NRZ slapped with US$236m lawsuit

SOUTH Africa-based business syndicate, the Diaspora Infrastructure Development Group (DIDG), has filed a lawsuit at the High Court demanding damages amounting to a staggering US$236 million from the National Railways of Zimbabwe (NRZ) after government unilaterally terminated its US$400 million contract to recapitalise the country’s out-of-date rail system.

Tinashe Kairiza

As revealed by this newspaper in its exclusive series on the botched deal, Attorney-General Prince Machaya advised Transport minister Joel Biggie Matiza on the legal consequences of reversing the US$400 million deal awarded to DIDG.

According DIDG’s application seen by the Zimbabwe Independent this week, the consortium, which won the tender to recapitalise NRZ in 2017, only to lose the deal last year, wants the contract to be restored, failure of which it wants NRZ to pay US$236 million as compensation for breach of contract.

The application was filed on Monday.

The court papers cite NRZ as the defendant and DIDG as the plaintiff.

“To the defendant (NRZ), the plaintiff’s claim is for an order declaring the cancellation of award of tender number 6599-5642 for the recapitalisation of the defendant awarded to the first plaintiff and cancelled by the defendant on 30 July 2020 unlawfully. The plaintiffs also claim costs of suit,” court documents read.

“As a result of the defendant’s unlawful action and or unjustified cancellation of the tender, the plaintiffs have suffered damages to the tune of US$235 984 757 which the plaintiffs will claim.”

DIDG also contends that the cancellation of the lucrative deal, which was done at the instigation of Matiza, was illegal and as such should be overturned.

The consortium further argues that during the subsistence of the deal, it did not breach any of its contractual terms to justify the reversal of the multi-million-dollar tender that was meant to rejuvenate Zimbabwe’s rail network.

“The plaintiffs plead that the cancellation of the tender was unlawful in one or more of the following respects. The termination was irregular in that the decision to terminate was not made by the defendant, but by external forces, including the Minister of Transport (Matiza),” the court papers read.

“The reasons for termination were grossly unreasonable. The plaintiffs had not breached any of the tender conditions.”

When the tender was cancelled, Matiza argued that DIDG lacked the financial wherewithal to roll out the project. However, indicative funding term sheets seen by the Independent, furnished to NRZ and Matiza show that the South African consortium had mobilised well over US$1 billion from finance institutions, including Afreximbank, Nedbank, Absa, Standard Bank, CBZ, Ecobank and wealth management firms Old Mutual and Imara Asset Managers.

National Social Security Authority (Nssa) and Harith Pan African Infrastructure Development Fund were also part of the deal. Under the transaction, Afreximbank was the mandated lead arranger, with the primary responsibility of mobilising the required funding.

In a separate letter of demand, dated September 1, by DIDG lawyers Atherstone and Cook furnished to NRZ seen by this newspaper, the consortium is demanding payment of damages split in two parts, namely project costs and “reasonable profits” that the South African entity projected to reap if the deal had come to fruition.

The September 1 DIDG letter of demand to NRZ reads: “The amount of damages suffered by our clients is in two parts. Firstly, there are damages relating to direct project costs which damages represent the amounts outlaid by our clients, and in addition it also includes the amount our clients reasonably project will become payable to its advisors. Under this head, the total due claimable from yourselves is US$15 506 456,00.

“Secondly, our clients are entitled to claim reasonable profits that they would have earned … under this head, our clients are claiming a total amount of US$220 478 301,00. Our client therefore claims a total amount of US$235 984 757,00.”

As it became clear that DIDG was going to sue following cancellation of the tender, NRZ this year announced that it was seeking competent legal counsel.

Prior to the termination of the deal, which South African President Cyril Ramaphosa tried to salvage in negotiations with President Emmerson Mnangagwa during the Zimbabwe-South Africa Bi-National Commission held in May last year, DIDG had sourced 13 locomotives, 200 wagons and eight passenger coaches for the insolvent state enterprise as part of the recapitalisation project.

At the time the deal was terminated by cabinet in August, Atherstone and Cook managing partner, Innocent Chagonda, told this newspaper that the cancellation of the bid was irregular and would attract steep penalties for the insolvent rail operator. He warned that the damages, running into hundreds of millions of dollars, would render NRZ unattractive to investors.

“My client has been trying to make the NRZ board see the consequences of re-tendering the deal. Re-tendering the deal will expose NRZ to a huge and embarrassing lawsuit and the possibility to put an injunction on any future tenders and therefore scaring away potential suitors. If they (government) make good their threat, there will be room to file for damages,” Chagonda said on November 29 last year.

NRZ is currently saddled with a US$575 million debt overhang.

The double whammy of mounting debt woes and damage claims by DIDG come at a time the rail operator recorded its lowest freight volumes in history, which plunged to 2,7 million tonnes, missing the set target of 4,2 million tonnes. At its peak, the rail operator was moving 18 million tonnes annually.

A recent forensic audit conducted by Baker Tilly Gwatidzo Chartered Accountants shows that the embattled state enterprise could have been prejudiced of millions of dollars, rendering it a non-going concern.

With a legal showdown between NRZ and DIDG now set, Matiza in August ordered the NRZ board to fire the management at the parastatal and inject the entity with “fresh blood” by October, in a move he said would revitalise the embattled rail operator.

Though the board had appeared hesitant to implement Matiza’s directive, Dinha has since highlighted that the entity would shed a number of their managerial positions, which he said were gobbling the state enterprise’s resources.

Following the termination of the DIDG bid, NRZ has started scouting for fresh suitors, with Russian firm Union Wagons among the frontrunners tipped to revive the embattled rail operator.