Eskom was warned repeatedly since 2015 that its contract with McKinsey and Gupta-linked Trillian, which together were paid R1.6n for six months’ work, was unlawful.
This emerges from a raft of reports and memos seen by Business Day and interviews with several sources with direct knowledge of how events unfolded.
But key officials, including generation chief Matshela Koko, chief financial officer Anoj Singh, acting head of group capital Prish Govender and chief procurement officer Edwin Mabelane, ensured the deal and payments went ahead anyway.
The first warning came on December 4 2015, a month before the contract was signed. Eskom received a legal opinion from Paul Kennedy SC that said the proposed fee structure for the McKinsey contract was unlawful. A month later Eskom signed the contract anyway.
Next came a flood of objections from Eskom officials. One was wary of being asked to create a contract on Eskom’s SAP system without a signed contract. Others objected to processing invoices without supporting papers.
These officials were overruled by their managers and forced to comply with what they considered unlawful instructions.
An official at Eskom’s legal division had “on numerous occasions” warned “the remuneration model was not consistent with law”, according to a report by G9 Forensic, which was commissioned by Eskom’s assurance and forensic division to investigate the payments.
Despite the legal opinion Eskom decided to contract McKinsey “at risk”, which means they are paid a percentage of savings as result of their interventions.
The board, through its tender committee, first gave its approval of the McKinsey talks and later contract in December 2015.
McKinsey and Trillian have both sought to portray this payment model as advantageous to Eskom. If no savings are achieved no fees are paid.
However, it allows consultants to earn vastly higher fees than they would on hourly rates.
Then came US based consultancy Oliver Wyman and sister company Marsh, hired to investigate whether the deal represented value for money to Eskom.
Their final report was delivered to Eskom on December 15 2016 and raised several red flags. It described “100% risk based contracts of such magnitude” as “rare”.
Of particular concern was that Eskom made payments to Trillian without there being any contract in place.
Oliver Wyman advised Eskom to address these issues through a legal review. Eskom ignored this advice, too, and paid Trillian and McKinsey another R500m over the following two months.
On August 2 this year, Eskom received another report by law firm Bowman. The Bowman investigation recommended suspending seven officials implicated in the scandal, including Singh, Govender and Mabelane.
The report was then presented to the Eskom board, with all the options laid out. These included taking legal action to recover the money from Trillian and McKinsey and submitting a report to the Hawks to open a corruption case.
The Bowman report of August 2 urged Eskom to act immediately to recover the money or risk weakening its case.
Eskom signed a settlement agreement with McKinsey on February 16 2017 and the courts took a dim view of unreasonable delays in public entities wanting to set aside their own decisions, the Bowman report said.
The board tender committee, then headed by current board chairman Zethembe Khoza, again approved the settlement.
Letters of demand for Trillian and McKinsey were drafted and heads of argument drawn up.
On September 1 Public Works Minister Lynne Brown received a report that summarised the Bowman investigation’s findings.
On September 8 a memo was circulated reiterating the need to suspend the officials implicated and take action to recover the money. This, too, was ignored.
It took another two months after Eskom received the Bowman report before any action was taken against the officials, and then belatedly.
The officials referred questions to Eskom, which declined to comment, saying it “does not discuss employees’ personal matters in the media”.
By contrast, Eskom has been quick to act against its head of legal, Suzanne Daniels, who wrote the damning Trillian and McKinsey report submitted to Brown.
Daniels was suspended this week, accused of irregularly spending R50,000 on a staff team building exercise in April this year.
Eskom also removed Johnny Dladla from the post of acting CE this week, citing the need to rotate executives in the post. Dladla returns to his position as CEO of Eskom Rotek Industries.
On Thursday night Eskom finally stopped dragging its heels on recovering the money paid to Trillian and McKinsey, and announced in a statement that “interim findings” suggested the payments were unlawful.
Eskom was legally obliged “to set aside these unlawful decisions and to have all the money unlawfully paid out returned”.
Accordingly, Eskom “wrote to each explaining the action it would take and requesting their co-operation in the matter”.
Being such a critical entity, inextricably tied to the nation’s economy, it was in the public interest that Eskom do everything it could to claw back all the fees which were unlawfully paid, while “expediting the disciplinary processes currently under way”, Eskom said.
McKinsey said in reaction that it had met with Eskom on Wednesday and was “reassured” by Eskom’s interim findings.
These showed McKinsey had not subcontracted Trillian or authorised any payments from Eskom to the firm, the company said.
Barely a day after Eskom issued the letters of demand for McKinsey and Trillian to pay back the money, both Dladla and Daniels were unceremoniously removed from their positions.
It did not address the allegation that its contract with Eskom was unlawful because the remuneration model it used violated Treasury rules.
Trillian has repeatedly denied any wrongdoing, insisting it was paid only for work done based on demonstrable impact.
Eskom didn’t respond to questions on Friday about Daniels’s suspension or Dlada’s “rotation”.