideas from. ADV MAHLAPE SELLO: F r o m a n o t h e r l a w y e r. suggestion Mr Chabi is by way of example. O k a y. Now the Let us look at your first entry under Productivity MGTK the first table. That is where we want to Page 56 of 173 27 NOVEMBER 2019 – DAY 194 s p e a k a b o u t t h e e x i s t i n g f l e e t c a p a c i t y. Yo u s e e t h a t ? MR CHABI: Correct. ADV MAHLAPE SELLO: Are you able to click on that and highlight as we talk through it? MR CHABI: Like that? ADV MAHLAPE SELLO: That might help. Which is ...(intervenes). C H A I R P E R S O N : T h a t i s m u c h b e t t e r. ADV MAHLAPE SELLO: So then we will do it as we go along. C H A I R P E R S O N : Ye s , y e s . 10 ADV MAHLAPE SELLO: Thank you. MR CHABI: Alright. ADV MAHLAPE SELLO: Please continue. MR CHABI: Thank you. ADV MAHLAPE SELLO: And if you may do so then with reference to you statement starting at paragraph 5.4. So we will read your 5.4 together with what you have projected on the screen or in otherwise what we have at page 161 of the statement. M R C H A B I : O k a y. ADV MAHLAPE SELLO: Ja. 20 M R C H A B I : I w i l l j u s t t r y a n d f o l l o w. A D V M A H L A P E S E L L O : Ye s . MR CHABI: It here but still cover what is covered in here. ADV MAHLAPE SELLO: Absolutely thank you. MR CHABI: O k a y. So Base Case Output what you have before you relates to what you would find in your business case document. Page 57 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: What should? MR CHABI: What you would find in your business case document. CHAIRPERSON: H’mm. MR CHABI: So in other words AC2 in this instance matches AC2 there. C H A I R P E R S O N : Ye s . MR CHABI: The actual business case, the document itself. C H A I R P E R S O N : Ye s . MR CHABI: So what is contained in that document would actually come from this tab that is titled Base Case Output. And in the statement I 10 have highlighted that I have mentioned what exhibits each of those tables – what exhibits they are within the business case. If my recollection serves me right I think productivity MGTK is Exhibit 16 on page 29 of the business case. ADV MAHLAPE SELLO: Okay just then let us find firstly at page 161 on the business case output productivity MGTK. On the screen where – which table is it? MR CHABI: I did not get the question Advocate. ADV MAHLAPE SELLO: At 5.4 you say the table titled Productivity MGTK. 20 MR CHABI: Correct. ADV MAHLAPE SELLO: Now you are dealing with that and I would like you to identify for purposes of our conversation to identify it on the screen. MR CHABI: O k a y. So that is the first table we have there on the s c r e e n a n d I w i l l h i g h l i g h t t h e w h o l e t a b l e f o r t h e C h a i r i n y e l l o w. Page 58 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: That is the table you refer to at paragraph 5.4? MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. T h e n d e a l w i t h t h a t t a b l e . M R C H A B I : O k a y. S o n o w t h i s t a b l e a s m e n t i o n e d i t i s o n p a g e 2 9 o f the exhibits and it is Exhibit 16 on page 29 of the business case which is the document. It moulds the ...(intervenes). A D V M A H L A P E S E L L O : Yo u d o n o t h a v e t o g o t h e r e a t t h e m o m e n t . M R C H A B I : S o r r y. 10 A D V M A H L A P E S E L L O : W e d o n o t n e e d t o g o t o t h a t p a r t i c u l a r. M R C H A B I : Yo u d o n o t n e e d t o i t i s j u s t . . . ( i n t e r v e n e s ) . ADV MAHLAPE SELLO: Thank you. MR CHABI: Assisting you in terms of identifying where it is within the document. A D V M A H L A P E S E L L O : Ye s . MR CHABI: And assuring you that the financial model actually speaks to the business case. A D V M A H L A P E S E L L O : Ye s . MR CHABI: Unpins the business case. This table models the volumes 20 that would be transported each year by the locomotives and what would b e r e q u i r e d – i n f a c t w h a t w o u l d b e l e f t o ff . S o I w i l l g o l i n e b y l i n e . As you can see there the first row there I will highlight that in red. ADV MAHLAPE SELLO: H’mm. MR CHABI: Is the Chair still with us? And it speaks to the required c a p a c i t y a s p e r t h e m a r k e t d e m a n d s t r a t e g y. S o I w i l l h i g h l i g h t t h a t . Page 59 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: And if I may then on that required capacity it is broken down by year? MR CHABI: Correct. A D V M A H L A P E S E L L O : Ye s . MR CHABI: And you – we can see here it is projected from 2013 to 2 0 2 2 s o I a m s t i l l o n t h a t r o w. I n f i r s t y e a r s t a r t i n g o ff a t 8 6 m i l l i o n gross ton. So gross ton in this instance relates to the weight including the wagon itself, the weight of the wagon. So we talk of gross ton and we talk of nett tons. Nett ton is just the weight of the contents. What 10 the wagon is transporting. first row there. So essentially you have your MDS in the I f y o u a r e f o l l o w i n g c u r s o r a l l t h e w a y. This table shows it only up to 2022 but goes as far as 2051 if we look at the source of this information. The ambius volumes are actually modelled under volume MDS. So as not to lose you Chair I am – I have gone back to Base Case Output and as you follow my cursor I am moving to t h e r i g h t u n d e r t h e d i ff e r e n t t a b s a n d I a m o n v o l u m e M D S O u t p u t . S o t h a t s h e e t t i t l e d Vo l u m e M D S O u t p u t m o d e l s o r p r o j e c t s w h a t t h e market demand would be for the various commodities. Yo u g o t c o m m o d i t i e s s u c h a s p e t r o l e u m . Yo u g o t m a n g a n e s e . Yo u g o t c h r o m e , 20 i r o n o r e . S o e v e r y t h i n g t h a t Tr a n s n e t w o u l d – c a n e x p e c t t o t r a n s p o r t is modelled there and the total of that is what you see there is MDS R e q u i r e d Vo l u m e i n e a c h o f t h e v a r i o u s y e a r s . S o 2 0 1 3 y o u h a v e g o t 86 – apologies Sir 86 million gross tons in 2013. 98 and so forth. So it i s t h e t o t a l a c r o s s a l l c o m m o d i t i e s t h a t Tr a n s n e t c a n e x p e c t t o transport over the year including the weight of the wagon hence million Page 60 of 173 27 NOVEMBER 2019 – DAY 194 gross ton. So it is a million. The line following that – so this is how the number of 1064 was arrived at. We have got existing fleet capacity I w i l l t h e n h i g h l i g h t i n r e d a g a i n . I f t h e C h a i r h a s p i c k e d i t u p ? O k a y. Alright. S o t h a t i s e x i s t i n g f l e e t c a p a c i t y. In other words what the existing fleet at the time is able to absorb from the market demand. And we see there from 86 million gross ton kilometres the existing fleet can only transport 79 million of that. And that tells you because they cannot absorb the entire market demand or they cannot service the entire market they are still in need to acquire additional locomotives. I 10 w i l l s k i p w r i t t e n o ff . W r i t t e n o ff i s e s s e n t i a l l y w h a t y o u l o s e f r o m l o c o m o t i v e s b e i n g w r i t t e n o ff t h e s e l o c o m o t i v e s h a d a l i f e s p a n o f a b o u t 30 years with modifications and additional work on them they could be extended to about 45 years. However in each year there was a wreckage. So from that wreckage you would have lost in 2013 1.1 m i l l i o n f r o m l o c o m o t i v e s n o t b e i n g o p e r a t i o n a l b e i n g w r i t t e n o ff . In total the required capacity in fact what was not – what would not have been transported in 2013 is about 8 million in 2013. I will just highlight t h e r o w I a m r e f e r r i n g t o . T h a t i s t h e r e d r o w t h e r e . O k a y. S o a b o u t 8 million gross ton kilometres will not be transported in 2013 and so 20 forth. So as mentioned this was projected right up 2051 to be able to arrive at a number for the locomotives required and model the revenue. W e w i l l l o o k a t t h a t a b i t l a t e r. S o t h a t i s t h e f i r s t t a b l e . I a m n o t s u r e i f t h e r e a r e a n y q u e s t i o n s f r o m t h e C h a i r ? O k a y. ADV MAHLAPE SELLO: Okay then the required capacity the last line you have on that table per annum would it be a correct understanding Page 61 of 173 27 NOVEMBER 2019 – DAY 194 to say it indicates on an annual basis how much extra capacity is required? MR CHABI: Left over correct. ADV MAHLAPE SELLO: Ja. Or shortfall? MR CHABI: Not – shortfall – not transported. A D V M A H L A P E S E L L O : Tr a n s p o r t e d . N o t t r a n s p o r t e d ? M R C H A B I : Ye s . A D V M A H L A P E S E L L O : Ye s . S o t h a t i s t h e d e m a n d t h a t t h e M D S t e l l s us we have to try and meet? 10 MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. MR CHABI: By acquiring locomotives. ADV MAHLAPE SELLO: Absolutely ja. M R C H A B I : B u t a s m e n t i o n e d e a r l i e r – s o r r y. ADV MAHLAPE SELLO: Go ahead. MR CHABI: As mentioned earlier we would not – it was out of our – outside of our mandate to actually interrogate that MDS required. A D V M A H L A P E S E L L O : Ye s . MR CHABI: Capacity yes. 20 A D V M A H L A P E S E L L O : Yo u a c c e p t – y o u a c c e p t e d i t a s f a c t ? MR CHABI: As fact yes. A D V M A H L A P E S E L L O : F o r p u r p o s e s o f y o u e x e r c i s e . Yo u d e a l – y o u have dealt now with the required capacity and the existing fleet capacity and these you deal with at paragraph 4.4 and – 4.5 and 4.6. MR CHABI: I missed that Advocate. Page 62 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: Come again? MR CHABI: I missed that. ADV MAHLAPE SELLO: I say at your 4.4 – 4 .5 and 4.6 – 5.6 why do I keep on saying 4 I apologise. 5.5 and 5.6 including 5.7. MR CHABI: 7 correct yes. A D V M A H L A P E S E L L O : Ye s . S o n o w w e a r e – y o u h a v e i n p a r t d e a l t with the contents of that first table. Am I correct? MR CHABI: Correct Advocate. A D V M A H L A P E S E L L O : O k a y. Yo u n o w l e a d u s a t y o u r p a r a g r a p h 5 . 8 10 to a table titled New GFB Diesel Locomotive Plan. MR CHABI: O k a y. So I must say the structure of this followed the exhibits within the business case you trying to identify those exhibits in this case. So I will explain what the – that table is. I will start again Chair I will just go back to the top. So to get to that table titled New General Freight Business Diesel Locomotive Plan I have to scroll down the sheet. O k a y. A n d I t h i n k – l e t m e j u s t h i g h l i g h t t h a t f o r C h a i r ’s a t t e n t i o n . I t i s h i g h l i g h t e d i n y e l l o w C h a i r. S o t h a t i s t h e t a b l e t h a t y o u see there. A D V M A H L A P E S E L L O : Ye s . 20 MR CHABI: And okay I cannot pick up the Exhibit number for this table in the business case. I will speak to it. ADV MAHLAPE SELLO: No but then when you speak to it because you have elected to highlight certain tables please point out to the Chair the relevance of highlighting this particular table? MR CHABI: O k a y. So this table refers to the number of diesel Page 63 of 173 27 NOVEMBER 2019 – DAY 194 locomotives out of the 1064 that would be acquired in over what period they would be acquired. And you would have seen this in the business case in the statement. Essentially it tells us that 100 locomotives as per the business case would have been acquired by March 2014. Because we know this business case started in April 2013 with 8 l o c o m o t i v e s b e i n g a c q u i r e d e a c h m o n t h . O k a y. To b e e x a c t i t i s 8 . 3 3 for modelling purposes. S o 1 0 0 w e r e e x p e c t e d w i t h i n t h e f i r s t y e a r. T h e n e x t 1 0 0 w e r e e x p e c t e d w i t h i n t h e y e a r to f o l l o w w h i c h i s 2 0 1 5 a n d so forth. In the final year which is March 2018, 65 diesel locomotives 10 were expected totalling 465 over the delivery period. So this just explains the delivery period – delivery schedule of the diesel locomotives. ADV MAHLAPE SELLO: And the delivery period you have indicated was at least on this business plan 7 years. MR CHABI: It was 7 years. A D V M A H L A P E S E L L O : O k a y. MR CHABI: From 2013 to the end of 2019, A D V M A H L A P E S E L L O : O k a y. Yo u m a y p r o c e e d . Yo u t h e n d e a l w i t h S u p p l y P r o d u c t i o n C a p a c i t y. 20 MR CHABI: So if I can just for complete – sorry I think just to complete the discussion the table just beneath that relates to the electric locomotives. This can be seen 65 as of March 2015, 130 thereafter and 144 in – by March 2019 expected. So a total of 599 electric locomotives the sum of the two gives you the 1064 locomotives. A D V M A H L A P E S E L L O : Yo u s a i d i n y e a r – i n 1 4 / 1 5 i t i s 1 6 5 n o t 6 5 ? Page 64 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: No it is ...(intervenes). ADV MAHLAPE SELLO: As regards electric? MR CHABI: It is 65. In which year sorry 20 – March – by March 2015 65 locomotives, electric locomotives would have been acquired. ADV MAHLAPE SELLO: Okay yes. O k a y. My apologies yes you correct 65. MR CHABI: S o t h a t i s t h e d e l i v e r y s c h e d u l e e s s e n t i a l l y. The combination of the diesel and the electric is what is termed the delivery schedule in the business case. 10 ADV MAHLAPE SELLO: So if we look at those two tables there and we know that the diesel locomotives plan is for the acquisition of 465 diesel locomotives and the electric locomotive plan is for the 599 – electric locomotives? MR CHABI: Correct. ADV MAHLAPE SELLO: Delivered in those batches over a period of 7 years and that gives us the total of 1064? MR CHABI: Correct. ADV MAHLAPE SELLO: Thank you. MR CHABI: 20 In the statement I speak about Supplier Production C a p a c i t y. A n d I w i l l j u s t s c r o l l d o w n C h a i r t o t h e r e l e v a n t t a b l e . O k a y it is actually the table following the electric locomotives table and I will h i g h l i g h t i n y e l l o w. S o t h a t t a b l e C h a i r t e l l s u s h o w m a n y l o c o m o t i v e s would be delivered each month in the respective categories in this instance diesel and electric. As I mentioned earlier 8 diesels were projected to be delivered each month over the delivery schedule and for Page 65 of 173 27 NOVEMBER 2019 – DAY 194 e l e c t r i c y o u h a d 5 i n t h e f i r s t y e a r m o v i n g u p 11 a n d t h e n 1 2 i n t h e f i n a l y e a r. S o t h e s e a r e t h e m o n t h l y d e l i v e r i e s e x p e c t e d . S o I a m j u s t a s I mentioned earlier explaining the Exhibits within the business case. ADV MAHLAPE SELLO: Ye s . So is – when we look at this table it says Supplier Production Capacity should the Chair understand that to mean that speaks to the ability of each individual supplier? MR CHABI: So ...(intervenes). ADV MAHLAPE SELLO: On a monthly basis? MR CHABI: On a monthly basis correct. 10 A D V M A H L A P E S E L L O : O k a y. MR CHABI: What the supplier is able to provide on a monthly basis yes. A D V M A H L A P E S E L L O : Ye s . O k a y. MR CHABI: Correct so 8 for diesels and right through the delivery p e r i o d a n d f o r e l e c t r i c s s t a r t i n g o ff a t 5 i n t o 11 a n d t h e n e n d i n g o ff a t 12. A D V M A H L A P E S E L L O : O k a y. N o w i f o n e h a s r e g a r d t h e n t o t h e t h r e e tables as they follow each other the diesel locomotive plan, the electric p l a n a n d t h e S u p p l i e r P r o d u c t i o n C a p a c i t y. T h e i n f o r m a t i o n s e t o u t i n 20 those tables is it in any manner relevant to the period of the project? The 7 – the period of acquisition. MR CHABI: Correct. ADV MAHLAPE SELLO: In any manner is it in – relevant to the fact that these were being acquired over 7 years? MR CHABI: It is. I think we can see there that you have got a 7 year Page 66 of 173 27 NOVEMBER 2019 – DAY 194 period roughly if you – because electric locomotives were to start in 2014 and diesels in 2013. I think if you overlap the two you get roughly 7 y e a r s . S o i t i s b e t w e e n 6 a n d 5 y e a r s . I m e a n 6 a n d 7 y e a r s s o r r y. ADV MAHLAPE SELLO: We then can expect changes to occur if that period is brought down from 7 to let us say 3 or 4 or 5? MR CHABI: Changes in? ADV MAHLAPE SELLO: In the numbers per annum that are set out in these tables of locomotives? MR CHABI: 10 Well that would be a function of the number of suppliers that you have. A D V M A H L A P E S E L L O : O k a y. I t w o u l d b e i n c l u d e d b y t h a t . MR CHABI: This tells us the supplier is expected to provide you with 8 a month. He does not tell us whether that is the maximum they can provide in that month. If you have two suppliers per diesel you can easily double that to 16 a month. ADV MAHLAPE SELLO: I t i s p r o v i d i n g f o r – o k a y. Thank you for highlighting that. At 5.10 – paragraph 5.10 you deal specifically with the existing fleet. MR CHABI: Okay so that is ...(intervenes). 20 ADV MAHLAPE SELLO: As at 2013/2014. MR CHABI: Correct. A D V M A H L A P E S E L L O : Ye s . MR CHABI: That is Exhibit 15 in the business case. A D V M A H L A P E S E L L O : Ye s . MR CHABI: At least that has been highlighted in ...(indistinct). And I Page 67 of 173 27 NOVEMBER 2019 – DAY 194 w i l l h i g h l i g h t t h e t a b l e f o r t h e a t t e n t i o n o f t h e C h a i r. ADV MAHLAPE SELLO: And if we look at that you have under fleet type we need not really concern ourselves much about that 6E, 7E all that relates to the type of locomotives? MR CHABI: Correct. ADV MAHLAPE SELLO: So what the model does for us is to tell us as a t t h e t i m e o f d e v e l o p m e n t o f t h i s b u s i n e s s m o d e l h o w m a n y 6 E ’s , 7 E ’s a n d 7 E 1 ’s w e r e t h e r e ? MR CHABI: 10 Correct. So essentially right up to and if the Chair is following everything in yellow relates to electric locomotive stock at the time. So this is April 2013. So the number of electric locomotives ...(intervenes). A D V M A H L A P E S E L L O : O k a y. M R C H A B I : T h a t Tr a n s n e t h a d . . . ( i n t e r v e n e s ) . A D V M A H L A P E S E L L O : Ye s . MR CHABI: And that is a total of about 1037. c o l u m n t h e r e – C – s o r r y. So summing up that Let me just highlight that in red. So what y o u h a v e i n y e l l o w r e l a t e s t o t h e e l e c t r i c l o c o m o t i v e s t h a t Tr a n s n e t h a d w i t h i n i t i s – I g u e s s i t i s s t o c k . O k a y. A s a t A p r i l 2 0 1 3 a n d w h a t y o u 20 have in red are the numbers per type of locomotive. So 6E they had 75 of those and right down to the bottom 18E, they had 597 of those. The total of that is 1037. Everything thereafter following are the diesel locomotives. The total was 1889 locomotives. ADV MAHLAPE SELLO: So what this then tells us that we had a total of 1889 and we sought to augment that with a further 1064? Page 68 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. Yo u g o f u r t h e r a t 5 11 a n d y o u d e a l w i t h a n e w t a b o r n e w t a b l e G F B Ta r i ff A v e r a g e . M R C H A B I : O k a y. A D V M A H L A P E S E L L O : Te l l t h e C h a i r a b o u t t h a t . MR CHABI: Again we speak to this, because it is in the business case. I j u s t h i g h l i g h t t h a t f o r t h e C h a i r ’s a t t e n t i o n . S o t h i s i s b a s i c a l l y o n t h e t a r i ff – t h e R a n d t a r i ff t h a t Tr a n s n e t w o u l d c h a r g e t o t r a n s p o r t a m i l l i o n tons of whatever commodity they are transporting per kilometre and we 10 can see in 2013 they were looking at 40 cents – 42 cents. Sorry and that went up to 45 cents – 48. This actually goes up to about R3,80 or so when you look at the full table in the sheets to f o l l o w, b u t i t i s e s s e n t i a l b e c a u s e i t t e l l s i t i s a n e s s e n t i a l c o m p o n e n t into the revenue that could be expected from the locomotives. The Rand per gross ton per kilometre and that is what we see there. A D V M A H L A P E S E L L O : O k a y. C a n y o u f o l l o w t h a t w i t h t h a t w i t h t h e volumes – net tons? MR CHABI: Correct. So now we are looking at net tons. I will h i g h l i g h t t h a t a g a i n f o r t h e C h a i r ’s a t t e n t i o n . 20 ADV MAHLAPE SELLO: Huh-uh. MR CHABI: Also in the business case. explain this table again as I mentioned. locomotives came from. looking at net tons. In Annexure AC2. Now to This tells us whether 1064 Yo u g o t t h e M D S t a r g e t . Now here we are This is excluding the weight of the wagon itself and we can see from the market demand strategy about 91 million tons Page 69 of 173 27 NOVEMBER 2019 – DAY 194 were required in 2013. That was the demand from the market and the existing fleet could only transport 83 million of those tons and given how the locomotives were to be acquired. We can see there is a shortfall of a b o u t – I g u e s s – 8 m i l l i o n t h e r e . O k a y. I f w e l o o k a t 9 1 a n d 8 3 . T h e short fall is 8 million. O k a y, b u t t h e B o a r d d e c i d e d a n d i f y o u l o o k a t t h e f u l l contingence of locomotives required it was about 1300-odd, but they decided instead of acquiring 1300. 10 We will acquire 1064. Given that these locomotives were spread out over the same period and were expecting only 100 diesel locomotives. The additional capacity or tonnage that they could transport was 1 million. ADV MAHLAPE SELLO: H’mm. MR CHABI: As can be seen there. So I will just highlight that for the C h a i r ’s a t t e n t i o n . O k a y. S o f r o m t h e 1 0 6 4 l o c o m o t i v e s p r o j e c t o n l y a million of that shortfall of eight would be catered by the 1064. In 2014 this goes up to seven, but there is still a shortfall as can be seen if you look at 104 versus 82 and that goes up to 21 and up to 77. That is locomotives would be able to transport. 20 So the 1000 locomotives did not absorb the entire – did not allow for the entire MDS to be met. I think there was still a shortfall even though with 1064 locomotives on board and that a decision taken by the board. I guess being prudent that the – maybe they were just a little bit too optimistic. For a number – there may have been reasons that we – there are reasons, but we are not aware of those reasons. Page 70 of 173 27 NOVEMBER 2019 – DAY 194 A D V M A H L A P E S E L L O : W h a t w e h a v e d o n e n o w. Yo u h a v e c h o s e n t o highlight certain aspects of the financial model? MR CHABI: Correct. ADV MAHLAPE SELLO: Okay and that has taken us to 5.12. Considering the various tables that you have highlighted and discussed and in the context of what you state at your paragraph 5.13. How would you describe these tables? What do they reflect as opposed to the rest of the worksheets that you speak of at 5.13? Yo u m a d e a s e l e c t i o n o f t h e s e s p e c i f i c o n e s t o d e a l w i t h i n p a r t i c u l a r. W h y i s t h a t ? 10 MR CHABI: O k a y. This was following the business case ...(intervenes). A D V M A H L A P E S E L L O : Ye s . MR CHABI: But making this relevant to the discussion – looking at what the 1064 locomotives could transport. We can see the projection i s t h e r e b e i n g o n e i n y e a r. a t t e n t i o n C h a i r. I have highlighted that in red for your So we have the volumes. The net tons that the l o c o m o t i v e s c o u l d t r a n s p o r t . ( I n d i s t i n c t ) t r a n s p o r t o n e i n t h e f i r s t y e a r. Seven in the second year 21 and so forth up to 77. These volumes multiplied by the rate and the distance gives 20 y o u t h e r e v e n u e , b u t I g u e s s w e w i l l a d d r e s s t h a t a b i t l a t e r, b u t t h a t i s t h e r e l e v a n c e o f t h i s t a b l e . To h e l p y o u u n d e r s t a n d h o w t h e v o l u m e s f i t into the revenue computation. The revenue computation is actually a function of your volumes to be transported. The distance over which t h o s e v o l u m e s w i l l b e t r a n s p o r t e d a n d t h e R a n d t a r i ff p e r t o n p e r kilometre. Page 71 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: Now in dealing with the tables in the business case output you did not discuss all the tables? MR CHABI: Correct. ADV MAHLAPE SELLO: And what is the reason for that? MR CHABI: I suppose because we will elaborate on them later on. ADV MAHLAPE SELLO: And what do those tables deal with that you did not discuss? M R C H A B I : T h e y d e a l w i t h N e t P r e s e n t Va l u e a n d t h e v a r i o u s c o s t s . I f you wish Advocate we can actually tough on that. 10 ADV MAHLAPE SELLO: No. No. We are – I am just – want to help us understand the rationale for the approach you have adopted. M R C H A B I : O k a y. ADV MAHLAPE SELLO: So you have excluded from the discussion currently any table or worksheet that deals with the revenue and the cost and the variables? MR CHABI: Correct. ADV MAHLAPE SELLO: And you have dealt with every other aspect that is relevant to the determination of the business case? MR CHABI: Correct. 20 ADV MAHLAPE SELLO: Okay and you say because we will deal in more specific terms with the variables and assumptions and the costs and the revenue ...(intervenes). MR CHABI: Correct. A D V M A H L A P E S E L L O : A n d t h e N P V. O k a y. W h a t w e h a v e d i s c u s s e d so far is by way of background. Right? Page 72 of 173 27 NOVEMBER 2019 – DAY 194 M R C H A B I : C o r r e c t . O k a y. ADV MAHLAPE SELLO: Because it is only at – from paragraph 6 at p a g e 1 2 t h a t w e t u r n t o t h e a c t u a l m a n – y o u r a c t u a l m a n d a t e . Yo u – i f one has regard to paragraph 2.1.1 where you have listed the mandate. Yo u h a v e s o u g h t t o g i v e a h e a d i n g t o e a c h o n e o f t h e m f o r b r e v i t y. S o at 2.1.1 you say: “ Yo u w e r e r e q u i r e d t o a s s e s s t h e r e a s o n a b i l i t y o f t h e variables and assumptions used in the modelling of the 2013 business case.” 10 MR CHABI: Correct. ADV MAHLAPE SELLO: And this for purposes or our discussion if I read your statement correctly you will deal with the heading of “Review of the Business Case”. MR CHABI: Correct. ADV MAHLAPE SELLO: And you have done that with every specific one – with every other mandate you were given? MR CHABI: Correct. ADV MAHLAPE SELLO: O k a y. So then going back to our page 12 p a r a g r a p h 6 . Yo u d e a l t h e n w i t h t h e f i r s t – t h e r e v i e w o f t h e b u s i n e s s 20 case. So – and I am sure we may safely close that Excel spreadsheet a n d d e a l m o r e w i t h w o r d s n o w. M R C H A B I : O k a y. ADV MAHLAPE SELLO: If we turn then to our paragraph 6. M R C H A B I : A l r i g h t C h a i r. CHAIRPERSON: I must confess. Spreadsheets are not my favourite Page 73 of 173 27 NOVEMBER 2019 – DAY 194 thing. ADV MAHLAPE SELLO: If it is not – if it is any consolation Chair you are not alone in that. C H A I R P E R S O N : Ye s . MR CHABI: Alright. So I guess we are looking at the review of the business case in this instance ...(intervenes). A D V M A H L A P E S E L L O : Ye s . MR CHABI: And we are tackling specifically the revenue and the cost components. 10 The idea behind this is to give you Chair an understanding of what this business case is. About how they arrived at t h a t i n t h a t P r e s e n t Va l u e f i g u r e . S o t h e c o m p o n e n t s . I g u e s s t h e s u b variables or the line items that make up cost and the line items that make up revenue. We have to a certain extent spoken about the line items that make up revenue and there is essentially three, but we will get to that a g a i n s h o r t l y. J u s t f o r c o m p l e t i o n . . . ( i n t e r v e n e s ) . ADV MAHLAPE SELLO: follow you. Before you proceed so that we are able to Perhaps you might want to put up slide 4 – slide 3 and slide 4. 20 M R C H A B I : O h . O k a y. ADV MAHLAPE SELLO: Let us go to slide 3. At slide 3 you have two e n t r i e s t h e r e . Yo u h a v e c a p t u r e d t h e m a n d a t e a n d y o u h a v e c a p t u r e d t h e f i n d i n g . O k a y. MR CHABI: Correct. ADV MAHLAPE SELLO: And you indicate that your finding which is Page 74 of 173 27 NOVEMBER 2019 – DAY 194 what you told us previously was that there are assumptions in relation to the variables you have found to be reasonable? MR CHABI: Correct Advocate. ADV MAHLAPE SELLO: Now going to slide 4 will I be correct to say from this point onwards you are providing an explanation and a substantiation for the finding you make at slide 3? MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. T h e n w e a r e a l l e a r s M r C h a b i . MR CHABI: 10 O k a y. We just trying to tie this in with the statement I suppose. A D V M A H L A P E S E L L O : Ye s . MR CHABI: So in our assessment of the model we found it to serve several purposes and some of which to be assessing the profitability of t h e p r o j e c t a n d t h i s i s i n N e t P r e s e n t Va l u e t e r m s . So this financial m o d e l h e l p Tr a n s n e t o ff i c i a l s t o a r r i v e a t w h a t t h e y e x p e c t e d t h e p r o f i t to be. What expected profit – they arrived at an expected profit figure. S o r r y. O k a y. To d e t e r m i n e w h a t t h e t o t a l – t h e E s t i m a t e d To t a l C o s t o f t h e l o c o m o t i v e s w o u l d b e . O k a y a n d I w i l l s p e a k t o t h a t . It is a component of the total cost of the project. 20 CHAIRPERSON: Let us try this again. If you move the mic a little further away from you. Just move it to the furthest point with the file. Let me see how with the file. furthest point of the table. Move the file as well to the almost O k a y. Just speak and let me see ...(intervenes). MR CHABI: If that works. Page 75 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: How it is? I hope that those at the back if they are d i s a d v a n t a g e d i f y o u p u t t o t h e m i c t o o f a r. They will give me some i n d i c a t i o n . O k a y. J u s t s p e a k . J u s t s p e a k a n d l e t m e s e e . M R C H A B I : W i l l s e e f r o m t h e r e . O k a y. A l r i g h t . S o t h e m o d e l s e r v e d several purposes from our assessment of ...(intervenes). CHAIRPERSON: One second. A D V M A H L A P E S E L L O : Ye s . CHAIRPERSON: How it is for everybody? Is it fine? Oh. At the back they say it is fine. 10 M R C H A B I : O k a y. CHAIRPERSON: For you Ms Sello? A D V M A H L A P E S E L L O : Ve r y f i n e C h a i r. I a m c l o s e r t o t h e m i c n o w. CHAIRPERSON: O k a y. A l r i g h t . Let us do it that way and just raise your voice a little bit. M R C H A B I : O k a y. O k a y. I t s e r v e d s e v e r a l p u r p o s e s . S o m e o f w h i c h were to determine what the profit would be – the expected profit at the t i m e . D e t e r m i n e w h a t t h e To t a l C o s t o f O w n e r s h i p o f w h i c h E T C f o r m e d a part of and we will look at that shortly and to better appreciate the risks of the project and that comes through in the form of sensitivities 20 being run on some of the variables and the assumptions. I think we will touch on that as we look at some of the tabs. C H A I R P E R S O N : Ye s . I t h i n k t h i s w i l l w o r k w e l l a s l o n g a s y o u r v o i c e is at the right level. M R C H A B I : O k a y. CHAIRPERSON: The moment it goes down it might not. So just bear Page 76 of 173 27 NOVEMBER 2019 – DAY 194 t h a t i n m i n d . O k a y. ADV MAHLAPE SELLO: And perhaps I do not know if it is at all possible for Mr Chabi if he could speak slower perhaps. C H A I R P E R S O N : Ye s . M a y . . . ( i n t e r v e n e s ) . ADV MAHLAPE SELLO: If at all possible. CHAIRPERSON: Maybe even that as well. M R C H A B I : O k a y. C H A I R P E R S O N : O k a y. T h a n k y o u . Ye s . P r o c e e d . MR CHABI: 10 Alright. So those are the purposes that we felt were relevant for the – for this statement. Well that we felt were important t o d i s c u s s a l l i n t h i s s t a t e m e n t a n d i n a s s e s s i n g t h e p r o f i t a b i l i t y, t h e ETC and assessing the risk two key measures were applied in the b u s i n e s s c a s e . N e t P r e s e n t Va l u e . W e s p o k e t o t h a t . I t i s e s s e n t i a l l y t h e d i ff e r e n c e b e t w e e n t h e v a l u e i n c u r r e n t terms of the revenue you expect and the value in current terms of the c o s t y o u e x p e c t t o i n c u r. I t i s j u s t t h e d i ff e r e n c e g i v i n g y o u a p r o f i t figure at the bottom. ETC. We have spoken to that. It is just the sum of the cost of the locomotives in each of the years. We looked at the schedule. 20 I must get myself to slowdown and we had 100 locomotives in 20 – as at March 2014. So it is simply the cost of those 100 locomotives plus the cost of the next 100 and so forth. Right up to 2 0 1 8 . S i m i l a r l y f o r e l e c t r i c s a n d t h a t s u m g i v e s y o u t h e E C T. I t i s a simple summation of costs of acquiring those locomotives. I also mentioned earlier those costs included - it was not just the locomotive Page 77 of 173 27 NOVEMBER 2019 – DAY 194 price. We had escalation costs in there. A locomotive today at price X w i l l c o s t y o u s o m e t h i n g e l s e i n a y e a r ’s t i m e . S o y o u h a d t o a c c o u n t for inflation in there. Exchange would impact as well. Yo u h a d t o account for that within the cost and you also had contingencies. I g u e s s w e w i l l l o o k a t t h e d i e s e l a b i t l a t e r. ADV MAHLAPE SELLO: Yo u – t h e n a t s l i d e 5 – a t s l i d e 4 y o u a r e talking about the measures applied in appraise – appraising the business case. 10 At slide 5 you then talk to us about the variables making up revenue as per the business case and the variables making up cost as per the business case? MR CHABI: Correct. ADV MAHLAPE SELLO: So if you could deal with those. M R C H A B I : O k a y. S o w e h a v e l o o k e d t h r e e s u b v a r i a b l e s o r s h o u l d I say line items making up revenue in this instance. We looked at the distance to be travelled each year by each locomotive. The volumes to b e t r a n s p o r t e d b y e a c h l o c o m o t i v e . W e a l s o l o o k e d a t t h e R a n d t a r i ff per locomotive. I mean per million ton per kilometre. Yo u r r e v e n u e i s e s s e n t i a l l y t h e p r o d u c t o f t h a t . 20 Yo u t a k e w h a t y o u e x p e c t t o t r a n s p o r t i n t h a t p a r t i c u l a r y e a r. M u l t i p l y i t b y t h e d i s t a n c e a n d m u l t i p l y i t b y t h e R a n d t a r i ff a n d t h a t i s d o n e r i g h t t h r o u g h to 2049. It was 36-year projection period for this project where revenue is concerned. I think just to speak a bit about the escalation i n t h e R a n d t a r i ff s . T h i s s t a r t e d o ff a t 4 2 c e n t s . We saw that up to 48. Page 78 of 173 The 27 NOVEMBER 2019 – DAY 194 a v e r a g e e s c a l a t i o n r a t e o f t h a t R a n d t a r i ff . S o e a c h y e a r i t w a s – t h e R a n d t a r i ff w a s e s c a l a t e d j u s t t o k e e p i n l i n e w i t h i n f l a t i o n . O n a v e r a g e it was about 6.12% over the 36-year period. A lot – a little higher over the initial period I think ranging between 6 and 8%, but then stabilising a b o u t 6 % . O k a y. W h i c h i s a r e a s o n a b l e a s s u m p t i o n t o m a k e w h e n y o u project a revenue. ADV MAHLAPE SELLO: And if I may just clarify that escalation rate y o u s p e a k o f . Yo u d e r i v e f r o m t h e f i n a n c i a l m o d e l MR CHABI: Correct. 10 A D V M A H L A P E S E L L O : O k a y. MR CHABI: It is what I read in the financial model. A D V M A H L A P E S E L L O : N o . I t i s f i n e . Yo u m a y c o n t i n u e a n d n o w w e deal with the variables making up the costs of the business. MR CHABI: I think just to touch a bit on the incremental volumes and this – that incremental volumes are just volumes expected from 1064. W e a l r e a d y s a w s t a r t i n g o ff a t o n e u p t o 7 7 . I t a c t u a l l y p e a k e d a t 8 9 a n d t h a t i s w h e n y o u h a d y o u r e n t i r e f l e e t o f 1 0 6 4 l o c o m o t i v e s . O k a y. With 1064 locomotives you were expected to transport about 89 million t o n s o f c o m m o d i t i e s . I t t h e n t a p e r s o ff a t t h e e n d a s y o u r l o c o m o t i v e s 20 a r e w r i t t e n o ff , b e c a u s e t h e s e l o c o m o t i v e s h a v e a 3 0 - y e a r l i f e s p a n . I guess. A D V M A H L A P E S E L L O : O k a y. MR CHABI: The distance was on average about 550 kilometres a year and that is derived from historical figures what has been observed from the existing locomotive fleet. Page 79 of 173 27 NOVEMBER 2019 – DAY 194 A D V M A H L A P E S E L L O : R e l a t i n g t o s l i d e 5 n o w. W h a t y o u h a v e j u s t done is talk to the – that is the left side of the slide which are the variables making up the revenue. Now let us talk about the variables making up the cost. M R C H A B I : T h e c o s t . O k a y. S o u n d e r c o s t C h a i r w e h a d a n u m b e r o f variables and you can see them overhead on the slide. The first one b e i n g T C O . T h e To t a l C o s t o f O w n e r s h i p o f w h i c h E T C f o r m t h e p a r t o f . Yo u a l s o h a d w a g o n c o s t s , b e c a u s e t h e l o c o m o t i v e a l s o r e f e r s t o t h e h e a d – t h e e n g i n e o f t h e t r a i n . Yo u h a d i n f r a s t r u c t u r e c o s t s . This is essentially what you had to lay out to operationalise 10 the trains and then you had overhead costs. So the certain costs as a business that occur that are fixed regardless of the volume of business that you take on and that was derived from the financial statements and your tax costs. So these are the cost items actually modelled as part of this p r o j e c t . N o w m o v i n g i n t o t h e To t a l C o s t o f O w n e r s h i p . W e m e n t i o n e d NTCO. We had the capital acquisition cost of the locomotive. That w a s t h e E T C . I n a d d i t i o n t o E T C a n d t h i s i s s t i l l p a r t o f To t a l C o s t o f O w n e r s h i p . Yo u h a d t h e f u e l c o s t s . Yo u h a d t h e p e r s o n n e l c o s t s . Yo u h a d i n s u r a n c e c o s t s . Yo u h a d e m i s s i o n c o s t s b o t h d i e s e l 20 and electric locomotives. So you had the same across diesels and across electrics. So those various costs and I am just trying to locate myself. ADV MAHLAPE SELLO: Perhaps before you jump too far ahead in your statement, because we have just gone through the variables Page 80 of 173 27 NOVEMBER 2019 – DAY 194 making up the revenue and the variables making up the cost and you told us about the measures applied in appraising the business case. Maybe you must talk to what you state in your paragraph 6.4 which is that: “The main measure used to appraise the business case w a s t h e N e t P r e s e n t Va l u e . ” So now you have told us what you have taken into c o n s i d e r a t i o n i n o r d e r t o a p p r a i s e t h e N e t P r e s e n t Va l u e a n d i f y o u g o to slide 6. That is where you set them out in tabular form and you put 10 values to each one of them? MR CHABI: Correct. ADV MAHLAPE SELLO: And it is in that table that you deal with your diesel TCO and your electric TCO. So you may talk to us per line item. MR CHABI: Or slide 6? A D V M A H L A P E S E L L O : Ye s . MR CHABI: So Chair as you can see from the slide. The slide speaks t o w h a t t h e n e t – t h e e x p e c t e d P r e s e n t Va l u e w a s a t t h e t i m e – t h e N e t P r e s e n t Va l u e a n d t h e v a l u e o f R 2 . 7 b i l l i o n w a s e x p e c t e d a t t h e t i m e from this project. 20 ADV MAHLAPE SELLO: Can I – sorry to interject. Can I put it in s i m p l e t e r m s a n d s a y N e t P r e s e n t Va l u e o f 2 . 7 b i l l i o n i s t h e p r o f i t ? MR CHABI: Correct. We can ...(intervenes). ADV MAHLAPE SELLO: So that is the expected profit on this entire project? M R C H A B I : Ye s . Page 81 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: Over the period? M R C H A B I : W e c a n a d d u p t h a t a n a l o g y. Ye s . A D V M A H L A P E S E L L O : O k a y. M R C H A B I : O k a y. S o I w i l l j u s t r e f e r t o i t a s t h e p r o f i t e x p e c t e d a s a t April 2013 and that came to about R2.7 billion. I will take you through the various cost items just to give an idea of how the 2.7 was …(indistinct). If you look at the revenue component in that slide – on t h a t s l i d e . S o r r y. R e v e n u e m a d e u p 1 0 9 b i l l i o n . So over that projection period, that 36-year period, the value 10 of the revenue expected as at April 2013 was R109 billion. I think when you look at the profit of 2.7 as a percentage of that. Yo u a r e looking at about 2.5% profit. So that tells us that the costs were quite high as well. I f y o u l o o k a t t h e d i e s e l T C O t h a t i s t h e To t a l C o s t o f Ownership attributable to diesel locomotives and that TCO includes ETC and if I recall right the ETC component was only 8 billion of that 22 billion that we see there. S o d i e s e l T C O w a s a b o u t 2 2 b i l l i o n i n P r e s e n t Va l u e t e r m s . Electric TCO was about 21 – also in the region of 22 billion. However the ETC relating to electrical was slightly higher at about four billion. I 20 t h i n k w e w i l l l o o k a t t h a t d i e s e l a b i t l a t e r. W a g o n c o s t s . . . ( i n t e r v e n e s ) . ADV MAHLAPE SELLO: Before you get there. Now those the diesel and the electric TCO, the costs, is it correct understanding that these are the costs I would have to incur to own and operate or just to own the locomotives? M R C H A B I : Yo u a r e r e f e r r i n g t o T C O i n t h i s i n s t a n c e ? Page 82 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: TCO. MR CHABI: So to own and to operate. ADV MAHLAPE SELLO: It is own and operate? MR CHABI: Correct. ADV MAHLAPE SELLO: locomotives at consideration. a So if I am going to buy a certain number of particular rate taking all the variables into I am calculating – you say it is calculated over the period in order for me to make my 2.7 billion profit. It is – the total cost of my owning and operating a diesel – those diesel locomotives is 10 going to come in at 22 billion? MR CHABI: Correct. ADV MAHLAPE SELLO: For which I must deduct from the revenue? M R C H A B I : Ye s . ADV MAHLAPE SELLO: Okay and I must do the same for the electrics as well? MR CHABI: Correct. A D V M A H L A P E S E L L O : T h a n k y o u . Yo u m a y p r o c e e d . MR CHABI: As mentioned in this point with diesel we only dealt with the locomotive. 20 Wagons were required. I think there was a total of about 16500 wagons required to operationalise the 1064 locomotives a n d t h o s e c a m e i n a t a c o s t i n P r e s e n t Va l u e t e r m s o f a b o u t 1 2 b i l l i o n . A D V M A H L A P E S E L L O : O k a y. MR CHABI: There were infrastructure costs as well and I would resume these would relate to the railing, the electrics and so forth. T h o s e c a m e i n a t a b o u t 1 9 – o h s o r r y. 18 – R18.5 billion and your Page 83 of 173 27 NOVEMBER 2019 – DAY 194 o v e r h e a d c o s t s i s a b o u t R 2 4 b i l l i o n . Ta x a t a b o u t R 7 . 7 b i l l i o n . G i v i n g us a profit position of about 2.7 billion. So despite a large revenue figure expected. We also had large costs associated with the project. Hence the statement that ETC made up a very tiny component of the costs of this project back when we look at the figures. It was only about 47% of the TCO costs and only about 20% of the overall costs. ADV MAHLAPE SELLO: Now in your – at your slide 6 you arrive at this N P V o f 2 . 7 b a s e d o n w h a t y o u c a l l a h u r d l e r a t e . Yo u h a v e t o t a k e a 10 hurdle rate into consideration. M R C H A B I : T h e b u s i n e s s c a s e d e r i v e s t h a t . Ye s . ADV MAHLAPE SELLO: Oh the business case. Yo u i t i s n o t d i r e c t l y w h o – M r C h a b i I a p o l o g i s e . Yo u a r e q u i t e c o r r e c t . T h e b u s i n e s s c a s e . Can you talk to us about the hurdle rate which is what you refer to at the top of that slide where you say? “ T h e P r e s e n t Va l u e c o m p u t a t i o n b a s e d o n a h u r d l e r a t e of 18.56%.” M R C H A B I : O k a y. ADV MAHLAPE SELLO: 20 And if I may while you are thinking is it the rate discount rate? MR CHABI: The risk discount rate. Correct. ADV MAHLAPE SELLO: The risk discount rate. Then you talk about t h a t a s w e l l a n d y o u h e l p u s d i s t i n g u i s h t h e o n e f r o m t h e o t h e r. MR CHABI: O k a y. We spoke about valuing cash flows in Present Va l u e t e r m s . T h e P r e s e n t Va l u e o f t h e r e v e n u e . T h e P r e s e n t Va l u e o f Page 84 of 173 27 NOVEMBER 2019 – DAY 194 the costs. P r e s e n t Va l u e s i m p l y m e a n s b r i n g i n g b a c k t h e c o s t b y a certain factor – a certain discount rate. I think to put it very simply and maybe I will come back to this. If you expect to invest R100 and get 10 i n t h e f i r s t y e a r, 1 0 i n t h e s e c o n d y e a r a n d 11 0 i n t h e t h i r d y e a r. Yo u a r e l o o k i n g a t a d i s c o u n t f o r a b o u t 1 0 % t o g e t y o u b a c k to 100. I think when we get to IR. I will explain how that 10% relates t o I R a s w e l l . N o w Tr a n s n e t h a s w h a t w e c a l l o r w h a t t h e y c a l l – s o r r y – a Work and Hurdle Rate Policy and that policy determines what the hurdle rate should be for two types of projects. 10 Greenfields Projects and Brownfields Projects. G r e e n f i e l d s P r o j e c t s a r e p r o j e c t s t h a t Tr a n s n e t h a s n e v e r undertaken before and as you will expect the discount rate, the hurdle r a t e , n e e d s t o … ( i n d i s t i n c t ) f o r t h i s p o i n t f o r n o w, w i l l b e h i g h e r f o r a Greenfield Project compared to a Brownfields Project. I think if we take a simple analogy of a site with nothing but grass. There is a lot more work to done to get that site to be operational to service purpose. A Brownfields Project at least you have got brown bricks. So y o u h a v e g o t s o m e w h e r e t o s t a r t o ff f r o m . T h e r i s k i s a l o t l o w e r, b e c a u s e y o u a r e s t a r t i n g y o u r p r o j e c t a t a d i ff e r e n t s t a g e . 20 So the c o n s t r u c t i o n s t a g e i s o ff t h e t a b l e . A t t h e t i m e Tr a n s n e t ’s p o l i c y o n t h e hurdle rate was 18.56% for Greenfields Project and I think Brownfields – I c a n n o t r e m e m b e r. P r o b a b l y a b o u t 2 % l o w e r, b u t t h a t n e e d s t o b e v e r i f i e d . N o w what is a hurdle rate? A hurdle rate is a rate of return that the organisation wants to make on any Greenfields Project that it will Page 85 of 173 27 NOVEMBER 2019 – DAY 194 invest in. In other words it will look at the return expected from a project and if that return does not meet the hurdle rate they are not interested. They will simply put aside. To a r r i v e a t t h a t r a t e y o u l o o k a t a r a n g e o f f a c t o r s , y o u r capital providers, in other words how much of your project is being financed by debt and what is the cost of that debt. In this case arriving at that rate the cost is about 7.31% so that is the weight of the various d e b t s t r u c t u r e s t h a t Tr a n s n e t w o u l d h a v e h a d t o e m p l o y. The capital coming through, what return do we want on that 10 c a p i t a l , i t w a s a b o u t 1 6 . 5 8 % o k a y. So it will cost you an average of about 12% if you combine the seven and the 16 for the capital to embark on this project. So your real weight has got to be at least that cost of capital. In this instance given that we’re dealing with the G r e e n f i e l d s p r o j e c t , o n e t h a t Tr a n s n e t h a s n e v e r u n d e r t a k e n b e f o r e a n d has no experience in undertaking a rate of 18.56 was applied which is q u i t e a h i g h r a t e c o n s i d e r i n g t h e 1 2 t h a t w e ’ r e l o o k i n g a t , t h a t ’s a 6 % margin addition to the cost of capital in this instance. Now that is just a target rate, in other words we’ve got six Greenfields projects, we’re only going to be undertaking three because 20 o n l y t h r e e g i v e u s a r e t u r n o f a t l e a s t 1 8 . 5 6 % t h a t ’s h o w y o u u s e t h e hurdle rate. To b e a b l e t o m a k e t h a t d e c i s i o n y o u ’ v e g o t t o c o m p u t e w h a t ’s c a l l e d a n i n t e r n a l r a t e o f r e t u r n , t h a t ’s s i m p l y t h e r e t u r n t h a t y o u expect from the project. Going to my initial example of a hundred t h a t ’s a t y p i c a l g o v e r n m e n t b o n d f o r e x a m p l e , I m e a n – i n t h i s i n s t a n c e , I mean you put in a 100 you expect 10 as a coupon in the first year Page 86 of 173 27 NOVEMBER 2019 – DAY 194 a n o t h e r 1 0 t h e s e c o n d y e a r, t h a t ’s a n e x a m p l e o f a – a n d a n o t h e r 1 0 0 a n d 1 0 a t t h e f i n a l s t a g e s , t h a t ’s y o u r c a p i t a l p l u s y o u r 1 0 % i n t e r e s t . The IRR or Internal Rate of Return in this instance is 10%, it is that 1 0 % t h a t y o u w i l l c o m p a r e y o u r h u r d l e r a t e . S o y o u m i g h t s a y, w e l l I want to invest a 100 I’m going to borrow the 100 but how much does it cost me to borrow the 100, it costs me 8%. I would set my hurdle rate at 9%, if my investment does not give me at least 9% I’m not interested. In this instance my IRR from this investment is 10, so it meets my investment criteria, my hurdle rate of nine. So I will invest 10 t h e 1 0 0 t h a t I b o r r o w e d i n t o t h i s p r o j e c t , m a k e m y 1 0 % a n d p a y o ff t h e 9 % , s o t h a t ’s h u r d l e r a t e a n d I R R . Now the risk inherent in this investment of a 100, 10, 10, 10, 1 0 0 a n d 1 0 i s a d i ff e r e n t r i s k a l t o g e t h e r. Yo u ’ v e g o t t o u n d e r g o a detailed risk assessment to understand what that risk discount ratio should be. So looking at government bonds and the profile I’ve just given you and equities, you might expect the same cash-flow screen from a government bond and equities however I think we can both a g r e e t h a t t h e r i s k p r o f i l e i s t o t a l l y d i ff e r e n t b e t w e e n e q u i t i e s a n d government bonds. 20 So the risk discount rate that you would apply on this stream o f c a s h - f l o w i s d i ff e r e n t t o t h e r i s k d i s c o u n t r a t e f r o m t h i s s t r e a m o f cash-flow from equities and that requires you to undergo a detailed risk assessment of both investments together with the risk discount rate. In t h i s i n s t a n c e Tr a n s n e t c h o s e t o a p p l y t h e h u r d l e r a t e a s i t ’s r i s k discount rate. I guess later on we will speak about our view on that Page 87 of 173 27 NOVEMBER 2019 – DAY 194 rate, we’re happy with it, given the process that they underwent to arrive at that 18.56% it was evidenced based looking at companies locally and abroad you’re looking at about 160 companies to arrive at a premium over the weighted average cost of capital which is what your shareholders will have. Average of the cost of your shareholder capital and your debt holder capital cost. We were happy with the 18.56% but essentially t h a t i s w h a t t h e 1 8 . 5 6 % i s , i t i s Tr a n s n e t ’s h u r d l e r a t e w h i c h i s a l s o their risk discount rate for this project. 10 ADV MAHLAPE SELLO: Okay is it coincidental that they both happen to be 18.56%? MR CHABI: Is it coincidental? ADV MAHLAPE SELLO: Ja is it just a matter of coincidence that they are both 18.56 both the hurdle rate and the risk discount rate? MR CHABI: Well I’d like to believe that a detailed risk assessment was done, my understanding is that the 18.56 was actually derived from this 1064 project. ADV MAHLAPE SELLO: MR CHABI: 20 O k a y. S o i t ’s s l i g h t l y o ff t h a t p r o j e c t t o a r r i v e a t t h e h u r d l e r a t e . ADV MAHLAPE SELLO: Now you say the hurdle rate used here is 18.56 was that a prescribed rate and if so by what or is that a rate that is randomly used in the business case, where does the 18.56% derive from? MR CHABI: W e l l t h e r e i s a p o l i c y t o t h a t e ff e c t , t h e W a c c a n d H u r d l e R a t e P o l i c y. Page 88 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: T h a t ’s w h a t p r e s c r i b e s w h a t t h e a p p l i c a b l e hurdle rate will be? MR CHABI: For the various projects it will be Brownfields or Greenfields. ADV MAHLAPE SELLO: So now this being Greenfields it had to be 18.56 so it was not open to whoever was working on the business case to decide that they are going to use a hurdle rate of 12? MR CHABI: No. ADV MAHLAPE SELLO: 10 I t w a s n ’ t i t w a s a p r e s c r i b e d r a t e o k a y. F r o m your paragraph 6 of – now we understand how you arrive at the net present value and let me just check at this point you, by you I mean ALL5 having done your investigations you don’t take issue with the treatment of all these costs to determine the net present value? MR CHABI: We were happy with the approach taken involving the c o s t s , w e h a d c e r t a i n v i e w s I s u p p o s e a l o n g t h e w a y, t h e t a x a s s e t w a s treated and by tax asset in this case I mean if you have a loss in one year you can carry it over and I think the taxation rues at this point allow you to carry it over for five years, in the model it was done for one year which is a very conservative approach, in other words we 20 were deciding not to carry this thing for five years but for one year and t h a t h a s a n e ff e c t o f r e d u c i n g y o u r p r e s e n t v a l u e . So we were – we accepted that approach. ADV MAHLAPE SELLO: W o u l d i t h a v e t h e e ff e c t o f r e d u c i n g t h e N P V significantly or? MR CHABI: Well had the ...(indistinct) of five years it would have Page 89 of 173 27 NOVEMBER 2019 – DAY 194 i n c r e a s e d t h e N P V. ADV MAHLAPE SELLO: MR CHABI: It would have increased it? Ye s . ADV MAHLAPE SELLO: So are you suggesting this was a more stringent approach? MR CHABI: This is a more conservative approach yes than, I guess, i t ’s m o r e p e s s i m i s t i c . ADV MAHLAPE SELLO: A d i ff e r e n t t r e a t m e n t m i g h t m a y h a v e r e s u l t e d in a higher NPV? 10 MR CHABI: ADV A higher profit yes. MAHLAPE SELLO: So because now they employed a conservative approach came out with a lesser NPV you are happy to accept that ...(intervenes). MR CHABI: We are happy to accept that. ADV MAHLAPE SELLO: MR CHABI: There are no real issues there? Correct. ADV MAHLAPE SELLO: From your then paragraph 6.7 you say the second measure is the ETC, right and you made the point as your slide 6 shows us that the project was profitable at an ETC of R38.6 billion, 20 you see that? MR CHABI: Correct. ADV MAHLAPE SELLO: Now you take it from there and just to give you guidance if you go over at slide 7 at some point, that might be a slide that is relevant to the next issues you are going to discuss. MR CHABI: Okay I think it is a – I should address this slide I Page 90 of 173 27 NOVEMBER 2019 – DAY 194 suppose. ADV MAHLAPE SELLO: MR CHABI: Ye s . So Chair this slide, essentially is a sensitivity test on the discount rate and its impact on the net present value, we spoke about the weight of average cost of capital in other words the average of what shareholders would cost for the capital and what your debt holders will cost for they want to provide you as capital, the average of that. For t h i s c a s e i t w a s 1 2 . 5 6 % o k a y a n d t h a t ’s t o w a r d s t h e e n d . S t a r t i n g o ff a t t h e f a r e n d o f t h e s l i d e 1 2 . 6 % - a t 1 2 . 6 % – i f 10 12.6% was used as the risk discount rate this would have produced a profit in that present value of R34.1 billion you drop that by 1% – I mean you increase that by 1% so move up from 12.6 to 13.6 your profit drops to 26.2. Now this is indicative of an increase of the level of risk i f y o u i n c r e a s e y o u r r i s k d i s c o u n t r a t e s , i t ’s s y n o n y m o u s w i t h y o u assuming that the risk of the project has increased. So I want to d i s c o u n t m y c a s h - f l o w b y a h i g h e r r a t e a n d t h a t h a s t h e e ff e c t o f lowering your profit. The objective of this slide is to show you how exponential this profit – the distribution of this profit is and if you look at that, it drops 20 exponentially so – and I think in the statement I do mention, I can just get back to those specific numbers, I can’t find it but essentially the d i ff e r e n c e b e t w e e n 2 . 7 a n d 5 . 9 I t h i n k i s a b o u t – w e l l R 3 . 2 b i l l i o n i f y o u l o o k a t t h e n e x t d i ff e r e n c e b e t w e e n 5 . 9 a n d 9 . 7 I t h i n k y o u ’ r e l o o k i n g a t about roughly 4. S o t h a t d i ff e r e n c e i n c r e a s e s w i t h a d r o p i n t h e d i s c o u n t r a t e s o Page 91 of 173 27 NOVEMBER 2019 – DAY 194 e x p o n e n t i a l l y t h e d i ff e r e n c e k e e p s i n c r e a s i n g a n d u p w a r d s l o p i n g , profit position there as you drop the discount rate by 1%. ADV MAHLAPE SELLO: So we know from what you informed us that at 18.5% hurdle rate there was a profit of R2.7 billion. MR CHABI: Correct. ADV MAHLAPE SELLO: Yo u i n c r e a s e t h a t h u r d l e r a t e b y 1 % a n d y o u wipe out all profit? MR CHABI: Ye s a n d t h a t i s e s s e n t i a l l y i n t e r n a l r a t e o f r e t u r n . ADV MAHLAPE SELLO: 10 MR CHABI: To 1 9 . 6 % . Correct, so just a 1% increase in that risk discount rate would have wiped out your profit of R2.7 billion in this instance. ADV MAHLAPE SELLO: And that hurdle rate would only drop the less r i s k y t h e p r o j e c t w a s . S o y o u w o u l d u s e , l e t ’s s a y a 1 7 . 6 r i g h t d o w n , l e t ’s s a y t o 1 2 d e p e n d i n g o n t h e r i s k p r o f i l e o f t h e p r o j e c t . MR CHABI: Okay so the risk discount rate would drop with a decrease i n r i s k y e s , t h a t ’s w h a t y o u w o u l d e x p e c t t o s e e . ADV MAHLAPE SELLO: And as it decreases then it gives you more profit? MR CHABI: 20 Correct. ADV MAHLAPE SELLO: Which you calculate at 12.6% would have been a profit of R34 billion? MR CHABI: Ye s . ADV MAHLAPE SELLO: N o w t h e r e ’s a s i g n i f i c a n t d i ff e r e n c e o r c h a n g e b e t w e e n t h e r a t e a t 1 3 . 6 a n d 1 2 . 6 i t ’s a – s o t h a t r e f l e c t s – d o e s t h a t g i v e a t r u e s e n s e o f t h e v a l u e o f t h a t 1 % d i ff e r e n c e i n t h e Page 92 of 173 27 NOVEMBER 2019 – DAY 194 h u r d l e r a t e ? T h e r e ’s a n i m p a c t , t h e 1 % c h a n g e h a s . MR CHABI: Sorry? ADV MAHLAPE SELLO: I t ’s t h e i m p a c t t h e 1 % c h a n g e o f t h e h u r d l e rate has on the projected profit. MR CHABI: Correct and that impact increases as you drop the discount rate. ADV MAHLAPE SELLO: Okay you make a point about the ETC and what the ETC establishes and doesn’t establish. What it considers or doesn’t consider and you say the estimated total cost speaks purely to 10 cost and does not consider revenue and therefore is not a measure to determine profit? MR CHABI: Ye s . ADV MAHLAPE SELLO: Okay and you mention that it is inappropriate therefore to have regard to the ETC only in order to determine the profitability of the project? MR CHABI: Correct. ADV MAHLAPE SELLO: Why are you pointing this out to us in particular? MR CHABI: 20 I point that out because there seemed to have been an over emphasis on ETC at the expense of the profitability of the project. ADV MAHLAPE SELLO: There seems to have been – where was this please be more specific you say you speak in general terms that there seems to have been? MR CHABI: Besides starting with the mandate that we should check the ETC and having looked deeper into the business case we realised Page 93 of 173 27 NOVEMBER 2019 – DAY 194 actually the ETC only makes up 20% of the cost, the project is a lot bigger than this ETC that we are referring to, the memorandum, I think a b i t l a t e r, a s w e a l l – w e l l w e ’ l l c o m e t o i t . ADV MAHLAPE SELLO: Ja for the record tell us again what memorandum this is? MR CHABI: The 23 May 2014 memorandum speaking of the increase in ETC and that is the headline on that memorandum the Board might have wanted to look beyond the ETC and get the profitability of the project and that seems to have been addressed in one or two 10 paragraphs whereas ETC made up the remaining 80 odd paragraphs. ADV MAHLAPE SELLO: And that memorandum is the memorandum to t h e B o a r d o f Tr a n s n e t a t t h e t i m e o n t h e 2 3 r d o f M a y, t h e r e a b o u t 2 0 1 4 ? MR CHABI: Correct. ADV MAHLAPE SELLO: Seeking approval for the increase of the ETC from R38 billion to R54 billion? MR CHABI: Correct. ADV MAHLAPE SELLO: And you are saying in that memorandum there seems to have been an over-emphasis on ETC? MR CHABI: 20 In justifying the ETC. ADV MAHLAPE SELLO: MR CHABI: In justifying the ETC? The increase in the ETC yes. ADV MAHLAPE SELLO: And your view is that less attention was given to the profitability of the project? MR CHABI: Correct. ADV MAHLAPE SELLO: To t h e t o t a l i t y o f t h e p r o j e c t o k a y. Yo u t h e n Page 94 of 173 27 NOVEMBER 2019 – DAY 194 lead into your paragraph 6.8 and you talk about what you must address in order to determine the financial viability of the 1064 transaction, you see that? MR CHABI: I do. ADV MAHLAPE SELLO: Okay can we deal with that in brief and we are now dealing, I think, specifically with your variables ...(intervenes). MR CHABI: So we have discussed this. ADV MAHLAPE SELLO: We have discussed this in reference to the slides yes, that would be slide 5 which is the slide which was dealing 10 with revenue and variables making up revenue and costs. MR CHABI: Correct, I think the one part we had not discussed the 6.83 which is the view on the assumptions made to the variables. ADV MAHLAPE SELLO: S o r r y, I d i d n ’ t h e a r t h a t p l e a s e s a y t h a t again? MR CHABI: So looking at that, 6.8.1 has been dealt with which is the – relates to the revenue costs. ADV MAHLAPE SELLO: MR CHABI: Ye s . In the business case the net present value of R2.7 billion has been addressed. 20 ADV MAHLAPE SELLO: MR CHABI: We’ve dealt with that. The reasonability of the assumptions in relation to ETC has not yet been addressed. ADV MAHLAPE SELLO: MR CHABI: O k a y t h e n p e r h a p s l e t ’s d e a l w i t h t h a t . O k a y. ADV MAHLAPE SELLO: Before we do Mr Chabi we have dealt with Page 95 of 173 27 NOVEMBER 2019 – DAY 194 the volumes. MR CHABI: We have. ADV MAHLAPE SELLO: Which you deal with at 7.2 we’ve dealt with t h e d i s t a n c e t h e t a r i ff s t h e c o s t s y o u r e c a l l w h e r e w e d e a l t w i t h t h e total cost of ownership, revenue cost and the like. We must deal with the total cost of ownership before you express an opinion on the reasonability of the assumptions. MR CHABI: Shouldn’t we? ADV MAHLAPE SELLO: 10 The total cost of ownership, what you deal with from your paragraph 7.6. MR CHABI: O k a y. ADV MAHLAPE SELLO: Before you express an opinion on the reasonableness of assumptions we must deal with some of these aspects yes. MR CHABI: Correct. ADV MAHLAPE SELLO: O k a y a n d t h a t , C h a i r, y o u ’ l l f i n d a t p a g e 1 6 starting at paragraph 7.6. CHAIRPERSON: MR CHABI: 20 Ye s I ’ v e g o t i t . S o C h a i r s t a r t i n g o ff o n p a r a g r a p h 7 . 6 t h i s l o o k s a t t h e total cost of ownership and we have dealt with this in some detail highlighting what the costs were but we did not speak specifically to the ETC component although we did allude to it earlier on and the ETC in this instance looked at the capital of acquiring the – or the cost of acquiring the locomotives, so the price per locomotive, there was a 2% localisation premium in the business case added to the price to allow Page 96 of 173 27 NOVEMBER 2019 – DAY 194 for the likelihood of the locomotive manufacture, locally being higher than that abroad. I think reasonably so, so ETC was the price the localisation premium also included inflation, so escalation in the price over the v a r i o u s y e a r s a l s o i n c l u d e d – a n d t h a t ’s e s c a l a t i o n o r i n f l a t i o n l o c a l l y and abroad because a part of these locomotives were to be manufactured there was a foreign component to it and there was a local c o m p o n e n t t o t h e l o c o m o t i v e s o d i ff e r e n t i n f l a t i o n o r e s c a l a t i o n r a t e s would apply on these locomotives. We also had a foreign currency risk 10 hedging cost, a Forex cost and we had contingencies, so those are the elements that made up ETC in this business case and as mentioned ETC made up – formed the part of total cost of ownership. Now how was ETC, and I’m not sure if we should actually a d d r e s s t h i s n o w h o w t h e E T C w a s m o d e l l e d o r m u c h l a t e r, I c a n g o through the modelling process quickly or shall I say the deviation of 3.6 or lave that for later? ADV MAHLAPE SELLO: MR CHABI: L e t ’s l e a v e t h a t f o r l a t e r. For later okay thank you. So just to give you a brief e x p l a n a t i o n o f – s t a r t i n g o ff w i t h d i e s e l s , s o t h e p r i c e a s s u m e d f o r 20 diesel locomotives in the 2013 business case was 2.6 million Dollars a n d 3 . 5 f o r e l e c t r i c s , 5 0 % o f t h a t 2 . 6 m i l l i o n w a s t o b e b o r n e l o c a l l y, s o t h a t ’s 1 . 3 m i l l i o n D o l l a r s o k a y, s o 1 . 3 m i l l i o n D o l l a r s w o r t h o f locomotive if I can use that term was to be manufactured in South Africa, 1.3 million Dollars worth of locomotive was to be manufactured overseas, in this instance looking at the US given that we’re dealing Page 97 of 173 27 NOVEMBER 2019 – DAY 194 with the US Dollar price. The foreign component of the locomotive, the 1.3 million Dollars, would be escalated as you would expect by foreign escalation, using foreign escalation rates and what was assumed in this instance was about 2.3% a year escalation. The local component of the 1.3 million Dollars would be escalated because that is in rands using local i n f l a t i o n i n d i c e s o r r a t e s , t h a t ’s a b e t t e r t e r m t o u s e a n d t h e r e w e I think the ...(indistinct) was between 5.3 and 5.7% over the period or 5 . 9 % o k a y. 10 So we can see that the inflation rates are materially d i ff e r e n t i n t h i s i n s t a n c e , t h e e c o n o m i e s a r e d i ff e r e n t , t h e y ’ r e s u b j e c t t o d i ff e r e n t e c o n o m i c c o n d i t i o n s s o y o u c a n e x p e c t t h o s e c h a n g e s i n p r i c e s t o d i ff e r b e t w e e n t h e t w o e c o n o m i e s . So to arrive at a price for the diesel locomotive in year one with the model assuming the 2.6 million Dollar price did not escalate t h a t i n t h a t y e a r, h o w e v e r u s e d f o r t h e f o r e i g n c o m p o n e n t b e c a u s e t h a t had to be hedged and we’ll demonstrate that there was hedging in a s h o r t w h i l e , t h e f o r w a r d r a t e f o r t h e D o l l a r i n a y e a r, a n d I t h i n k a t t h a t p o i n t i t m u s t h a v e b e e n 9 . 5 8 2 o r s o m e t h i n g t o t h a t e ff e c t . So the foreign component of course to convert that amount to Rand terms had 20 to be multiplied by 9.5 rands to the Dollar to arrive at a Rand price to arrive at that foreign component and ...(intervenes). ADV MAHLAPE SELLO: MR CHABI: That was the exchange rate applied at the time. ADV MAHLAPE SELLO: MR CHABI: That was the exchange rate at the time? Ye s . And the rest of course, was just – to the local component Page 98 of 173 27 NOVEMBER 2019 – DAY 194 of course you had to add the 2% premium to that, the sum of those f a c t o r s I g a v e y o u , t h e R a n d p r i c e i n t h a t y e a r, I t h i n k i t w a s a b o u t R25.2 million, let me just check that. ADV MAHLAPE SELLO: Yo u d e a l w i t h – j u s t l o o k a t y o u r 7 . 6 . 4 . 1 y o u give it in Dollar terms at 2.6 million for diesel and 3.5 for electric locomotives. MR CHABI: Correct, okay yes to that gave us a total of R25.2 million rands per locomotive – diesel locomotive in 2013 ...(intervenes). ADV MAHLAPE SELLO: 10 MR CHABI: 9.58 odd. ADV MAHLAPE SELLO: MR CHABI: At an exchange rate of 9.5. O k a y. T h e s a m e p r o c e s s w a s f o l l o w e d f o r t h e y e a r s t o f o l l o w, however the Rand component was escalated at the local rate of inflation, the foreign component at the foreign rate of inflation and whatever that amounted – so in year two you would take the 1.6 million Dollars, escalate it by 2.3% and then that figure is then what you then hedge, multiply at the forward rate in year two. The combination of that gives you a price and that price was R26.7 million in 2014. ADV MAHLAPE SELLO: 20 MR CHABI: Per locomotive. ADV MAHLAPE SELLO: MR CHABI: And that is what you have to hedge? No, no so this already includes the hedging cost. ADV MAHLAPE SELLO: MR CHABI: Per locomotive? Oh so it already includes the hedging cost? T h e 2 6 – i t ’s a R a n d a m o u n t a n d i t ’s a c o m b i n a t i o n o f t h e local component in Rand terms and the foreign component in Rand Page 99 of 173 27 NOVEMBER 2019 – DAY 194 terms allowing for the 2% localisation premium. ADV MAHLAPE SELLO: Allowing for 2 – yes. So if it were to be set out in an Excel Spreadsheet you say you are looking at the initial c a p i t a l o u t l a y, t h e a c q u i s i t i o n c o s t r i g h t , w o u l d i t b e c o r r e c t t o s a y, i n that acquisition cost the Chair should expect to be able to locate the base price of the locomotive, the localisation premium, I’m looking at paragraph 7.6.2, the escalations to the price, the hedging costs and contingencies. MR CHABI: 10 Correct. ADV MAHLAPE SELLO: A n d t h e c u m u l a t i v e o f a l l t h a t i s w h a t ’s g o i n g to tell me what the acquisition costs, the pure acquisition costs are? MR CHABI: W e l l i t ’s g o i n g t o t e l l y o u w h a t t h e E T C i s . ADV MAHLAPE SELLO: MR CHABI: What the ETC is? Correct. ADV MAHLAPE SELLO: Ye s o k a y, o v e r l e a f y o u d e a l – w h a t y o u ’ v e just dealt with is an example – was a diesel locomotive and then the same process is repeated for electric locomotives which is what you deal with at page 17, are you still with me? MR CHABI: 20 Correct. ADV MAHLAPE SELLO: Okay and if you look at your paragraph 7 . 6 . 1 0 a t p a g e 1 8 t h e r e ’s y o u r 9 . 1 2 8 5 t h a t w a s y o u r s p o t r a t e , t h a t w a s exchange rate as at April 2013? MR CHABI: Correct so. ADV MAHLAPE SELLO: What is the source of that exchange rate or did you ...(indistinct) that exchange rate that you have reflected here? Page 100 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: O h t h a t ’s t h e b u s i n e s s c a s e , t h e f i n a n c i a l m o d e l a l l o f these derives from the business model. ADV MAHLAPE SELLO: MR CHABI: These figures? Correct. ADV MAHLAPE SELLO: And equally so then the forward rates as set out immediately below that at page 18 looking at 2014, 2015, 2016, 2017, 2018, 2019 all those derived from the financial model? MR CHABI: Correct. ADV MAHLAPE SELLO: 10 other And it applying those various rates amongst t h a t e v e n t u a l l y, t o the original locomotive price that will eventually lead us to the R38.6 billion? MR CHABI: Correct, applying these rates allowing for inflation and all the other variables. ADV MAHLAPE SELLO: Ye s a b s o l u t e l y, t h e c o n t i n g e n c i e s . From paragraph 19 you deal with the detail of the cost. MR CHABI: Paragraph 19? CHAIRPERSON: Yo u s a i d f r o m p a r a g r a p h ? ADV MAHLAPE SELLO: P a g e 1 9 t o o m a n y P ’s I a p o l o g i s e C h a i r. F o r the record your page 19 of your statement you then unpack the various 20 costs, the personal costs, fuel costs, maintenance costs. MR CHABI: T h o s e a r e s t i l l t h e c o s t s m a k i n g u p T C O , To t a l C o s t o f Ownership. ADV MAHLAPE SELLO: MR CHABI: Ye s . Correct. ADV MAHLAPE SELLO: And that detail we have dealt with in part, Page 101 of 173 27 NOVEMBER 2019 – DAY 194 p r e v i o u s l y. MR CHABI: We have. ADV MAHLAPE SELLO: We don’t have to worry about – so now we have taken into consideration all the assumptions. MR CHABI: Well I think it is important to mention one thing Advocate, the maintenance costs. ADV MAHLAPE SELLO: MR CHABI: Maintenance costs? W e ’ v e g o t t w o d i ff e r e n t t a b l e s , t w o d i ff e r e n t F o r e x r a t e s within the business plan. 10 ADV MAHLAPE SELLO: MR CHABI: Okay take us through that, talk to us to that. Now we found it important to speak about the various exchange rates found in the business case because the mandate will tell us that hedging is included in 30.6, hedging costs I included in the 30.6 billion or not. We came across hedged forward curves for foreign currency hedging we also came across forecasts and those forecasts are what we have under the maintenance costs and we have them specifically under maintenance costs because forecasts – forecasted rates are only applied in projecting maintenance costs and that is the only instance where we saw forecasted rates being applied in the 20 business case. Everywhere else it was the forward curve. ADV MAHLAPE SELLO: And we will get to the relevance of what you point out later when we’re talking about the treasury curve rate. For n o w, t h e n w e ’ v e c o n s i d e r e d t h e v a r i a b l e s a n d a s s u m p t i o n s t h a t underpin the ETC. Page 102 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: We have. ADV MAHLAPE SELLO: Okay and you summarise these at your slide 8 and having taken us through that detail are you now in a position to express a view as regards the reasonability of these assumptions? MR CHABI: Correct, so a lot of these costs were escalated, well the ETC the locomotive price – the local component of the locomotive prices was escalated using SA Producer Price Indices, it is undoubtedly the right index to use given that you look at manufacturing goods, the locomotives in the same sense, not CPI but PPI. 10 ADV MAHLAPE SELLO: MR CHABI: Ye s . We’re happy with the fact that the variable itself was PPI, i t ’s t h e a p p r o p r i a t e i n d e x t o u s e . The assumptions used in the business case at the time was around 6% going forward and I think 5.7 to 5.9 in the initial period, we were also happy with those assumptions I think largely considering what it had been in the past and looking at the five-year period preceding it was about 3.6% and the 10-year preceding it was about 5.6%. We felt that the assumptions made in the business case were pretty much in line with what he had observed historically and where it was likely to go. 20 ADV MAHLAPE SELLO: If you could go to slide 9 then, you show us a graph there that reflects ...(intervenes). MR CHABI: T h a t ’s U S n o w. ADV MAHLAPE SELLO: MR CHABI: T h a t ’s U S ? So we’re still speaking about SA. ADV MAHLAPE SELLO: Yo u ’ r e s t i l l s p e a k i n g a b o u t S A o k a y ? Page 103 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: Alright Chair on the foreign currency and I think we’ll still get to that – discuss that a bit later but we simply state that those rates were forward curve rates, so hedging costs were allowed for and we’ll unpack that later but earlier we spoke about the 6% margin over the w e i g h t e d a v e r a g e c o s t o f c a p i t a l , i t ’s q u i t e a h i g h m a r g i n e s p e c i a l l y considering that the cost of equity used to arrive at the weight was about 16% so you’re looking at an additional 2% over the cost of equity f o r t h i s t y p e o f p r o j e c t , i t ’s a h i g h r i s k p r o j e c t g i v e n t h a t Tr a n s n e t h a d never undertaken this type of project before 80.56% was considered 10 acceptable also considering that it was evidence based looking at a number of companies, not just locally but abroad about 160. ADV MAHLAPE SELLO: MR CHABI: How many? About 160. ADV MAHLAPE SELLO: 160? MR CHABI: T h a t ’s w h a t t h e y r e s e a r c h e d s o w e c o n s i d e r e d t h a t 80.56% as a reasonable discount rate to use in discounting the cash flows. On the US side we had a – it was a bit concerning that the financial model applied CPI as opposed to PPI because we thought, okay these are locomotives okay they’re not consumer goods they are 20 p r o d u c e r g o o d s t h e y w i l l b e a ff e c t e d b y p r o d u c e r p r i c e c h a n g e s r a t h e r than consumer price changes. We then looked at the correlation between CIP in the United S t a t e s a n d P P I a n d t h e c o r r e l a t i o n , a s y o u c a n s e e t h e r e i s w a s v e r y, v e r y h i g h a n d p o s i t i v e f o r t h a t m a t t e r, I m e a n C P I a n d P P I i n t h e U S they pretty much track each other as can be seen from the graph. We Page 104 of 173 27 NOVEMBER 2019 – DAY 194 also find that for the most part US CPI led US CPI except above US PPI, it was slightly higher and I think when you look at the average going back it was about 3.6 compared to 3.3. 3.6 being that of the United States and 3.3 being that of – sorry being that of CPI and 3.3 being that of PPI. So we’re happy with US CPI because, again that implied a certain level of conservation I suppose, being a little pessimistic around the price of locomotives going forward. So at least the incentive was not to push this project through when you look at the 10 business case but to be very conservative when presenting to the B o a r d a n d s a y i n g , l i s t e n i t ’s R 3 . 7 b i l l i o n a n d w e h a v e , w h e r e w e c o u l d apply margins to our assumptions to allow for any additional risk that m i g h t h a v e c r e p t i n t h a t c o u l d c r e e p i n i f w e d i d n o t a l l o w f o r, e i t h e r i n our insurance or in the risk discount rate. ADV MAHLAPE SELLO: And the purpose – before I get to the purpose, slide 9 is what you produced it doesn’t come from the business case it doesn’t come from ...(intervenes). MR CHABI: O h y e s c o r r e c t , s o t h i s w a s s o u r c e d f r o m I t h i n k t h i s d a y ’s t r a d i n g e c o n o m i c s b u t t h e r e ’s . . . ( i n t e r v e n e s ) . 20 ADV MAHLAPE SELLO: MR CHABI: Ye s t h i s i s w h a t y o u s o u r c e d ? This is market data. ADV MAHLAPE SELLO: Ye s a n d t h e p u r p o s e w a s t o s e e h o w t h e r i g h t – the correct rate which ought to have been the US PPI related over the period to the US CPI? MR CHABI: Correct. Page 105 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: And the takeout from that slide must be that t h e d i ff e r e n c e s b e t w e e n t h e t w o i n d i c e s i s s l i g h t – i t ’s a s l i g h t d i ff e r e n c e a n d t h e u s e o f t h e U S C P I d i d n o t u n d u l y i n f l a t e o r r e d u c e the ETC, so it ...(intervenes). MR CHABI: I t s e r v e d t o i n c r e a s e i t s l i g h t l y. ADV MAHLAPE SELLO: MR CHABI: I t s e r v e d t o i n c r e a s e i t b u t e v e r s o s l i g h t l y. Ye s . ADV MAHLAPE SELLO: But using US CPI we come in at 38.6 billion looking at your graph what would you say would perhaps have been the 10 right ETC using the PPI. MR CHABI: US PPI wouldn’t expect to come any lower than 38.4 billion. ADV MAHLAPE SELLO: So 38.4 as against the 38.6 and what opinion do you express on that, the fact that they used the wrong index? MR CHABI: Well I won’t say they used the wrong index but they’re probably trying to be more prudent and conservative, we’re happy with the 38.6 as an ETC. ADV MAHLAPE SELLO: So then that now that we have looked at this particular issue, the inflation issue both local and foreign. 20 MR CHABI: A n d f o r e i g n y e s t h a t ’s r i g h t . ADV MAHLAPE SELLO: A r e y o u t h e n a b l e , i n y o u r p o s i t i o n n o w, t o express a view on the reasonableness in the assumptions made in determining the ETC? MR CHABI: W e l l I t h i n k – t h e r e ’s a n o t h e r s l i d e t h a t w e l o o k e d a t another sensitivity that we ran and this speaks to – I mentioned this, Page 106 of 173 27 NOVEMBER 2019 – DAY 194 I’m not sure if I did but local content as well was a variable in this instance it varied from diesel to electric, we look at the detailed requirements that are – the business case speaks to the 60/40 for electrics and the 55/45 for diesel, 60% required local content on the e l e c t r i c s a n d 5 5 % l o c a l c o n t e n t r e q u i r e d o n t h e d i e s e l a n d – h o w e v e r, the business case modelled this ETC on a 50/50 on an assumption of 50 locally and 50% abroad, we tried to assess the impact of this and we found the impact to be negligible here as well. I think if you move away from a 50% local content and you 10 assume a 60% local content the impact in the price is a drop in the ETC as can be seen. I t ’s p r e t t y m u c h t h e s a m e 3 8 . 6 b i l l i o n c o m p a r e d t o 38.555 billion. ADV MAHLAPE SELLO: MR CHABI: S o t h e 2 b i l l i o n d i ff e r e n c e . S o i t ’s a , i n o u r v i e w, a n e g l i g i b l e d i ff e r e n c e , n e g l i g i b l e i n the sense that it will not ...(intervenes). ADV MAHLAPE SELLO: N o , n o m y a p o l o g i e s m y c a l c u l a t i o n i t ’s l u n c h time. MR CHABI: Sorry? ADV MAHLAPE SELLO: 20 I s a y m y c a l c u l a t i o n i s e n t i r e l y w r o n g , i t ’s t h e h o u r. I s a i d t h e d i ff e r e n c e b e t w e e n t h e t w o i s n e g l i g i b l e t h e y a r e b o t h 38 billion just that the other one is .55 and the other is 6 so yes. MR CHABI: So moving to 60 would have actually reduced the ETC and increased the net present value as can be seen from 2.739 to 2.75 b i l l i o n a n d t h a t ’s w h a t a n i m p a c t o f a n i n c r e a s e o r a c h a n g e i n t h a t assumption would have done to this business case. Page 107 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: CHAIRPERSON: O k a y. Yo u d i d n ’ t r e a l i s e w e h a v e g o n e . . . ( i n t e r v e n e s ) . ADV MAHLAPE SELLO: I was hoping we wouldn’t go much I just wanted him to – this is, I think the last point to conclude. CHAIRPERSON: Ye s o k a y d o t h a t . ADV MAHLAPE SELLO: CHAIRPERSON: MR CHABI: On his first mandate then. O k a y. So I suppose in conclusion we were happy with the mechanics of the model in other words how the model actually 10 modelled, projected and discounted the cash flows. We’re happy with the variables employed within the model, the assumptions made around those variables of course within the context of our mandate one variable being the number of locomotives which we did not interrogate we took as is. We were also happy with 38.6 billion ETC and I’m not sure if this is the point where we answer if it includes all the other – but I ...(intervenes). ADV MAHLAPE SELLO: MR CHABI: No, we’re not at that stage. ADV MAHLAPE SELLO: 20 No. CHAIRPERSON: T h a n k y o u C h a i r t h e n , i f w e m a y, a p o l o g i e s . Ye s w e ’ l l t a k e t h e l u n c h a d j o u r n m e n t a n d r e s u m e a t 14:05, we adjourn. REGUSTRAR: All rise. I N Q U I RY A D J O U R N S I N Q U I RY R E S U M E S CHAIRPERSON: Okay let us continue. Page 108 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: T h a n k y o u C h a i r. Mr Chabi just before we broke for lunch we had completed and you had given your finding as regards one of the issues you were mandated to investigate. We now turn to the second issue which is addressing the actual ETC of 38.6 billion. Yo u d e a l w i t h t h a t f r o m y o u r p a g e 2 7 a t p a r a g r a p h – f r o m p a r a g r a p h 9 . 11 . N o w a s i s o u r p r a c t i c e b e f o r e w e d e a l w i t h t h e d e t a i l of this ETC of 38.8 billion – 38.6 billion my apologies perhaps it might b e a p p r o p r i a t e t o p u t u p o n t o t h e s c r e e n s l i d e 11 . CHAIRPERSON: And you could switch on your microphone as well. 10 ADV MAHLAPE SELLO: And in this slide you summarise the mandate and your findings. So if you could just quickly take us through that? MR CHABI: O k a y. So the second part of the mandate entailed assessing whether the 38.6 billion was a reasonable cost for the locomotive. I think we spoke briefly about that. A D V M A H L A P E S E L L O : Ye s . MR CHABI: And whether that included Forex Hedging and escalation. A D V M A H L A P E S E L L O : Ye s . MR CHABI: The finding in that regard was the 38.6 billion was a reliable estimate for the locomotive – for the 1064 locomotives and the 20 ETC did indeed include Forex Hedging and escalation. ADV MAHLAPE SELLO: As you correctly point out we have touched somewhat on the reasonableness of the 38.6 billion. MR CHABI: Ja. ADV MAHLAPE SELLO: For the 1064 and in this session we will deal with only those aspects that we did not perhaps cover before we broke Page 109 of 173 27 NOVEMBER 2019 – DAY 194 for lunch. M R C H A B I : O k a y. ADV MAHLAPE SELLO: But the bulk of our time on this issue will be spent on the question of whether or not the 38.6 billion included Forex Hedging and escalation. MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. N o w s t a r t i n g a t y o u r p a g e 2 7 a s I s a i d p a r a g r a p h 9 . 11 y o u t h e n m a y t a k e u s t h r o u g h h o w y o u a r r i v e d a t t h e f i n d i n g t h a t i s r e f l e c t e d a t s l i d e 11 ? 10 M R C H A B I : O k a y. S o i f I m a y C h a i r ? S o I h a v e g o t o v e r h e a d s l i d e 1 2 . A D V M A H L A P E S E L L O : Ye s . MR CHABI: Which details the delivery schedule. We have spoken to t h i s a l r e a d y. A g a i n j u s t q u i c k l y g o i n g t h r o u g h i t w a s 1 0 0 r i g h t t h r o u g h to 2017 for diesel locomotives in each year and 65 locomotives in the year 2018 and that is ending in March 2018. And we can see the electrics being shifted out one year starting in April 2014 and ending March 2015 we were expecting 65 electric locomotives. 130 right through to 2018 and 144 locomotives in the last year – the year ending March 2019. 20 A D V M A H L A P E S E L L O : Ye s . MR CHABI: And that is a total of 1064 locomotives. What I point beneath point to underneath that table is the four month testing period. So one thing I omitted to mention earlier on was that 90% of the price was paid on delivery for the locomotive. That is how the business schedule is developed with the remaining 10% paid four months later Page 110 of 173 27 NOVEMBER 2019 – DAY 194 a f t e r t e s t i n g . T h e r e v e n u e a s w e l l f o l l o w e d t h a t p h i l o s o p h y. Yo u c a n only generate revenue once the locomotives are operational so your revenue only locomotive. kicked in four months after delivery of the first The business case also allows for that delay in time. A f o u r m o n t h d e l a y. ADV MAHLAPE SELLO: So the revenue we have been considering of 109 billion over time – over the period was based on this four month d e l a y. MR CHABI: Correct. 10 ADV MAHLAPE SELLO: The testing of the locomotives. M R C H A B I : I t a c c o u n t e d f o r t h e d e l a y. ADV MAHLAPE SELLO: It accounted for that yes. MR CHABI: In the operation of the locomotives. The four month delay period was one of the aspects we also engaged with – engaged on – w i t h Tr a n s n e t O ff i c i a l s . W h e t h e r f o u r m o n t h s w a s a r e a s o n a b l e p e r i o d for testing their view was based on practice it was around nine months. It will take about nine months to – from delivery to getting the locomotives to start operating. Basically nine months to test. What the four month delay did in the business case was to bring the costs 20 forward a bit and again that has the – and well has the impact of reducing your profit. Because you incurring costs a lot sooner than you would have initially anticipated or expected if you had used the nine month lead period. So we were happy with the four month delay – again it was conservative. A D V M A H L A P E S E L L O : O k a y. We then now deal with the breakdown Page 111 of 173 27 NOVEMBER 2019 – DAY 194 of the 38.6 billion specifically and for that purpose I think we should have regard to your slide 13. M R C H A B I : O k a y. S o s l i d e 1 3 . A D V M A H L A P E S E L L O : Ye s . MR CHABI: Is presented – projected overhead. So we break down the 38.6 billion into the various components that we spoke to earlier on except for the localisation premium. The localisation premium we have allowed for in the locomotive price. We then – we will look at SA PPI and what proportion – what amount that formed in the 38.6 billion. We 10 will look at US PPI and what amount that formed in the 38.6 billion. The foreign currency cost as well we will look at that and what amount it formed in the 38.6 billion and the contingency amount. Essentially all of that made up your 38.6 billion we discussed it. We then divide – we divided those costs by locomotive type as well. We looking at diesels and looking at electric locomotives. ADV MAHLAPE SELLO: Help us here? What we see on slide on 13 is a product of your work. The slide as currently presented does not exist in any of the documentation provided you in the form that you present it at 13? 20 MR CHABI: Correct. In the form presenting that amount. ADV MAHLAPE SELLO: So this is as a result of an analysis you conducted of the financial model? MR CHABI: Correct. ADV MAHLAPE SELLO: Now are you able to point us to the source of information that led you to the conclusions you draw on this slide? Page 112 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: So would it be from the financial model. A D V M A H L A P E S E L L O : Ye s . MR CHABI: And from certain sheets in the financials – certain worksheets in the financial model. A D V M A H L A P E S E L L O : O k a y. MR CHABI: I can speak to the sheet? ADV MAHLAPE SELLO: Yo u r e f e r u s t o a n n e x u r e A C 4 a t y o u r paragraph 9.16. MR CHABI: Correct we look at annexure AC4. 10 A D V M A H L A P E S E L L O : Ye s . I – i n t h a t p a r a g r a p h I p i c k e d u p a l i t t l e e r r o r. I think the paragraph is incomplete. It concludes that this annexure is titled in the financial model but does not give the title. MR CHABI: Oh. Apologies for that. ADV MAHLAPE SELLO: Is that not supposed to read in inverts TCO l o c o s C A PA X . MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. S o w e m u s t a d d t h a t . M R C H A B I : A p o l o g i e s C h a i r. ADV MAHLAPE SELLO: Sentence at the end of paragraph 9.16. 20 CHAIRPERSON: What do we add? ADV MAHLAPE SELLO: At the end Chair of that paragraph. CHAIRPERSON: 9.? ADV MAHLAPE SELLO: 9.16. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: It should read what you have currently is this Page 113 of 173 27 NOVEMBER 2019 – DAY 194 annexure is titled in the financial model but then does not give you the title. CHAIRPERSON: H’mm. ADV MAHLAPE SELLO: So we propose to add the title and we do so by opening inverts we write capital “TCO”. CHAIRPERSON: Okay shall I arrange that replace it with an amended page? ADV MAHLAPE SELLO: I shall C H A I R P E R S O N : Yo u g i v e m e a n a m e n d e d p a g e . 10 A D V M A H L A P E S E L L O : W e w i l l d o s o C h a i r. CHAIRPERSON: That would replace. Ja. ADV MAHLAPE SELLO: But for purposes of the record at least just state the title of that annexure? M R C H A B I : I t i s t i t l e d T C O L o c o s C A PA X . A D V M A H L A P E S E L L O : O k a y. C H A I R P E R S O N : O k a y. ADV MAHLAPE SELLO: Now you direct us to annexure AC4 and that starts at your page 162. Now if you could just go page by page it is supposed, so we will start at 162 we may for our purposes ignore 163 20 correct? Please check your page 163. MR CHABI: I have 163 here. ADV MAHLAPE SELLO: We may ignore that graph there. MR CHABI: Oh we can ignore that yes. A D V M A H L A P E S E L L O : O k a y. MR CHABI: We can ignore that. Page 114 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: And you want in particular for us to have regard to 163. Page 163. MR CHABI: Page 163 and in particular the table. ADV MAHLAPE SELLO: The table. M R C H A B I : To t h e l e f t o f t h e g r a p h y e s . ADV MAHLAPE SELLO: Chair page 163 has got a table to the left and on the right is a graph. We may ignore the graph for purposes of our discussion. What is important is the table. But the reproduction at p a g e 1 6 3 i s v e r y t i n y a n d d i ff i c u l t t o r e a d . W h a t w e h a v e d o n e i s w e 10 have reproduced a larger table which I beg leave to hand a copy in of. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: And we propose that that be numbered 163.1. it comes already numbered. C H A I R P E R S O N : O h o k a y. A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. N o w M r C h a b i y o u i n t e n d t o go to this specific worksheet right in order to help us understand how you arrive at the figures that you set out in your slide 13. M R C H A B I : Ye s . ADV MAHLAPE SELLO: If you could take us there. 20 CHAIRPERSON: Is what you have on the screen now 163.1? ADV MAHLAPE SELLO: It is coming up. No it is coming up. CHAIRPERSON: Oh. A D V M A H L A P E S E L L O : T h e r e i t i s C h a i r. N o w i t i s c o m i n g u p . C H A I R P E R S O N : O h o k a y. A D V M A H L A P E S E L L O : Ye s . Ye s . Page 115 of 173 27 NOVEMBER 2019 – DAY 194 M R C H A B I : O k a y. ADV MAHLAPE SELLO: Now you will recall because now slide 13 – if the Chair could just keep it open slide 13? At slide 13 you give us the total respectively of the locomotive price, the SAAPPI escalation cost, USCPI escalation cost foreign hedging and contingencies. MR CHABI: Correct. ADV MAHLAPE SELLO: So you give us the totals for both electric and diesel and you conclude at the bottom with a total ETC of 38.6 billion. MR CHABI: Correct. 10 ADV MAHLAPE SELLO: So that we will keep handy and then you can help us work through this worksheet. M R C H A B I : O k a y. ADV MAHLAPE SELLO: Would it be correct to say the worksheet you are referring us to supports the conclusions drawn at slide 13? MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. MR CHABI: In part. ADV MAHLAPE SELLO: Then – I part? M R C H A B I : Ye s . 20 ADV MAHLAPE SELLO: Okay then identify those parts and help us understand slide 13? MR CHABI: Okay so there are a number of worksheets we would need to work through in order to demonstrate what we have in slide 13. The second worksheet we would need to work through is the third worksheet titled Main Control Input. Page 116 of 173 27 NOVEMBER 2019 – DAY 194 A D V M A H L A P E S E L L O : O k a y. M R C H A B I : I s t h e C h a i r a b l e t o s e e ? O k a y. C h a i r i f I c a n p o i n t y o u t o the red cells. C H A I R P E R S O N : Ye s . M R C H A B I : A n d t h e t h i r d o n e i n p a r t i c u l a r. I f y o u c a n s e e w h e r e m y cursor is it shows you 38.6 billion. If that is ...(intervenes). ADV MAHLAPE SELLO: That is our ETC. MR CHABI: That is our ETC, A D V M A H L A P E S E L L O : Ye s . 10 C H A I R P E R S O N : Ye s . M R C H A B I : O k a y. T h a t i s p e r t h e b u s i n e s s c a s e . J u s t b e n e a t h t h a t cell you can see the nett present value of 2.7 billion. CHAIRPERSON: H’mm. MR CHABI: Again trying to substantiate the view that the business case was actually derived from this ...(indistinct). What we will attempt to do in this instance is to look at the inflation assumptions made locally and abroad. Look at the assumptions made around foreign exchange – the foreign exchange rate going forward and adjust those and determine what – and well basically observe the impact it has on 20 t h e 3 8 . 6 b i l l i o n . H o p e f u l l y t h a t w i l l s u ff i c e a s p r o o f t h a t t h e 3 8 . 6 b i l l i o n allowed for both costs. But I guess before we get there as well it would b e i d e a l t o l o o k a t w h a t t h e l o c o m o t i v e s w o u l d h a v e c o s t Tr a n s n e t h a d they decided to acquire them as at April 2013. Going back to your initial suggestion and discussion around ETC about acquiring them right there and not spreading over the delivery period. I think once we Page 117 of 173 27 NOVEMBER 2019 – DAY 194 have verified that it would become clear that this is what the locomotives will have cost you barring all the additional costs. A D V M A H L A P E S E L L O : O k a y. P l e a s e p r o c e e d . MR CHABI: So Chair I will go back to the annexure before you which is T C O L o c o s C A PA X . ADV MAHLAPE SELLO: And by that you mean annexure AC4? MR CHABI: AC4. ADV MAHLAPE SELLO: In our ...(indistinct) yes. MR CHABI: 10 Ye s . A n d I w i l l a t t e m p t t o e x p l a i n w h a t y o u h a v e b e f o r e you. C H A I R P E R S O N : Ye s . I n p a r t i c u l a r w e a r e g o i n g t o 1 6 3 . 1 o r ? A D V M A H L A P E S E L L O : I n d e e d C h a i r. C H A I R P E R S O N : I n d e e d o k a y. ADV MAHLAPE SELLO: The table yes. C H A I R P E R S O N : O k a y. MR CHABI: So Chair the first table which is the top part as you can see there and I maybe I should highlight all of that. C H A I R P E R S O N : Ye s . MR CHABI: 20 That table is what we are looking at. Relates to the projection of the diesel locomotive prices right through to 2022. We know however that the delivery schedule ended in 2019. Following the cursor – maybe I should use the mouse instead. That is the financial year in red as can be seen. Second row says Diesel. ZAR locomotive essentially is the price of the locomotive in Rand terms. And we can see starting April 2013 the price of the locomotive in Rands was R25.2 Page 118 of 173 27 NOVEMBER 2019 – DAY 194 million. We can that price – that is the next cell is the yellow cell is h e l d c o n s t a n t r i g h t t h r o u g h t h e y e a r. So up to March 2014. It is important to understand how this price – how this – how we arrive at his 25.2. Yo u w i l l r e c a l l C h a i r t h e p r i c e o f t h e d i e s e l l o c o m o t i v e t h a t w e h a d s t a r t e d o ff w i t h w a s 2 . 6 m i l l i o n D o l l a r s . I a t t e m p t e d t o e x p l a i n how we move from 2.6 million Dollars to 25.2 million Rands. The assumption made was 50% of the locomotive content would be sourced locally and 50% would be sourced abroad. D o l l a r s l o c a l l y, 1 . 3 m i l l i o n D o l l a r s a b r o a d . 10 And that is 1.3 million However to allow for the additional cost of manufacturing this locomotive locally a 2% premium was added onto the local components of the 1.3 million Dollars. So going back with the cursor 25.2 million Dollars the price in Dollars – I mean 25.2 million Rands the price in Dollars is 2.6. Just beneath that you have 12.7 million Rands. It is roughly half of 25.2 million Rands. B u t I w i l l g e t i n t o t h a t s h o r t l y. T h e f o r e i g n b i t s i t s a t 1 2 – s o r r y 1 2 . 5 million Rands and we can see just beneath that the percentage foreign which 50% of the 2.6 million Dollars and it is reflected there as 1.3 million. I am not sure if the Chair is following ADV MAHLAPE SELLO: H’mm. 20 MR CHABI: So we are still in that column. 1.3, 12.5, 12.7, 2.6, 25.2. Yo u r 2 5 . 2 i s t h e s u m o r t h e a d d i t i o n o f t h o s e t w o c e l l s . I w i l l h i g h l i g h t them in red. 12.7 and 12.5. ADV MAHLAPE SELLO: And then ...(intervenes). M R C H A B I : I t i s n o – s o r r y. ADV MAHLAPE SELLO: Sorry that 12.7 – is 12.7 million Rands. Page 119 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: Rands. ADV MAHLAPE SELLO: Being the local portion of the 25.2 million. MR CHABI: Correct. ADV MAHLAPE SELLO: Which is the cost of the locomotive? MR CHABI: Correct. ADV MAHLAPE SELLO: And the 12.5 million is the foreign component of that price? M R C H A B I : Ye s . A D V M A H L A P E S E L L O : Tr a n s l a t e d i n t o R a n d s ? 10 MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. A n d y o u s a y t h a t . . . ( i n t e r v e n e s ) . MR CHABI: So 12 ...(intervenes). ADV MAHLAPE SELLO: The sum of those two give us 25.2? MR CHABI: Million Rands. ADV MAHLAPE SELLO: That is how we determine that the price of the locomotive is 25.2? MR CHABI: Correct. ADV MAHLAPE SELLO: Adding of course the – now the 12.7 for the local portion of the price has taken into consideration the 2% 20 localisation already? MR CHABI: And that is why it is higher than the foreign component. A D V M A H L A P E S E L L O : O k a y. MR CHABI: Had we not had the 2% because we are assuming 50/50 would expected those two figures to be the same. A D V M A H L A P E S E L L O : Ye s . Page 120 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: But because of the 2% premium on the local content it is higher in Rand terms. And I suppose in your words Chair that principle should follow right through. And we can test that principle across the various years. So in 2013 – well year 2013 ending March 2014 12.7 higher than 12.5. So the 12.7 is the local is higher than the foreign. If we look at the next year we still see the same principle applying. A D V M A H L A P E S E L L O : Ye s . M R C H A B I : I a m n o t s u r e w h y i t i s d i ff e r e n t i n t h a t c e l l . ADV MAHLAPE SELLO: And ja – but as you go further appears that 10 t h e f o r e i g n c o m p o n e n t b e c o m e s h i g h e r. MR CHABI: Correct. ADV MAHLAPE SELLO: Is there an explanation for that? M R C H A B I : J u s t a m i n u t e . O k a y. S o t h e r e a s o n y o u s e e t h e f o r e i g n component increasing at a higher rate than the local component it is because of the hedging cost. So allowing for that and the escalation you come up with the price locally that is higher than the price abroad and you will likely see that from the table. If you look at the component prices, the prices make up the 38.6 billion you will see that SA PPI only came in at if we look at the totals – this is slide 13. 20 ADV MAHLAPE SELLO: As at slide 13 ja. MR CHABI: The total for SA PPI came in at 1.8 billion however take into account USCPI and FOREX we are looking at about 4 billion. So the foreign component in terms of price actually increases beyond the local component. So that is allowing for the exchange rate. A D V M A H L A P E S E L L O : Ye s . Page 121 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: But we can see in the first year allowing for that 50/50 and the 2% above on the – 2% premium the local component is higher than the foreign component. A D V M A H L A P E S E L L O : Ye s o k a y. O k a y. MR CHABI: I think at this point going back to slide 13 I think we will try and derive the 30.476 billion we have there. Or maybe just focus on t h e d i e s e l p a r t a n d t r y a n d d e r i v e t h e 11 . 1 4 7 . ADV MAHLAPE SELLO: I think there is a principle that cuts across. Yo u p e r h a p s c a n m a k e a n e x a m p l e w i t h t h e d i e s e l i n 1 3 / 1 4 a n d t h e n i f 10 that is applicable you then say we can apply the same principle across if not you will explain what principle to apply and then you can extend that same principle to the electrics. MR CHABI: Correct. So we can just be ...(intervenes). ADV MAHLAPE SELLO: So let us deal with it.. MR CHABI: Focussed on diesel. ADV MAHLAPE SELLO: Example of the diesels ja. MR CHABI: electrics. And if we happy with diesels we should happy with So Chair we know that the starting price for diesel locomotives was 2.6 million Dollars. 20 A D V M A H L A P E S E L L O : Ye s . MR CHABI: And that was in 2013 – April 2013. Had they acquired all the diesel locomotives in April 2013 allowing for the 2% localisation they would have paid a b o u t 11 billion Rands for those diesel locomotives? How do you arrive at that? Should I do a calculation on my end while I speak to it? Page 122 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: Ja you explain it to us yes. M R C H A B I : O k a y. S o w e t a k e t h e . . . ( i n t e r v e n e s ) . ADV MAHLAPE SELLO: Just make sure you are clear for the – for t o m o r r o w ’s r e a d e r o f t h e t r a n s c r i p t t h a t t h e y c a n f o l l o w w h a t y o u saying. M R C H A B I : O k a y. S o w e t a k e t h e 2 . 6 m i l l i o n D o l l a r s . T h e e x c h a n g e rate that applied at the time was 9.5854 – sorry Chair maybe I should actually take you through the additional cells. ADV MAHLAPE SELLO: 518? 10 M R C H A B I : S o r r y. ADV MAHLAPE SELLO: 9.158? MR CHABI: Correct that is the forward rate. And that is very correct so we should applying the spot rate not the forward rate. Thanks. ADV MAHLAPE SELLO: And just to perhaps – we do not have to go to the – you can – you stated – just check your pages 18 paragraph 7 . 6 . 1 0 ? Yo u t e l l u s t h a t t h e s p o t r a t e a s a t 1 8 A p r i l 2 0 1 3 w a s 9 . 1 2 8 5 . MR CHABI: Just check that. So this – okay so on page 18 yes the spot rate was 9.12185. A D V M A H L A P E S E L L O : Ye s . N o 1 2 8 5 . 20 MR CHABI: 1285 correct. ADV MAHLAPE SELLO: Ja. Okay so now we have located our spot rate. MR CHABI: Correct. ADV MAHLAPE SELLO: And we know the price then in 2013 was 2.6 million Dollars? Page 123 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: So to get the Rand. A D V M A H L A P E S E L L O : Ye s . MR CHABI: Part we take the 2.6 million multiplied by the spot rate at the time and that gives us 23.7 million. So 23.7341 million Rands. A D V M A H L A P E S E L L O : Ye s . MR CHABI: However this still does not include that 2% localisation. CHAIRPERSON: Please raise your voice again? MR CHABI: Okay so the 2% - this price of 23.7341 does not include the 2% localisation premium. So to this price we need to add the 2% 10 localisation premium. But the 2% only applies to the local component. S o i n e ff e c t w e a d d i n g 1 % . B e c a u s e i t i s h a l f o f 2 % . ADV MAHLAPE SELLO: H’mm. MR CHABI: So we take this 23.7341 and we multiply it by 1.01 and t h a t g i v e s u s t h e p r i c e w i t h t h e l o c a l i s a t i o n p r e m i u m a l l o w e d f o r. ADV MAHLAPE SELLO: H’mm. MR CHABI: That gives us a price of 23.971441 per diesel locomotive a n d t h a t i s i n R a n d t e r m s . I m u s t s t a t e i t i s d i ff e r e n t t o t h e 2 5 t h a t w e see here. ADV MAHLAPE SELLO: Ja. 20 MR CHABI: Because the 25 that we see here uses the forward rate of 9.585. We then take this 23 – this price per locomotive at the spot price allowing for the 2% localisation premium and multiply it by the number of diesel locomotives we would have acquired at the time. In t h i s i n s t a n c e i t i s 4 6 5 . A n d t h a t g i v e s u s 111 4 6 . 7 2 . A D V M A H L A P E S E L L O : Ye s . Page 124 of 173 27 NOVEMBER 2019 – DAY 194 M R C H A B I : 111 4 6 . 7 2 . A D V M A H L A P E S E L L O : N o w t h a t 11 y o u s a y i t i s 11 . 1 4 6 ? M R C H A B I : 11 – s o r r y 11 , 1 4 6 . 7 2 . ADV MAHLAPE SELLO: And that is the figure at your slide 13 under d i e s e l f o r l o c o m o t i v e p r i c e y o u h a v e r o u n d e d o ff t o 11 , 1 4 7 ? MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. MR CHABI: So had your quite older diesel locomotives as at April 2013 this is what you would have paid in terms of ETC just for your diesels. 10 Moving that across to electrics it would have been 19.329 billion. So we are happy that we now have the price of the locomotives. So a n y t h i n g – t h a t t e l l s u s t h e r e i s a d i ff e r e n c e t h e n b e t w e e n t h e 3 0 . 4 7 6 we seeing the 30.6 billion. We now need to understand what that d i ff e r e n c e i s ? ADV MAHLAPE SELLO: So we can say at this juncture now we know that the ETC was 38.6. What we have done is to extract the cost of the locomotive free from all other associated costs. MR CHABI: Correct. ADV MAHLAPE SELLO: So we know of the 38.6 the actual cost of the 20 locomotives were 30. MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. S o t h e n w e l o o k a t t h e m a k e u p o f t h e d i ff e r e n c e b e t w e e n t h e t w o . MR CHABI: Correct. A D V M A H L A P E S E L L O : Ye s . Page 125 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: So Chair still focussing on the diesel tab we have shown that the local price increases by a certain amount each year and if I take you to – so I will just highlight the row that I am looking at in red. If the Chair is able to – is it highlighted there Chair? No. ADV MAHLAPE SELLO: Just scroll down or up. M R C H A B I : S o r r y. ADV MAHLAPE SELLO: I do not know what would happen. M R C H A B I : I a m w o r k i n g o ff t h e w r o n g s h e e t – m y a p o l o g i e s . A D V M A H L A P E S E L L O : Yo u w o r k i n g o ff – o k a y. 10 M R C H A B I : M y a p o l o g i e s C h a i r I a m w o r k i n g o ff t h e w r o n g s h e e t . S o Chair that is the row of interest which relates to the price of the local component of the locomotive in Rand terms. ADV MAHLAPE SELLO: H’mm. MR CHABI: 12.7 is the starting price but this 12.7 is based on – if I go further down Chair I will highlight again a row of interest here. Is based on that exchange rate of 9.59. ADV MAHLAPE SELLO: H’mm. MR CHABI: Allow to flick between pages. I think on page 18 again I have put there the table applicable to this forward curve and we can 20 s e e i n y e a r 2 0 1 4 t h e r a t e w a s 9 . 5 8 5 4 r o u n d e d o ff h e r e t o 9 . 5 9 a n d t h a t we can increase that for Chair to – there we go. If I increase the number of decimal places we can see the 5854 coming up. ADV MAHLAPE SELLO: And then that before you leave that row that number then changes in every successive year? MR CHABI: Correct. Page 126 of 173 27 NOVEMBER 2019 – DAY 194 A D V M A H L A P E S E L L O : I t g o e s u p t o 1 0 . 4 0 . T h e n g o e s t o 1 0 . 5 2 t o 11 and so forth until eventually in 2022/2023 it is at 14.30. MR CHABI: 14.30. So we can see from this that the Rand was expected to depreciate over those years, because the amounts needed in Rand terms per Dollar kept increasing over the years. A D V M A H L A P E S E L L O : O k a y. M R C H A B I : G o i n g b a c k t o t h e t o p r o w i n r e d . Yo u c a n s e e t h e 1 3 . 7 i s a function of the price in the previous year raised – this can be seen. I h i g h l i g h t e d t h e c e l l s t h a t a r e a ff e c t e d t h e r e , b y 5 . 3 % . 10 ADV MAHLAPE SELLO: Huh-uh. MR CHABI: The Chair can see that. So 5.3% feeds into that price as can be seen and if we look at the row where 5.3 comes from. It is titled SA PPI. ADV MAHLAPE SELLO: Huh-uh. MR CHABI: If the Chair is happy with that. I will again highlight that and that carries on in each of the respective years. I think for the C h a i r ’s c o m f o r t I w i l l l o o k a t a n o t h e r 1 6 . 6 i n t h i s i n s t a n c e a n d w e c a n s e e i t r e f e r e n c e s 5 . 5 % f r o m t h e S A P P I r o w. So we can see those percentages feed into the locomotive price. 20 ADV MAHLAPE SELLO: Huh-uh. MR CHABI: Stated in red. I will try and demonstrate this for the ZAR foreign component and that is row beneath that. So I am just going to revert and refer to the row of interest here which is the row just under that and that is the part dealing with the foreign component, but in ZAR terms ...(intervenes). Page 127 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: Huh-uh. M R C H A B I : A n d I m e n t i o n e d h e r e t h i s i s a ff e c t e d b y t w o q u a n t i t i e s . S o i t c a n b e s e e n h e r e t h e 1 . 3 i s a ff e c t e d b y t h e – I w i l l c o m e h e r e . Exchange rate can be seen there at 10.4. This however does not include the localisation number you can see on top. ADV MAHLAPE SELLO: H’mm. M R C H A B I : S o i t t a k e s t h e v a l u e a s c a n b e s e e n C h a i r. I j u s t w a n t t o show you that it is not just the exchange rate, but also US CPI. So you will notice that to get to the 12.5 you have got to take the 1.3 just 10 beneath that. S o r r y. That is already at 9.5. Use the next one and apply the exchange rate of 10.04 to it. So I am looking at 13.3 in this instance, because remember the 12.5 is already in Rand terms from the 25.2 on top which used 9.5854. If you look at the next one R13.3 million it takes the $1.3 million beneath it and then multiplies that by the exchange rate. So R10,00 to the Dollar at the time to give you the price in Rands. CHAIRPERSON: Mr Chabi some of these – the application of some of these numbers one will understand when one goes through your evidence 20 MR CHABI: Report. C H A I R P E R S O N : Ve r y s l o w l y i n a t r a n s c r i p t . Ye s . Ye s . C o n t i n u e . MR CHABI: But I would not want to lose you at any point. CHAIRPERSON: No. No fault with you. M R C H A B I : O k a y C h a i r. CHAIRPERSON: No fault with you, but some of them you know one Page 128 of 173 27 NOVEMBER 2019 – DAY 194 needs to ...(intervenes). MR CHABI: Spend some time on it. C H A I R P E R S O N : To s p e n d s o m e t i m e . MR CHABI: Right. C H A I R P E R S O N : L o o k a t a h a r d c o p y. A t l e a s t p e o p l e l i k e m e n o t o n a s c r e e n . L o o k i n a h a r d c o p y. MR CHABI: And I appreciate. C H A I R P E R S O N : Tr y a n d f o l l o w i t p r o p e r l y. MR CHABI: Agreed. 10 C H A I R P E R S O N : T h e a p p l i c a t i o n o f p e r c e n t a g e s a n d a l l o f t h a t . Ye s , but continue. M R C H A B I : O k a y. A s m e n t i o n e d t h e 3 0 . 3 m i l l i o n t h a t w e a r e l o o k i n g a t there is – comes from the 1.3 multiplied by the exchange rate, but where does that 1.3 come from? It comes from the price in the previous year raised by US CPI and we can see that when I highlight that cell it looks at the 1.3 in the previous year and the 2.2% just beneath in the row labelled US inflation. So we can see US inflation – I am trying to demonstrate that US inflation feeds into the price as can be seen. SA PPI feeds into the 20 price and this exchange rate series feeds into the price. I think we can be satisfied that these three variables feed into the price of a locomotive. ADV MAHLAPE SELLO: O k a y. Now you will recall while you are looking at the next issue that with reference to slide 13. We at least have determined the PO price of the locomotive if they were they were Page 129 of 173 27 NOVEMBER 2019 – DAY 194 acquired in April 2013 ...(intervenes). MR CHABI: That is correct. ADV MAHLAPE SELLO: And we know that we should have spent 30 billion according to the business case? MR CHABI: Correct. ADV MAHLAPE SELLO: But the AGC that was actually approved was 38.6 billion and your reference to the slide is to demonstrate to us that the 38.6 billion is derived at by taking the locomotive price – total locomotive price and you add the inflation and you add the hedging. 10 This slide does exactly what you are talking about except that it does it on an individual locomotive. MR CHABI: Huh-uh. ADV MAHLAPE SELLO: What you have ...(intervenes). M R C H A B I : S o r r y. ADV MAHLAPE SELLO: On the slide. So we are working – the slide works of one locomotive. MR CHABI: Oh. This particular slide? A D V M A H L A P E S E L L O : Ye s . MR CHABI: Correct. 20 ADV MAHLAPE SELLO: S o r r y. Not the slide. Let me say the ...(intervenes). M R C H A B I : To t h e . . . ( i n t e r v e n e s ) . ADV MAHLAPE SELLO: The worksheet. M R C H A B I : T h e w o r k s h e e t . Ye s . A D V M A H L A P E S E L L O : Ye s . T h e w o r k s h e e t w o r k s o ff o n e l o c o m o t i v e . Page 130 of 173 27 NOVEMBER 2019 – DAY 194 So it is one locomotive adding the 2%, Adding the PPI ...(intervenes). MR CHABI: CPI. ADV MAHLAPE SELLO: Or ...(intervenes). MR CHABI: CPI. ADV MAHLAPE SELLO: CPI as the case maybe ...(intervenes). MR CHABI: The cost of hedging. ADV MAHLAPE SELLO: And then – yes and then hedging that part of the price that is in foreign exchange ...(intervenes). MR CHABI: Correct. 10 ADV MAHLAPE SELLO: And that will then give you the total price of that diesel locomotive inclusive of these two costs? MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. W h e n w e g o t o s l i d e 1 3 y o u f o l l o w t h e same thinking. E x c e p t y o u d o n o t s t a r t o ff w i t h o n e l o c o m o t i v e . Yo u got the price for the locomotive and you multiply it by the number of locomotives in the diesel category and in the ...(intervenes). MR CHABI: Electric. ADV MAHLAPE SELLO: Electric c a t e g o r y. Yo u calculated the accumulative PPI across all the diesel locomotives and that is the – 20 that is why you come up with 388 million. That is for all of them at slide 13. M R C H A B I : O h f o r d i e s e l . Ye s . ADV MAHLAPE SELLO: For diesel. Yo u d o t h e s a m e . So whereas then this particular worksheet works per individual locomotive. Yo u r slide 13 is the accumulative based there of all locomotives split up into Page 131 of 173 27 NOVEMBER 2019 – DAY 194 ...(intervenes). MR CHABI: Diesel. ADV MAHLAPE SELLO: Electric and diesel. MR CHABI: Correct. ADV MAHLAPE SELLO: Am I right thus far? MR CHABI: That is correct Advocate. ADV MAHLAPE SELLO: Now you recall you took the Chair to a slide – no, to a worksheet where you indicated the 38.6 billion and you said that the Chair should take note of that cell. 10 M R C H A B I : Ye s . A D V M A H L A P E S E L L O : Ye s . MR CHABI: So I take it the Chair is happy that we have gone back to the original case on this worksheet. CHAIRPERSON: Are we moving away from 163.1? A D V M A H L A P E S E L L O : W e a r e c o m i n g b a c k C h a i r. CHAIRPERSON: We are coming back to it? MR CHABI: We are coming back. A D V M A H L A P E S E L L O : Ye s . C H A I R P E R S O N : O k a y. 20 MR CHABI: So ...(intervenes). ADV MAHLAPE SELLO: It is just that you had flagged that other worksheet and I want us to remind ourselves the importance of that worksheet and its interrelation to this particular one. M R C H A B I : O k a y. ADV MAHLAPE SELLO: That is on the screen. Page 132 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: Alright. ADV MAHLAPE SELLO: Ja. MR CHABI: So Chair I think we pointed to the 38.6 billion here and we know that is the ETC. A lot spoken of ETC of the 38.6 billion. A change in any of the variables we looked at on the previous worksheet s h o u l d a ff e c t t h i s 3 8 . 6 b i l l i o n . I think I will spare you the trouble of having to show you how that sheet leads into this 38.6 billion, because it is involved in a number of other sheets. As mentioned there are 54 sheets in this model of which 49 10 or 48 – I think have been used to model the transaction. So if the Chair will accept and we can demonstrate that by just changing one of these variables ...(intervenes). CHAIRPERSON: H’mm. MR CHABI: And see what impact it has on the 38.6 billion and then s t a r t w i t h t h e r e v i s i o n o f t h i s t a b l e t h e r e a f t e r. A D V M A H L A P E S E L L O : Ye s . P l e a s e d o . P l e a s e . MR CHABI: We change SA PPI, US inflation the forward curve. ADV MAHLAPE SELLO: And you may move anyone of them. M R C H A B I : O k a y. 20 ADV MAHLAPE SELLO: I suggest perhaps we change the one that will d e m o n s t r a t e a s i g n i f i c a n t c h a n g e o r a t l e a s t a – y o u k n o w. A p p r e c i a b l e change to the 38.6 billion. So which one do we ...(intervenes)? MR CHABI: That will be the exchange rate ...(intervenes). ADV MAHLAPE SELLO: Let us do the exchange rate then. MR CHABI: And I will put a number there that is not reasonable, Page 133 of 173 27 NOVEMBER 2019 – DAY 194 because I will put zero put in there. ADV MAHLAPE SELLO: Huh-uh. MR CHABI: Although you cannot apply – acquire a draft for R0,00 or maybe let us just use R1,00. So R1,00 per $1,00 under that forward ...(intervenes). ADV MAHLAPE SELLO: Let us do zero and I, because the question is whether or not the 38.6 billion took into consider – hedge that – exchange rate at all. MR CHABI: Included the Forex. 10 A D V M A H L A P E S E L L O : Yo u k n o w. S o t h e s c r e e n – t h e w o r k s h e e t y o u have up there would appear to suggest that there was hedging involved which is what you took us through. M R C H A B I : Ye s . A D V M A H L A P E S E L L O : O k a y. N o w l e t u s r e m o v e a l l h e d g i n g a n d s e e what happens to the 38.6 billion. MR CHABI: O k a y. So taking the Chair back to that cell. I have changed in place of the 9.5854. I have put zero. ADV MAHLAPE SELLO: Before you switch worksheets please remove all the hedging right through the years. 20 M R C H A B I : O k a y. ADV MAHLAPE SELLO: Let us all make it zero right across. M R C H A B I : O k a y. A D V M A H L A P E S E L L O : O k a y. MR CHABI: Is the Chair happy with that? So it is zero right through. So ...(intervenes). Page 134 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: Ja. ADV MAHLAPE SELLO: So what you have just done is take out all the hedging. MR CHABI: And as can be seen Chair that capex comes down to 2.782 billion. From 38.6 billion to 2.7 billion. That is ...(indistinct). CHAIRPERSON: Thank you. MR CHABI: But then again as I mentioned you cannot expect the exchange rate to be zero. That means you are acquiring the locomotive a t n o c o s t e s s e n t i a l l y. 10 ADV MAHLAPE SELLO: Ja. MR CHABI: On the foreign component. Hence that significant drop. ADV MAHLAPE SELLO: So what you basically are trying to communicate to us is what we see in the red cells there the total of 38.6 is intricately linked to this worksheet. Any changes in this w o r k s h e e t w i l l c h a n g e t h a t 3 8 . 6 b i l l i o n a u t o m a t i c a l l y. M R C H A B I : C o r r e c t a n d t h e N P V. ADV MAHLAPE SELLO: And the NPV ...(intervenes). MR CHABI: The model is highly consistent. ADV MAHLAPE SELLO: So then getting back to your slide 13. 20 M R C H A B I : O k a y. ADV MAHLAPE SELLO: Yo u t h e n h a v e s e t o u t t h e F o r e x H e d g i n g . Again in globular terms of diesel. That is for all the locomotives over the period of acquisition. For electric at 2.4 billion. Similarly for all of them over the period of acquisition and you have a total figure of 3.358 and so that is the hedging cost of the foreign component – foreign Page 135 of 173 27 NOVEMBER 2019 – DAY 194 exchange component of the acquisition of the ...(intervenes). MR CHABI: Oh. ADV MAHLAPE SELLO: Locomotives over a seven-year period. Okay and just like with inflation you are suggesting we must add that to our original locomotive price of 30. MR CHABI: Correct. ADV MAHLAPE SELLO: 476. MR CHABI: So the approach to take here is, let us first try and arrive at 30.476 million. 10 ADV MAHLAPE SELLO: Huh-uh. MR CHABI: That we see on the slide. A D V M A H L A P E S E L L O : Ye s . M R C H A B I : Ye s . I s t h a t w e a r e g o i n g ? ADV MAHLAPE SELLO: Coming again. MR CHABI: Is that where we are going? A D V M A H L A P E S E L L O : Ye s . MR CHABI: again as O k a y. mentioned So we will try and arrive at 30.476 million and that assumes you have acquired all your locomotives as at April 2013. That means no inflation costs locally and 20 abroad and you are acquiring everything at the spot rate in April 2013. To d o t h a t w e h a v e g o t t o c h a n g e t h e f o r w a r d c u r v e r o l e t o r e f l e c t t h e spot rate and not the forward curve. So every single number in that row will be 9.1285. So I will reference that. So Chair will note that in the first row there where the cursor is we have got 9.1285 which is a spot rage. Page 136 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: H’mm. MR CHABI: We will copy the spot rate right across. ADV MAHLAPE SELLO: Huh-uh. MR CHABI: As mentioned we assume no inflation because we are acquiring the locomotives as at 18 April 2013. So we will plug in zero. A rate of 0% right across for SA PPI and 0% right across for US CPI. So as the Chair will see we have got zero right across for SA PPI and zero right across for US CPI. Yo u w i l l n o t i c e w h e r e m y c u r s o r i s t h e l o c a l i s a t i o n p r e m i u m o f 10 2% is still included. That as I mentioned is not the 30.476 million. We could have excluded it, but then we thought being such a tiny amount let us just leave it within the locomotive pricing. In any case it forms part of the locomotive price, because that is what it would cost you locally to get that local component. Going back to the sheet with the 38.6 billion. We should expect to see a change in that sheet and we see 32.708 billion in there. That includes the contingency of 2.2 billion. We also need to deduct that ...(intervenes). ADV MAHLAPE SELLO: And that is as a result of the manipulation of 20 the actual forward curve. Instead of reflecting the increasing exchange r a t e o v e r t h e p e r i o d . Yo u j u s t u s e d t h e c o n s i s t e n t e x c h a n g e r a t e ? M R C H A B I : T h e s p o t r a t e . Ye s . ADV MAHLAPE SELLO: Spot rate ...(intervenes). MR CHABI: So we ...(intervenes). ADV MAHLAPE SELLO: And you applied it cross the seven years? Page 137 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: Correct. ADV MAHLAPE SELLO: So you said assuming then that there was no change in the exchange rate you would have used the 9.1258 for seven years and that would have given you an ETC of 32 billion? MR CHABI: No. Sorry Advocate. Can I just ...(intervenes) ? A D V M A H L A P E S E L L O : O k a y. MR CHABI: Follow through. ADV MAHLAPE SELLO: I say the exercise you have just done now you assumed for purposes of this exercise that the exchange rate over the 10 seven-year period will stay at 9.1258? M R C H A B I : Tw o . J a . 2 8 5 . A D V M A H L A P E S E L L O : Ye s . MR CHABI: Correct. A D V M A H L A P E S E L L O : 2 8 5 . O k a y. M R C H A B I : Ye s . ADV MAHLAPE SELLO: 1285. That is correct. MR CHABI: And that there was no inflation right through locally ...(intervenes). ADV MAHLAPE SELLO: There was no inflation right through. 20 MR CHABI: And abroad. A D V M A H L A P E S E L L O : Ye s . MR CHABI: Ja and then I have now just deducted the contingency of 2.23 billion, because that as we know was a balance and cost item. A D V M A H L A P E S E L L O : O k a y. MR CHABI: Ja. Page 138 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: Which is the final – the last entry on your slide 13? MR CHABI: Correct. A D V M A H L A P E S E L L O : O k a y. M R C H A B I : Ta k i n g y o u b a c k t o t h e m a i n c o n t r o l i n p u t s h e e t . Yo u w i l l notice Chair that figure is 30.476 billion. So I have essentially stripped out all the costs from the 38.6 billion to arrive at the pure locomotive. Aligned with the two percent localisation premium and that ties in with what you have in slide 13. 10 C H A I R P E R S O N : O k a y. ADV MAHLAPE SELLO: Then just to remind ourselves this – these spreadsheets we have been working on are the spreadsheets provided t o u s b y Tr a n s n e t ? MR CHABI: Correct. ADV MAHLAPE SELLO: These are the – this is the financial model w h e r e Tr a n s n e t t e l l s u s t h a t 3 8 . 6 b i l l i o n y o u w i l l s e e i n t h e b u s i n e s s case is underpinned by these calculations? MR CHABI: Correct. ADV MAHLAPE SELLO: 20 Would it be correct then to surmise that the inclusion of exclusion of the exchange – the hedging costs and the inflation from the 38.6 will be determined by these worksheets. Not by – by anything else. The worksheets will tell us whether or not the hedging is part of the 38.6 or not? MR CHABI: Correct. ADV MAHLAPE SELLO: So any suggestion that the 38.6 billion did not Page 139 of 173 27 NOVEMBER 2019 – DAY 194 include hedging or escalation must be rejected if the financial model is to be accepted? M R C H A B I : Ye s . A D V M A H L A P E S E L L O : Yo u c a n n o t a c c e p t b o t h . MR CHABI: Correct. ADV MAHLAPE SELLO: Because the financial model tells us it is inclusive? MR CHABI: Correct. ADV MAHLAPE SELLO: And that is a long process we have just gone 10 through and that Chair was a bit to demonstrate that the 38 – what the 38.6 billion included. This issue will become relevant going forward when we discuss the increase from 38.6 to 54 billion, because time and again mister – as you heard previously from Mr Callard and Mr Sedumedi from MNS that there has consistently been a suggestion that the 38.6 billion did not include these costs and Mr Chabi today was trying to demonstrate to us that they in fact did and he draws that conclusion from the very worksheets the financial model provided to h i m b y Tr a n s n e t . O k a y. CHAIRPERSON: Thank you. 20 MR CHABI: Shall we continue to derive at the other costs? A D V M A H L A P E S E L L O : Ye s . M R C H A B I : O k a y. A D V M A H L A P E S E L L O : S o r r y. L e t m e h e a r y o u . MR CHABI: Should we then continue to derive the other costs? 1.8 million. The 7.13. The 3358. Page 140 of 173 The 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: We are now back in slide 13? M R C H A B I : 1 3 . Ye s . ADV MAHLAPE SELLO: I take it that you then have – you are able to show us with reference to AC4 the SA PPI escalation cost for the diesel and the electric. That is the slide we are looking at. The worksheet we a r e l o o k i n g p r e v i o u s l y. Yo u e q u a l l y s h o w e d u s t h e U S C P I ? MR CHABI: Correct. ADV MAHLAPE SELLO: Showed us the Forex and you allowed for contingency? 10 MR CHABI: Correct. ADV MAHLAPE SELLO: Now as I indicated that worksheet shows us all those costs but in respect of one locomotive? MR CHABI: Correct. ADV MAHLAPE SELLO: Do we accept that your slide 13 then give – just gives us the total cost based on 1064? MR CHABI: We do. ADV MAHLAPE SELLO: The exercise you just took us through do you suggest that we take that exercise. We apply it to electrics. We worked on diesel. 20 MR CHABI: We can do that. A D V M A H L A P E S E L L O : J a . S o w h y, b u t y o u s a y t h e s a m e p r i n c i p l e i s applicable? M R C H A B I : To e l e c t r i c s . Ye s . ADV MAHLAPE SELLO: And once we have applied it to the electrical locomotives. We will multiply by that number of electrical locomotives Page 141 of 173 27 NOVEMBER 2019 – DAY 194 and it will give us escalation cost of PPI of 1.432 billion as per slide 13? MR CHABI: Correct. It would. ADV MAHLAPE SELLO: And that the total of 1.821 billion is a simple arithmetic exercise. It is 388 for diesel, escalation plus 1432. MR CHABI: Correct. ADV MAHLAPE SELLO: Which gives us 1821? MR CHABI: Correct. ADV MAHLAPE SELLO: I think we understand. I am will – I am happy 10 to accept what you said. Slide 13, but it is not for me to accept. It is f o r t h e C h a i r. M R C H A B I : C o r r e c t . Ye s . ADV MAHLAPE SELLO: The question I guess – the main one is whether your conclusions and findings at 13 are defensible with reference to the financial model. Would you say they are? MR CHABI: I would say they are. A D V M A H L A P E S E L L O : O k a y. T h e n a n y c l a r i f i c a t i o n I g u e s s t h a t t h e Chair may require. CHAIRPERSON: 20 I am sure there is a good chance that there will be questions for clarification after going through the transcript at my own pace. A D V M A H L A P E S E L L O : O k a y. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: Then justly before we leave your slide 13. Yo u h a v e t h e l a s t e n t r y o f t o t a l 2 . 2 3 2 b i l l i o n f o r c o n t i n g e n c y. Page 142 of 173 27 NOVEMBER 2019 – DAY 194 M R C H A B I : Ye s . ADV MAHLAPE SELLO: Would you like to quickly talk us through that? MR CHABI: Well 2.23 billion is simply the reserve set aside as per my understanding for capital spares and all of that for the locomotives. So I understand it was a scientifically derived based on the capital spares that we required for the locomotives. ADV MAHLAPE SELLO: So the contingency of 2.2 billion you find reasonable and appropriate in the circumstances? MR CHABI: One must also look at the percentage that it forms as part 10 of the total – of the capital costs. A D V M A H L A P E S E L L O : Ye s . MR CHABI: It is about 7%. If I am not mistaken. I find that reasonable. ADV MAHLAPE SELLO: O k a y. So we now have established through what we have discussed this afternoon that the 38.6 billion ETC was the locomotive price duly escalated in terms of the SA PPI and US CPI. Ta k i n g i n t o c o n s i d e r a t i o n t h e h e d g i n g c o s t s a n d c o n t i n g e n c i e s a n d t h a t is how we arrive at 38.6? MR CHABI: Correct. 20 ADV MAHLAPE SELLO: At your slide 14 then you give us a comparison of foreign currency forward rates. That is slide 14. Could you quickly explain to us why you find it necessary to share this piece of information with us and the graphs? MR CHABI: So Chair I think we discussed this briefly earlier on. It is one thing to show slide 13 with a breakdown of what the R38.6 billion Page 143 of 173 27 NOVEMBER 2019 – DAY 194 include, but that is not proof enough that the 38.6 billion includes inflation and foreign currency hedging and the costs that we claim it to be and even if it did. It is not proof enough that those were the – it includes them to those amounts. To t h e e x t e n t r e f l e c t e d o n s l i d e 1 3 . Specifically with reference to the forward curve applied. The argument could be fair and f i n e . Yo u h a v e f o r e i g n c u r r e n c y f o r e c a s t s i n t h e r e . T h e r e m a y s e e m t o j u s t b e f o r e c a s t s a n d n o t f o r e i g n e x c h a n g e h e d g e r a t e s a s Tr a n s n e t calls them. 10 ADV MAHLAPE SELLO: Before you go into any further detail. Can you explain each ...(intervenes)? M R C H A B I : T h e d i ff e r e n c e ? ADV MAHLAPE SELLO: Each one? M R C H A B I : O k a y. A D V M A H L A P E S E L L O : J a . T h e d i ff e r e n c e b e t w e e n e a c h o n e . MR CHABI: So the forward curve as we have seen and as we have been discussing gives you rates at which a commercial bank would contract with you for the Dollar in future. In other words they are prepared to pay at the end of year one R9.5854 to the Dollar to every 20 Dollar you bring forward or give you a Dollar for every R9.5854 that you b r i n g t o t h e m . O k a y. So they contract with you on that basis on those rates. So regardless of what the exchange rate does they will stick to the agreement and exchange currency with you at the stipulated rate. A D V M A H L A P E S E L L O : Ye s . Page 144 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: With a forecast it takes into account other factors. It is not a rate that you are certain to get in future. It is not contractible. It is simply a view on where the currency is going to be in time to come in the future basically going forward. The process of arriving at Forex h e d g e d r a t e s a n d t h a t u s e d t o a r r i v e a t f o r e c a s t e d r a t e s a r e d i ff e r e n t . T h e p r o c e s s e s a r e d i ff e r e n t . F o r h e d g e d r a t e s y o u l o o k a t t h e d i ff e r e n c e s i n i n t e r e s t r a t e s i n t h e c u r r e n t – i n t h e c o u n t r i e s o f i n t e r e s t . O k a y. is termed. 10 It is based on what Sorry to introduce jargon here. Arbitrage-free pricing. other words there is no free lunch. In So considering that you have R100,00 today and you have a choice between investing it in a Money Market Account here and with a foreign country of interest is the US. O k a y. Investing it in a Money Market Account in the US. The forward rate is that which equates the investment at the end of the y e a r. S o e ff e c t i v e l y y o u a r e n o t i n a b e t t e r p o s i t i o n i n v e s t i n g i n t h e States or investing locally and that is how your forward curve is derived. ADV MAHLAPE SELLO: Now before you move on. When we dealt with 20 Annexure 4 at page 163.1 you highlighted the foreign exchange futures on that very worksheet. MR CHABI: The one overhead? ADV MAHLAPE SELLO: The exchange rate – the hedging, you see the hedging on the Forex shift. MR CHABI: Correct. Page 145 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: Ja and you indicated to the Chair that that is the hedging. MR CHABI: That is the forward curve yes. ADV MAHLAPE SELLO: The forward curve, do you know where Tr a n s n e t o b t a i n e d t h o s e f i g u r e s f r o m ? MR CHABI: F r o m t h e Tr e a s u r y D e p a r t m e n t w h e r e t h e Tr e a s u r y Department obtained it from? ADV MAHLAPE SELLO: MR CHABI: 10 N o Tr a n s n e t . F r o m t h e Tr e a s u r y D e p a r t m e n t . ADV MAHLAPE SELLO: F r o m t h e Tr e a s u r y D e p a r t m e n t s o j u s t t a l k t o u s a b o u t t h a t , t h e Tr e a s u r y D e p a r t m e n t p r o v i d e s S O E ’s o r w h a t d o e s t h e Tr e a s u r y D e p a r t m e n t t h e n p r o v i d e ? MR CHABI: W e l l i n t h i s i n s t a n c e t h e Tr e a s u r y D e p a r t m e n t w o u l d a s s i s t w i t h f o r e i g n c u r r e n c y, r i s k h e d g i n g , t h e y w o u l d o b t a i n t h e s e r a t e s i t ’s n o t s u r e w h e t h e r i t ’s i n t e r n a l l y o r o n t h e m a r k e t . ADV MAHLAPE SELLO: Okay so these are as determined by Tr e a s u r y ? MR CHABI: Correct. ADV MAHLAPE SELLO: 20 MR CHABI: Now if you could pull up your slide 14. 15? ADV MAHLAPE SELLO: Ye s 1 5 a p o l o g i e s , w h y i s y o u r s 1 5 a n d m i n e 14 – yes I’m looking for that slide headed comparison of foreign currency forward rates. Yo u have Tr a n s n e t forward rates and B l o o m b e r g f o r w a r d r a t e s . Yo u t o u c h e d a b i t o n f o r e c a s t r a t e s w e w i l l get there. Just explain to us what it is you are doing here with Page 146 of 173 27 NOVEMBER 2019 – DAY 194 r e f e r e n c e t o t h e Tr e a s u r y c u r v e r a t e ? MR CHABI: Okay so essentially we’re trying to dispel the argument that the rates used there could have been forecasted rates and not n e c e s s a r i l y f o r w a r d e x c h a n g e r a t e s – f o r w a r d c u r v e r a t e s b a s i c a l l y. S o what we did is and hence my explanation in terms of – well my explanation of how the forward curve is derived versus forecasted r a t e s , t h e p r o c e s s e s u s e d t o d e r i v e a t t h o s e t w o c u r v e s a r e d i ff e r e n t , y o u r f o r e c a s t e d r a t e s v e r s u s y o u r f o r w a r d r a t e s . F o r w a r d r a t e s , t h e r e ’s a deterministic process it does not matter where you go, you will get 10 the same forward curve if you’re looking at two countries of interest at a particular point in time, they are based on interest rates, locally and abroad, in this case the United States and in particular where South Africa is concerned we’re looking at the Johannesburg Interbank Average Rate okay which is the average of the deposit rates across the b a n k s i n S o u t h A f r i c a a n d t h a t i s a t e r m i n a l f i g u r e . Yo u c a n p i c k t h a t o ff , i t ’s m a r k e t d a t a a v a i l a b l e i t ’s t h e s a m e w h e r e v e r y o u p i c k i t u p t o try and source it from and LIBOR in the United States which is the L o n d o n I n t e r b a n k O ff e r e d R a t e o k a y i t ’s a n a v e r a g e o f m o n e y m a r k e t rates. 20 We then went on to the markets to understand, as at April 2013 g i v e n t h i s s t r e a m o f c a s h - f l o w s w h i c h i s t h e c a s h - f l o w s t h a t Tr a n s n e t would have like to hedge at the time okay for the locomotives – with a seven-year delivery schedule what would the forward curve have looked like at the time allowing for the brokerage fees, transaction costs, that a bank would charge over and above the forward curve to enter into a Page 147 of 173 27 NOVEMBER 2019 – DAY 194 c o n t r a c t w i t h Tr a n s n e t . We did that exercise and what we have there as your Bloomberg forward written fact, this was obtained from Bloomberg, okay if you perform the same exercise of Thompson Routers you should get the same curve. So you approach any bank as at April 2013 you should get this forward curve because at that date you knew what the spot rate is because your forward curve is a function o f y o u r s p o t r a t e a t t h e t i m e , i t ’s a f u n c t i o n o f y o u r J i b a r r a t e s g o i n g forward at that point in time and is a function of your Libor rates going forward at that point in time and those rates are not variable, they’re 10 stated because the average is across a number of entities on the market. ADV MAHLAPE SELLO: So then what conclusion do we derive from that slide? MR CHABI: So looking at that curve we can see that the rates – the curve derived from Bloomberg pretty much mirrors the curve that Tr a n s n e t Tr e a s u r y a p p l i e d t o t h e 1 0 6 4 b u s i n e s s c a s e . CHAIRPERSON: MR CHABI: Just repeat that please? The curve derived from Bloomberg mirrors that applied by Tr a n s n e t ’s Tr e a s u r y D e p a r t m e n t . 20 ADV MAHLAPE SELLO: MR CHABI: To g e t t o t h e 3 8 . 6 b i l l i o n ? Correct. ADV MAHLAPE SELLO: And that, as we said, we see in Annexure 4 A C 4 a t p a g e 1 6 3 . 1 i t ’s t h o s e f i g u r e s , 9 . 5 , 9 . 1 0 , 1 0 . 0 4 , 1 0 . 5 2 a n d y o u have plotted them in a chart here on the slide and you compare them against the Bloomberg rates and I see that if there is – there are Page 148 of 173 27 NOVEMBER 2019 – DAY 194 d i ff e r e n c e s s o m e t i m e s i t ’s . . . ( i n t e r v e n e s ) . MR CHABI: T h e y ’ r e v e r y m i n o r a n d t h e y r e l a t e t o d i ff e r e n c e s b e t w e e n bank charge between banks in terms of their charges. ADV MAHLAPE SELLO: And the figures in blue, those figures we get from the model? MR CHABI: Correct, the financial model. ADV MAHLAPE SELLO: T h e Tr a n s n e t f o r w a r d r a t e s , o v e r l e a f y o u t h e n make another comparison which is forward rates versus forecasted rates. 10 MR CHABI: Correct, so as mentioned earlier there were two exchange rate tables applied in the business case, the forward curve and forecasted rates and if the Chair recalls, based on our discussions earlier I actually put that table under maintenance cost to reflect where they were applied. They were applied purely to forecast maintenance c o s t s . Tr a n s n e t ’s p o l i c y, b e l o w a c e r t a i n t h r e s h o l d d o e s n o t r e q u i r e y o u to go and hedge exposures. Maintenance costs fell below that t h r e s h o l d h e n c e a f o r e c a s t w a s s u ff i c i e n t f o r m o d e l l i n g p u r p o s e s i n t h i s instance and as can be seen these are the forecasted rates used in the financial model. 20 T h e s e f o r e c a s t e d r a t e s a r e q u i t e d i ff e r e n t t o t h e f o r w a r d c u r v e r a t e s a s c a n b e s e e n . T h e s e r a t e s , a c t u a l l y, i n c e r t a i n instances show an appreciation in the rand, we know from our forward curve we see a depreciation in the Rand right through to 2022. That is t h e d i ff e r e n c e b e t w e e n t h e t w o , f o r w a r d c u r v e r a t e s w e r e a p p l i e d f o r ETC, Global Insight Forecasted Rates were applied for maintenance costs and maintenance costs do not form part of ETC, they form part of Page 149 of 173 27 NOVEMBER 2019 – DAY 194 T C O h e n c e t h e d i s t i n c t i o n t h a t ’s w h y w e w e n t t h r o u g h t h e c o s t I h a d t o show you, TCO and what TCO is made up of, ETC and then you have your personnel costs, your maintenance costs, your fuel costs, your e m i s s i o n c o s t s a n d s o f o r t h . S o i t r e a l l y, I t h i n k w e h a v e d e m o n s t r a t e d that they were applied, forecasted rates were applied but not to ETC and what was applied in modelling the ETC was the forward curve which was verified using market data. ADV MAHLAPE SELLO: And you make this comparison in this slide to demonstrate that the 38.6 billion was arrived at not with reference to 10 f o r e c a s t e d r a t e s b u t t o a c t u a l f o r w a r d r a t e s , t h a t ’s t h e f i r s t p o i n t . T h e second is, you acknowledge that the business case does make use of forecasted rates. MR CHABI: Correct. ADV MAHLAPE SELLO: Except those rates are confined strictly to the issue on maintenance? MR CHABI: Correct. ADV MAHLAPE SELLO: And in the previous slide you then said, if we accept that I have demonstrated that the rates used as the forward r a t e s o b t a i n e d f r o m Tr e a s u r y D e p a r t m e n t I h a v e c o m p a r e d t h o s e 20 against the rates I obtained from Bloomberg and they are more or less in line with one another? MR CHABI: Correct. ADV MAHLAPE SELLO: MR CHABI: Would that be a correct summation? Ye s . ADV MAHLAPE SELLO: Okay you then go further in that slide and in Page 150 of 173 27 NOVEMBER 2019 – DAY 194 your statement give us more detail – forward. MR CHABI: Concluding slide? ADV MAHLAPE SELLO: MR CHABI: Ye s . D o I h a v e a d i ff e r e n t s l i d e o n . . . ( i n t e r v e n e s ) . ADV MAHLAPE SELLO: Then you reach – we now have worked out the makeup of the 38.6 billion, we have calculated the escalation rate, the Forex, we have demonstrated that what was taken into consideration is actual forward rates and not forecasted rates and now we must draw a conclusion from that exercise and what is your 10 conclusion? MR CHABI: Okay so look at the mandate I think it entailed assessing whether the 38.6 billion was an acceptable estimate for the ETC, our view is, yes it was and acceptable ETC at the time. Did it include Forex hedging rates, it did, did it allow for Forex hedging, it did, did it allow for Forex hedging costs, it did, did it include escalation, it did, I think we have demonstrated that by zero rising some of those costs and observing the impact on the 38.6 billion, so yes it allowed for all of t h o s e f o r t h o s e t w o c o s t s i n p a r t i c u l a r, e s c a l a t i o n l o c a l l y a n d a b r o a d and Forex hedging and was an acceptable estimate. 20 ADV MAHLAPE SELLO: And I think we have indicated earlier that any suggesting that the 38.6 billion did not include Forex hedging and escalation you would reject outright? MR CHABI: Correct. ADV MAHLAPE SELLO: With that conclusion then we have disposed of the two issues that you were required to investigate and comment on Page 151 of 173 27 NOVEMBER 2019 – DAY 194 so far as 1064 is concerned and we are now at your page 36 of your statement where we are dealing with the third aspect which is the increase in estimated total costs from 38.6 billion to 54.5 billion. CHAIRPERSON: Yo u s a i d t h a t t a k e s u s t o w h a t p a g e o f t h e statement? ADV MAHLAPE SELLO: CHAIRPERSON: Page? ADV MAHLAPE SELLO: CHAIRPERSON: 10 36. 36 Okay ADV MAHLAPE SELLO: CHAIRPERSON: 3 6 C h a i r. Okay? I ’ v e d o n e a l o t o f n u m b e r s t o d a y, o k a y a l r i g h t . ADV MAHLAPE SELLO: There are a few and unfortunately we are a b o u t t o g e t m o r e , t h e r e ’s n o w a r n i n g . CHAIRPERSON: T h e y h a v e t o b e d o n e j a w e – l e t ’s c o n t i n u e . ADV MAHLAPE SELLO: CHAIRPERSON: We shall soldier on, this ...(intervenes). Yo u d i d n ’ t s a y t h a t t o g o t o l a w o n e m u s t g o a n d d o actuarial science 101. ADV MAHLAPE SELLO: CHAIRPERSON: 20 No count me out Chair I’m not going there. Ye s . ADV MAHLAPE SELLO: Did you want to say something before we ...(intervenes). MR CHABI: I t ’s f i n e . ADV MAHLAPE SELLO: Okay we are now at your page 36, slide 18 right. MR CHABI: O k a y. Page 152 of 173 27 NOVEMBER 2019 – DAY 194 ADV MAHLAPE SELLO: And your mandate now – you were now looking as I said at the increase in ETC from 38.6 billion to 54.5 billion? MR CHABI: To w h a t s o r r y ? ADV MAHLAPE SELLO: We are looking at the increase from 38.6 billion to 54.5 billion. MR CHABI: Correct. ADV MAHLAPE SELLO: E a r l i e r y o u c o r r e c t e d m e a n d s a i d i t ’s . 9 I said .5. 10 MR CHABI: 15.9 is the increase yes. ADV MAHLAPE SELLO: And you start this at your slide 18, statement page 36 starting then at your paragraph 9.47 can you take us through the issues relevant to this particular enquiry and help us work through it and understand how we arrive at an increase of 15.9 billion before you express a view thereon? MR CHABI: Okay so I think just to reiterate what the mandate was here identify the reasons put forward for the increase from 38.6 billion to 54.5 billion that represents a 15.9 billion increase in the ETC. A s s e s s t h e q u a n t u m ’s , a s s e s t h e r e a s o n a b i l i t y o f t h o s e r e a s o n s , a s s e s s 20 the reasonability of the amounts next to those reasons okay and give an opinion on a reasonable increase over the period, it was, essentially a one-year period from April 2013 to March 2014. Should I carry on to the finding? ADV MAHLAPE SELLO: We don’t have a finding on this one we work through the issues before we get to the finding. Page 153 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: Alright. ADV MAHLAPE SELLO: Because of the nature of the enquiry you k n o w, s o I g u e s s w e w i l l g o s t r a i g h t i n t o d e a l i n g w i t h t h e i s s u e s t h a t are relevant to this determination. MR CHABI: Okay should we at this point then refer to the memorandum on the first page? ADV MAHLAPE SELLO: We are happy to and by memorandum you’re referring to your Annexure AC5 starting at your statement page 164, is that so? 10 CHAIRPERSON: Is that the memorandum from Group CEO? ADV MAHLAPE SELLO: CHAIRPERSON: Marked AC5. A C 5 J a , i t ’s a m e m o . . . ( i n t e r v e n e s ) . ADV MAHLAPE SELLO: I t s t a r t s a t 1 6 5 , i t ’s a m e m o t o t h e Tr a n s n e t Board is that the memo you are talking about? CHAIRPERSON: MR CHABI: J a i t ’s f r o m t h e G r o u p C E O , y e s . I t s a y s , t o t h e Tr a n s n e t B o a r d o f D i r e c t o r s f r o m t h e G r o u p CEO at the time. ADV MAHLAPE SELLO: I was clarifying is that the memo you are directing us to? 20 MR CHABI: That is the one. ADV MAHLAPE SELLO: MR CHABI: Okay the Chair has located it as well. O k a y s o C h a i r, t h e r e a s o n f o r t h i s m e m o I g u e s s t h e purpose put forward and I will just read it on the memo verbatim so: “The purpose of this memo is for the Board to note the reasons for the increase in ETC and to request that the Page 154 of 173 27 NOVEMBER 2019 – DAY 194 Board of Directors approve an increase in ETC for the acquisition of 1064 locomotive from GFB of TFR from 38.6 billion to 54.5 billion.” S o t h a t ’s t h e f i r s t p a r a g r a p h . T h e E x e c u t o r y s u m m a r y i n t h a t memo ...(intervenes). ADV MAHLAPE SELLO: Before you go into the Executive summary j u s t s o t h a t e v e r y o n e c a n f o l l o w, w h a t w e a r e r e a d i n g o r w h a t w e ’ l l b e reading under the Executive summary is captured in your slide 24 perhaps you might want to run ahead a bit and bring up slide 24, am I 10 correct? MR CHABI: Yo u a r e c o r r e c t o k a y ; c a n I h o w e v e r r e v e r t b a c k t o t h e previous slide which also captures this? ADV MAHLAPE SELLO: Ye s s o I s a y w h e n y o u d e a l w i t h t h e Executive summary in the memo it should be with reference to slide 24. MR CHABI: S l i d e 2 4 o k a y. ADV MAHLAPE SELLO: So that everybody can follow what you are saying. MR CHABI: O k a y. ADV MAHLAPE SELLO: 20 MR CHABI: Ye s . S o C h a i r, s l i d e 2 4 e s s e n t i a l l y r e p l i c a t e s t h a t t a b l e i n t h e memo on the slide. Now I’ll take you through the various components. I think to facilitate understanding let me just go back to this slide and explain to you how this slide links to table two or am I jumping the gun as per my statement? ADV MAHLAPE SELLO: May I suggest we deal first with the Page 155 of 173 27 NOVEMBER 2019 – DAY 194 Executive Summary and then we go to table two being a more involved table and try and then we will try and link it back to this table under the E x e c u t i v e S u m m a r y. MR CHABI: O k a y. ADV MAHLAPE SELLO: So on your screen then if you could go to slide 24 for this purpose we shall revert to this one, yes thank you. MR CHABI: Okay so this table is a replica of what we have in the Executive summary in the – those are the reasons advanced for the i n c r e a s e i n E T C . S t a r t i n g o ff w i t h t h e f i r s t o n e , t h e r e a s o n p u t f o r w a r d 10 was an update of the business case for updated economic factors and I think I have captured that verbatim and that amounted to 5.4 billion. I have 5.39 billion but essentially it is 5.4 billion or roundabout and that accounts for 34% of the increase in ETC, so essentially of that 15.9 billion. The second reason put forward, before I explain each of those is risk mitigation looking at Forex and escalation amounting to 9.5 billion and that makes up 59% of the ETC, I mean of the ETC increase of 15.9 billion. We then have TE scope at an amount of 2.6 billion making up 16% of the increase in ETC, we have contingencies, contingencies have gone up in this instance if you recall Chair it was 20 2.232 billion from the business case it is now 4.9 billion or 4.95 billion t o b e e x a c t a n d t h a t ’s 3 1 % o f t h a t i n c r e a s e a n d i n a d d i t i o n t o t h a t t h e r e was, according to the memo, a saving and I’ll just read it verbatim, what the source of that saving is, it says, “Lower capital acquisition costs of the locomotive obtained through the competitive Page 156 of 173 tender and 27 NOVEMBER 2019 – DAY 194 negotiation process less the batch pricing adjustment of 2.7 billion”, And that saving is noted at 6.5 billion Rands making up negative 41% of that 15.9 billion Rand increase. ADV MAHLAPE SELLO: So if one tries to understand this table in l a y m a n ’s t e r m s , w o u l d I b e c o r r e c t t o s a y t h e E T C h a d t o i n c r e a s e because one of updated economic factors of taking into consideration Forex and escalation as listed there. MR CHABI: 10 Correct. ADV MAHLAPE SELLO: The TE scope and the contingency except what changes is the amount of the contingency because our original business case had to take into consideration contingency but that in all this there has been a saving of 6.5 billion? MR CHABI: Correct. ADV MAHLAPE SELLO: Would I be correct in interpreting it in that way? MR CHABI: Correct. ADV MAHLAPE SELLO: Okay have – do you in your report deal specifically with this saving, are you in a position to assist the Chair to 20 locate where this saving comes from? MR CHABI: I cannot pick up the saving when I look at it, when I go through the memo. ADV MAHLAPE SELLO: MR CHABI: Yo u c a n ’ t p i c k u p a s a v i n g ? I can’t pick up a saving. ADV MAHLAPE SELLO: Why not? Page 157 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: I suppose it will become clearer as we go through the r e l e v a n t c o s t i t e m s s t a r t i n g o ff w i t h t h e l o c o m o t i v e p r i c e b u t t h e y d o n o t contain ...(intervenes). ADV MAHLAPE SELLO: O k a y t h e n l e t ’s d o i t t h a t w a y b e c a u s e w e would like to be able to follow and see this saving of 6.5 billion and while I’m at that – because I would expect, correct me if I’m wrong, that I must apply that saving to the increased ETC, I must have my saving of 6.5 billion and I would like you to help us work through the memo to show me how that saving is applied to whatever new cost there is. 10 MR CHABI: O k a y. ADV MAHLAPE SELLO: MR CHABI: If I can? ADV MAHLAPE SELLO: MR CHABI: Ye s . To t r y a n d i d e n t i f y o r l o c a t e t h e 6 . 5 b i l l i o n s a v i n g ? ADV MAHLAPE SELLO: MR CHABI: Okay so if you can. A b s o l u t e l y, o k a y. I suppose at this point we look at the more detailed table two. ADV MAHLAPE SELLO: Okay and table two you mean table two of AC5? 20 MR CHABI: O f A C 5 , t h a t i s c o r r e c t C h a i r. ADV MAHLAPE SELLO: CHAIRPERSON: Is that – did you say what page on the Annexures? ADV MAHLAPE SELLO: CHAIRPERSON: Of Annexure AC5. AC5, we are back in our ...(intervenes). AC5? ADV MAHLAPE SELLO: AC5. Page 158 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: O k a y. ADV MAHLAPE SELLO: MR CHABI: Ta b l e t w o o f A C 5 . ADV MAHLAPE SELLO: MR CHABI: And Mr Chabi you are referring us to a table? Ye s . Gives you a build-up from the locomotive price right up to the 54.5 billion. ADV MAHLAPE SELLO: With your permission that table two Chair is to be found at page 169. Now Chair what you have at page 169, I think was not meant to be read we have ...(intervenes). 10 CHAIRPERSON: Did you say was not meant to be read? ADV MAHLAPE SELLO: CHAIRPERSON: it was not meant to be read. R e d i n c o l o u r, r e a d a s i n r e a d i n g . ADV MAHLAPE SELLO: As in reading the print is so small we have extracted from the reference bundle a copy of that table presented better it is exact the same and we propose to hand it in as 169.1, this will facilitate working through the table than relying on the original table in the memo. CHAIRPERSON: O k a y. ADV MAHLAPE SELLO: 20 I ’ v e j u s t p a g i n a t e d i t 1 6 9 . 1 C h a i r. Do you have a legible copy of that before you Mr Chabi? MR CHABI: I h a v e p u t i t o v e r h e a d a n d i t ’s t h e m i d d l e c o l u m n . CHAIRPERSON: Is it the same thing over there? ADV MAHLAPE SELLO: N o i t ’s n o t e x a c t l y t h e s a m e t h i n g t h i s i s y o u r worked on document. MR CHABI: Correct but the middle column reflected this table but it Page 159 of 173 27 NOVEMBER 2019 – DAY 194 doesn’t have the numbers ...(intervenes). ADV MAHLAPE SELLO: Okay for the moment the Chair should ignore what is on the screen he should listen to you as you assist him to work t h r o u g h t a b l e t w o t h a t ’s w h a t w e w a n t t o – y o u s e n t u s t o t a b l e t w o s o ...(intervenes). CHAIRPERSON: W e ’ v e g o t t h i s o n t h e s l i d e s a t p a g e 2 1 , w h a t ’s o n the screen. ADV MAHLAPE SELLO: Ye s C h a i r, 2 1 , 2 2 a n d w e w i l l c o m e b a c k t o that because that particular slide already includes an opinion, his 10 opinion so I think it would be a bit – a tad confusing to seal with it at t h i s j u n c t u r e , w e w i l l g e t t o i t s o i t ’s b e s t w e w o r k o u r w a y t h r o u g h t a b l e t w o . N o w a s t h e C h a i r s a i d w e ’ r e w o r k i n g t h r o u g h f i g u r e s ; i t ’s b e e n a day of figures. CHAIRPERSON: We don’t have a choice today we have to continue with figures. ADV MAHLAPE SELLO: W e d o n ’ t h a v e a c h o i c e , i t ’s 1 5 : 3 0 I n e e d t o find out from Mr Chabi, Mr Chabi by 16:00 would we have worked our w a y t h r o u g h t a b l e t w o , w h a t ’s y o u r a s s e s s m e n t ? C o m f o r t a b l y a n d i n a m a n n e r t h a t ’s u n d e r s t a n d a b l e o r w i l l w e n e e d m o r e t i m e ? 20 MR CHABI: I t h i n k w e w i l l h a v e – t h e n e x t h a l f a n h o u r. ADV MAHLAPE SELLO: MR CHABI: The next half an hour? Correct but only so far as linking, going through table two a n d l i n k i n g t h a t t o t h e t a b l e i n t h e E x e c u t i v e s u m m a r y. ADV MAHLAPE SELLO: B e c a u s e I a s k t h i s q u e s t i o n C h a i r, b e c a u s e i f we leave table two hanging and try to pick it up tomorrow – so when we Page 160 of 173 27 NOVEMBER 2019 – DAY 194 e n g a g e w i t h t a b l e t w o w e t a k e i t a l l t h e w a y. CHAIRPERSON: Yo u t a l k a b o u t t o m o r r o w, t h e r e ’s n o t o m o r r o w. ADV MAHLAPE SELLO: MR CHABI: Ye s C h a i r. I was told the witness would be only one day and tomorrow got given other commitments. ADV MAHLAPE SELLO: CHAIRPERSON: Is there Friday Chair? T h e r e ’s n o F r i d a y e i t h e r. ADV MAHLAPE SELLO: T h e n t h e o n l y c h o i c e w e h a v e C h a i r, I w a s n ’ t aware of that, because we actually had more witnesses lined up for you 10 t o m o r r o w. CHAIRPERSON: Well I don’t know what happened but even with Mr Chabi I had to ask whether he would need the whole day then I was told that definitely he would need the whole day but in terms of the programme for this week, tomorrow and Friday I was told there would b e n o w i t n e s s a n d M o n d a y, t h e n e x t h e a r i n g i s Tu e s d a y t h e 3 r d , Wednesday the 4th and I’m not sure whether on the 5th there is already a witness or something is still being worked out? ADV MAHLAPE SELLO: 4, 5, 6, there were witnesses subject to your confirmation. 20 CHAIRPERSON: Ja I can’t remember about 5, I know 3 and 4 are confirmed and I know who the witnesses are. I think I may have said something must be done to explore the possibility of getting a certain witness on the 5th but I can’t remember where that process is whether i t ’s f i n a l i s e d o r n o t a n d I s a i d t o M r P r e t o r i u s b e c a u s e M o n d a y a n d Tu e s d a y t h i s w e e k – M o n d a y a n d y e s t e r d a y h e w a s s u p p o s e d t o l e a d Page 161 of 173 27 NOVEMBER 2019 – DAY 194 three witnesses, he only managed to lead two. I said to him the third one he could look at – I don’t know whether I said the 5th or the 6th I may have said the 6th because I said we need to finish with him. So I was never made to understand that we need another day for Mr Chabi and ...(intervenes). ADV MAHLAPE SELLO: May I propose something Chair? CHAIRPERSON: Ja. ADV MAHLAPE SELLO: That perhaps we consider going to 18:30 – 19:00 today to finish Mr Chabi, we’re still on 1064 we haven’t touched 10 100. CHAIRPERSON: W e c a n ’ t g o b e y o n d 1 7 : 0 0 t o d a y e i t h e r, y o u k n o w there are days when we can go even beyond 17:00 and 18:00 and so on but it happens to be a day when I have got other commitments. I think l e t ’s t a l k a b o u t – b y 1 6 : 0 0 h o w m u c h t i m e y o u t h i n k w i l l b e n e c e s s a r y f o r t h e c o m p l e t i o n o f h i s e v i d e n c e o r l e t ’s s a y f r o m n o w h o w m a n y hours will we still need? ADV MAHLAPE SELLO: CHAIRPERSON: Ye s . ADV MAHLAPE SELLO: 20 I’m conferring here, I’m seeking counsel. I’m advised, maximum two hours including 100 transaction. CHAIRPERSON: Maximum? ADV MAHLAPE SELLO: CHAIRPERSON: T h a t ’s t h e a d v i c e I g e t C h a i r. Is it minimum or maximum? I just want to make sure nobody made a mistake. ADV MAHLAPE SELLO: Mr Chabi shakes his head and I shall be led Page 162 of 173 27 NOVEMBER 2019 – DAY 194 by him and this is – I guess my concern is this is the one aspect based on the mandate he was given. The Chair will recall that as far as two a r e c o n c e r n e d h e s a i d h e d i d n o t h a v e a d i ff i c u l t y t h i s i s t h e o n e a s p e c t t h a t h e h a s s e r i o u s d i ff i c u l t i e s w i t h a n d t h i s i s – i t ’s q u i t e i m p o r t a n t t o understand the basis for that conclusion and we would need to work through it. So I too am very concerned that we can work through it in two hours. CHAIRPERSON: Yo u s a y y o u a r e c o m f o r t a b l e w i t h t w o h o u r s ? ADV MAHLAPE SELLO: 10 No, no I don’t – Mr Chabi – it took me more t h a n t w o h o u r s t o e v e n g e t a s e n s e o f w h a t h e ’s t a l k i n g a b o u t l e t a l o n e understand. CHAIRPERSON: Ye s s o w h a t i s a r e a s o n a b l e e s t i m a t e o f h o w m a n y h o u r s w e n e e d t o – o r l e t m e s a y f r o m w h e r e w e a r e n o w, l e t ’s f o r g e t about 16:00 in terms of ...(intervenes). ADV MAHLAPE SELLO: CHAIRPERSON: Four hours? ADV MAHLAPE SELLO: CHAIRPERSON: Ye s C h a i r. Well certainly ...(intervenes). ADV MAHLAPE SELLO: 20 I ’ d s a y f o u r h o u r s h a l f a d a y. I was going to make a proposal; I know the l i n e - u p f o r Tu e s d a y o r i g i n a l l y w h e n Tu e s d a y w a s s e t u p i t w a s supposed to be – those two witnesses were supposed to be for half a d a y. CHAIRPERSON: W e l l y o u s e e o n – n o , n o Tu e s d a y i s a w i t n e s s w h o could take half a day but I’m not sure I had thought even the witness with whom he was supposed to have come previously I would have Page 163 of 173 27 NOVEMBER 2019 – DAY 194 thought half a day was good enough for him but he ended up with more t h a n a d a y h e h a d t o c o m e b a c k t h e f o l l o w i n g d a y s o i t m a k e s i t d i ff i c u l t to estimate. ADV MAHLAPE SELLO: May we then take the 5th because – may we t h e n t a k e t h e 5 t h b e c a u s e – W e d n e s d a y t h e 5 t h b e c a u s e t h e C h a i r, i s i t the 5th – Wednesday the 4th because the Chair is expecting for a witness to be presented on the 4th and no firm plans have been made in that regard and – no firm plans have been made about that witness or witnesses for the 4th and ...(intervenes). 10 CHAIRPERSON: No on the 4th the witnesses – the two witnesses are coming. ADV MAHLAPE SELLO: No they come on the 3rd, they come on the Tu e s d a y. CHAIRPERSON: Maybe we are talking about two d i ff e r e n t ...(intervenes). ADV MAHLAPE SELLO: S o t h e r e a r e t w o f o r Tu e s d a y t h e r e a r e t w o f o r W e d n e s d a y. CHAIRPERSON: O h n o , n o , n o t h e r e a r e t w o f o r Tu e s d a y j a t w o f o r Tu e s d a y. 20 ADV MAHLAPE SELLO: CHAIRPERSON: Ye s a n d I ’ m s a y i n g . . . ( i n t e r v e n e s ) . And the one for the 4th summons was issued and no arrangements or application has been brought so as far as we know he should be here unless you know something that has not reached me. ADV MAHLAPE SELLO: CHAIRPERSON: No Chair I don’t. So I think – but I think we are talking about the same Page 164 of 173 27 NOVEMBER 2019 – DAY 194 w i t n e s s w h e n w e s a i d m a y b e h e w o u l d t a k e h a l f a n h o u r, w a s i t t h e same witness? ADV MAHLAPE SELLO: No I was talking about the witnesses for Tu e s d a y, t h o s e a r e t h e w i t n e s s e s I t h o u g h t m a y b e s h o r t . CHAIRPERSON: N o I w a s t a l k i n g a b o u t t h e o n e f o r W e d n e s d a y. ADV MAHLAPE SELLO: CHAIRPERSON: And Thursday the 5th? J a t h a t ’s t h e o n e t h a t I s a y I ’ m n o t s u r e a b o u t b u t you see also a matter that I will be working on which will take most of m y t i m e T h u r s d a y a n d F r i d a y a n d w e e k e n d a n d M o n d a y, i f i t d o e s n ’ t g e t 10 finished I might need every time possible. So you know when you use p a r t o f t h e d a y f o r a h e a r i n g i t ’s v e r y d i ff i c u l t t o d o c e r t a i n t h i n g s t h a t n e e d f o c u s a n d a t t e n t i o n l a t e r i t ’s m u c h b e t t e r i f y o u h a v e g o t a – y o u set aside a day but I think that we might not be able to fix the date now but we should be able to find three or four hours before the end of next week. If, for example the matter that I’m talking about, I’ve been able t o g i v e i t a t t e n t i o n a n d f i n a l i s e d b y M o n d a y t h e n w e c o u l d f i n d F r i d a y, I think Friday is the 6th we could find that we could use that but because this other matter needs priority I wouldn’t like to risk. S o i f i t ’s n o t g o i n g t o b e t o o i n c o n v e n i e n t t o e v e r y b o d y, I w o u l d s a y, l e t ’s c o n t i n u e 20 n o w a n d m a y b e g o u p t o 1 7 : 0 0 i f t h a t ’s c o n v e n i e n t f o r e v e r y b o d y a n d t h e n M o n d a y a t s o m e s t a g e , l a t e s t Tu e s d a y I c a n i n d i c a t e w h a t t h e p o s s i b i l i t i e s a r e o n e i t h e r Tu e s d a y n o n o t Tu e s d a y, W e d n e s d a y, T h u r s d a y o r F r i d a y. M r C h a b i I k n o w t h i s i s n o t s o m e t h i n g t h a t is c e r t a i n b u t y o u h e a r w h a t I s a y, h o w w o u l d t h a t w o r k f o r y o u , w o u l d y o u b e a b l e w i t h t h a t u n c e r t a i n t y u n t i l e i t h e r M o n d a y a f t e r n o o n o r Tu e s d a y ? Page 165 of 173 27 NOVEMBER 2019 – DAY 194 MR CHABI: I ’ l l w o r k a c c o r d i n g t o y o u r s c h e d u l e C h a i r. CHAIRPERSON: Yo u c a n o k a y t h a n k y o u . ADV MAHLAPE SELLO: CHAIRPERSON: T h a n k y o u C h a i r. O k a y. ADV MAHLAPE SELLO: A n d i t ’s n o w 1 5 : 4 0 , y o u ’ r e a b l e t o g o t o 17:00, Mr Chabi are you comfortable still. CHAIRPERSON: MR CHABI: With a cup of tea at some point yes. CHAIRPERSON: 10 Are you able for us to work up until five? O k a y, w e l l l e t ’s t a k e – w e ’ l l t a k e i t a t 1 6 : 0 0 i s t h a t alright. ADV MAHLAPE SELLO: CHAIRPERSON: O k a y. O k a y i t ’s n e a r l y q u a r t e r t o o n m y w a t c h s o ...(intervenes). ADV MAHLAPE SELLO: Do we take it at 16:00 Chair or before he g e t s i n t o t a b l e t w o b e c a u s e w e a r e g e t t i n g i n t o t a b l e t w o n o w. CHAIRPERSON: Oh is that so? ADV MAHLAPE SELLO: CHAIRPERSON: Ja. O k a y m a y b e l e t ’s t a k e i t n o w. ADV MAHLAPE SELLO: So that when we get into table two we try get 20 all the way to the ...(intervenes). CHAIRPERSON: O k a y l e t ’s t a k e – a n d w e ’ l l r e s u m e a t 1 6 : 0 0 . ADV MAHLAPE SELLO: CHAIRPERSON: REGISTRAR: T h a n k y o u C h a i r. O k a y, w e a d j o u r n . All rise. I N Q U I RY A D J O U R N S Page 166 of 173 27 NOVEMBER 2019 – DAY 194 I N Q U I RY R E S U M E S CHAIRPERSON: If we do an hour now up to 17:00 are we going to be left with three hours? ADV MAHLAPE SELLO: Chair before I answer that may I say something because during the break. C H A I R P E R S O N : Ye s s o m e t h i n g w a s d i s c u s s e d . ADV MAHLAPE SELLO: We were conferring. Ye s . And we were looking at whether we are capable of realistically dealing with this a s p e c t i n o n e h o u r. W o u l d w e b e d o i n g j u s t i c e t o i t ? W e h a v e a c h o i c e 10 of dealing with it at a very high level and that will not be doing justice t o t h e t o p i c . T h e s e n s e i s t h a t w e w i l l n o t f i n i s h i t i n o n e h o u r. W h e n we reconvene the time between when we stop and reconvene will require us to rehash what we do today in order for the remainder to make sense. And that is what we are trying to work through and we are in your hands at this point. CHAIRPERSON: H’mm. Well maybe let me tell you what I was thinking. A D V M A H L A P E S E L L O : Ye s C h a i r. CHAIRPERSON: 20 Then you can see how it fits into the discussion during the break that you people had. I was thinking we could take an h o u r n o w d o j u s t i c e t o M r C h a b i ’s e v i d e n c e t h e n a d j o u r n . Then on Tu e s d a y e x p l o r e t h e p o s s i b i l i t y o f s t a r t i n g e a r l y w i t h h i m o n Tu e s d a y. A D V M A H L A P E S E L L O : Ye s C h a i r. CHAIRPERSON: Say 09:00. S o 0 9 : 0 0 t o 1 0 : 0 0 i s a n o t h e r h o u r. M a y b e i f w e a d d a n o t h e r h o u r b e f o r e I – w e s t a r t w i t h Tu e s d a y ’s f i r s t Page 167 of 173 27 NOVEMBER 2019 – DAY 194 w i t n e s s w e g o u p t o 11 : 0 0 . T h a t i s t w o h o u r s . S o t h a t g i v e s u s t h r e e h o u r s i n c l u d i n g t h e h o u r t h a t w e w i l l d o n o w. And I was wondering whether – you said four hours but I do not know whether we could finish within three hours without doing any injustice to his evidence. I do not know what you think? ADV MAHLAPE SELLO: I think three hours would be a fair amount of time. If the Chair will recall we are still dealing with 1064 we then need to go to 100. But as Mr Chabi indicated his mandate on 100 was a narrower mandate. It is not as involved as with 1064. So insofar as 10 100 is concerned we need very little time. We could just highlight the key issues. The bulk of the principles that emanate from this 1064 are applicable to 100 so we could just by extension deal with 100 in that m a n n e r. S o i f w e w e r e t o p e r h a p s t a k e a n h o u r t o d a y a n d t r y a n d f i n d another two hours to complete next week it might help. The concern we had was the break between when we finish today and when we reconvene. That it should not be too long otherwise we have to rehash this hour for that evidence to make sense. But if we – there is a p o s s i b i l i t y w e m a y c o m e b a c k o n Tu e s d a y t h e n i t i s d o a b l e C h a i r. T h e n it is doable. 20 CHAIRPERSON: Is the short answer that because of the time that may b e n e c e s s a r y t o r e f r e s h e v e r y o n e ’s m e m o r y t h e t h r e e h o u r s w o u l d n o t be enough? ADV MAHLAPE SELLO: No. C H A I R P E R S O N : O n e h o u r t o d a y a n d t w o h o u r s o n Tu e s d a y m o r n i n g . ADV MAHLAPE SELLO: The view was the remaining portion of his Page 168 of 173 27 NOVEMBER 2019 – DAY 194 evidence insofar as 1064 is concerned is best dealt with in one fell swoop in order for it to make sense. C H A I R P E R S O N : O h o k a y. ADV MAHLAPE SELLO: If it is broken the longer the break between when he appears. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: The more likely the need to rehash again – restart. C H A I R P E R S O N : O k a y. 10 ADV MAHLAPE SELLO: Next time we reconvene. CHAIRPERSON: So is the position therefore that three hours would be fine but it should rather be at a stretch? A D V M A H L A P E S E L L O : P r e f e r a b l y. C H A I R P E R S O N : A n d n o t o n e h o u r t o d a y a n d t w o h o u r s o n Tu e s d a y. ADV MAHLAPE SELLO: Preferably yes. Because it is a singular topic n o w. CHAIRPERSON: Oh. ADV MAHLAPE SELLO: It is a single topic that we are dealing with. C H A I R P E R S O N : O k a y. 20 ADV MAHLAPE SELLO: Ye s . And then that would be enough to complete his evidence? ADV MAHLAPE SELLO: It would. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: We could find in the interim means and ways of perhaps presenting the evidence on transaction 100. Page 169 of 173 27 NOVEMBER 2019 – DAY 194 CHAIRPERSON: Ja. A D V M A H L A P E S E L L O : I n a q u i c k e r m a n n e r. C H A I R P E R S O N : Ye s . ADV MAHLAPE SELLO: But like I say all the principles would have been established through 1064. C H A I R P E R S O N : Ye s . J a . J a . A D V M A H L A P E S E L L O : Ye s . CHAIRPERSON: Ja. A D V M A H L A P E S E L L O : Ye s C h a i r. 10 C H A I R P E R S O N : O k a y. T h e w i t n e s s f o r – o h t h e r e a r e t w o w i t n e s s e s o n Tu e s d a y. A D V M A H L A P E S E L L O : O n Tu e s d a y. O n Tu e s d a y y e s C h a i r. O u r b e s t bet would have been on Wednesday subject to whether or not the witness the Chair referred to who has been served with summons. CHAIRPERSON: Ja. A D V M A H L A P E S E L L O : I s a b l e t o a p p e a r. C H A I R P E R S O N : Ye s . ADV MAHLAPE SELLO: And I do not know where do we get the answer for that. 20 C H A I R P E R S O N : Yo u k n o w I t h i n k W e d n e s d a y f o r t h a t w i t n e s s – I t h i n k it may be better that we start – we adjourn the hearing to – the hearing o f M r C h a b i ’s e v i d e n c e t o W e d n e s d a y. A D V M A H L A P E S E L L O : Ye s C h a i r. W e s t a r t a t 0 9 : 0 0 . B e c a u s e i f w e start at 09:00 and we need three hours that take us to 12:00, is that right? Page 170 of 173 27 NOVEMBER 2019 – DAY 194 A D V M A H L A P E S E L L O : To 1 2 : 0 0 . C H A I R P E R S O N : To 1 2 : 0 0 . ADV MAHLAPE SELLO: Or maybe sooner if we find a better way perhaps of ...(intervenes). CHAIRPERSON: Eh? ADV MAHLAPE SELLO: Or maybe before 12:00 – maybe sooner than 12:00. C H A I R P E R S O N : O h j a m a y b e s o o n e r. ADV MAHLAPE SELLO: If we find a better way of ...(intervenes). 10 C H A I R P E R S O N : M a y b e s o o n e r. ADV MAHLAPE SELLO: Working through it. CHAIRPERSON: M a y b e s o o n e r. B u t a g a i n Tu e s d a y ’s w i t n e s s i s – could be very – could be quite short even though there two. ADV MAHLAPE SELLO: We had anticipated but we may be wrong that both of them would be a – would be half a day witnesses. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: But we could be wrong. CHAIRPERSON: Maybe we should rather adjourn to Wednesday and we do the best we can to finish before the expiry of three hours if 20 possible but if not at least we do not go beyond three hours. A D V M A H L A P E S E L L O : B e y o n d t w e l v e y e s C h a i r. CHAIRPERSON: Ja I think maybe we do that. I s W e d n e s d a y ’s suitable? Are – would you be available on Wednesday? MR CHABI: Certainly Chair I would. CHAIRPERSON: Yo u w o u l d b e a v a i l a b l e . Page 171 of 173 So maybe that is what we 27 NOVEMBER 2019 – DAY 194 should do and ...(intervenes). A D V M A H L A P E S E L L O : W e w i l l a i m f o r 11 : 3 0 . C H A I R P E R S O N : J a t o t r y a n d f i n i s h 11 : 3 0 . ADV MAHLAPE SELLO: So then perhaps the Chair can have a 15 minute break. CHAIRPERSON: Ja. ADV MAHLAPE SELLO: Before then he ...(indistinct) the other two w i t n e s s e s . Ye s C h a i r. CHAIRPERSON: 10 Ye s j a . Okay no I think let us do that. So let us adjourn then for today to Wednesday is the 4th I think it is. ADV MAHLAPE SELLO: The 4th December yes. CHAIRPERSON: Wednesday the 4th December commencing at 09:00 a n d t h e n w e w i l l s e e h o w i t g o e s . O k a y. A D V M A H L A P E S E L L O : N o w w e h a p p y w i t h t h a t a r r a n g e m e n t C h a i r. C H A I R P E R S O N : O k a y. O k a y M r C h a b i w e w i l l a d j o u r n t h e h e a r i n g o f your evidence to Wednesday at 09:00 and – so we will continue of Wednesday morning. A D V M A H L A P E S E L L O : Ye s C h a i r. CHAIRPERSON: Okay we adjourn. 20 A D V M A H L A P E S E L L O : T h a n k y o u C h a i r. REGISTRAR: All rise. I N Q U I RY A D J O U R N S T O 4 D E C E M B E R 2 0 1 9 Page 172 of 173 27 NOVEMBER 2019 – DAY 194 TRANSCRIBER’S CERTIFICATE FOR COMMISSION OF INQUIRY INTO STATE CAPTURE HELD AT PARKTOWN, JOHANNESBURG DATE HELD : 2019-11-27 DAY: : 194 TRANSCRIBERS : B KLINE; M NETTA; D STANIFORTH Audio’s are typed verbatim, as far as audible/possible Page 173 of 173