Brown ‘clarifies’ legal action order against McKinsey
Eskom sources say paperwork has been prepared to institute legal proceedings against McKinsey and Trillian ‘and individuals’, but no instruction has been issued yet to ‘pull the trigger’
Public Enterprises Minister Lynne Brown says internal legal processes are still under way at Eskom into suspect payments of R1.6bn to McKinsey and Gupta-linked firm Trillian.
Brown sought to “clarify the facts” on Friday afternoon after Bloomberg reported that she had instructed Eskom to institute legal action against McKinsey, Trillian, former acting Eskom CEO Matshela Koko and acting chief financial officer Anoj Singh.
“In relation to labour relations matters where investigations have been concluded, she has instructed the Eskom board to ensure that the disciplinary processes must be expedited and concluded,” her spokesperson, Colin Cruywagen, said on Friday.
Eskom sources said paperwork had been prepared to institute legal proceedings against McKinsey and Trillian “and individuals”, but no instruction had been issued yet to “pull the trigger”.
Business Day reported on Friday that Eskom had received a legal opinion in December 2015, more than a month before it signed a three-year contract with McKinsey and Trillian worth R7.8bn, advising the power utility that the deal was illegal.
The consulting firms were eventually paid R1.6bn after the contract was cut to six months.
Questions have also been raised about the value McKinsey delivered after Eskom posted R3bn in irregular and wasteful expenditure this year. Singh was placed on special leave on July 27 after the results were announced following pressure from Eskom’s lenders.
Business Day has seen evidence that has been in Eskom’s possession for months incriminating virtually the entire top management layer in the Trillian and McKinsey scandal.
Officials implicated in wrongdoing include Singh, Koko, former head of procurement Edwin Mabelane, acting head of group capital Prish Govender and senior procurement manager Charles Kalima.
They referred questions to Eskom, which said it did not comment on the disciplinary action against officials “due to strict confidentiality considerations of the HR processes currently underway”.
The evidence includes a report by G9 Forensic Consulting, details of investigations by US management consultancy Oliver Wyman and law firm Bowmans, minutes of board meetings and internal correspondence.
The G9 report recommends laying criminal charges against Trillian and also implicates McKinsey. Another report recommends legal action to recover the R1.6bn McKinsey and Trillian earned from an illegal contract.
Eskom obtained a legal opinion by Paul Kennedy, SC, on December 4 2015 that concluded McKinsey’s contract was in breach of a Treasury instruction that its consultants be paid at hourly rates set by the South African Institute of Chartered Accountants, or in a guide issued by the Department of Public Administration.
Kennedy said the Treasury instruction, “having the force of law, [requires] compliance by organs of state such as public entities, including Eskom”. He advised Eskom to renegotiate the contract to pay McKinsey hourly rates.
Instead their work was done “at risk”, which means they were paid a percentage of savings achieved by Eskom as a direct result of their work, allowing them to pocket vastly higher fees.
Sources at Eskom said McKinsey were hard pressed to explain how it arrived at its calculations of savings accepted by Eskom during Singh’s tenure.
Despite Kennedy’s advice, Eskom signed the deal with McKinsey on January 7 2016 for the consulting firms to be paid “at risk”.
Trillian pocketed R600m from the deal, even though the Gupta-linked firm had no contract with either Eskom or McKinsey.
At the time Trillian was majority owned by Gupta lieutenant Salim Essa and was later shown in an audit report by Deloitte to have helped the Guptas pay for Optimum coal mine.
Trillian and McKinsey have denied wrongdoing.
“We have not paid bribes in exchange for these engagements/projects,” McKinsey spokesperson Steve John said on Tuesday. “We have secured all our work for state-owned companies on the basis of our demonstrable impact for our clients.”
He previously said McKinsey had conducted its work “entirely ‘at risk’. This means we were not paid any fees until Eskom achieved agreed performance targets as a direct result of our work. We are proud of our work at Eskom and stand fully behind the impact and value we delivered.”
Trillian insists it was only paid for work done and “made no fraudulent representations in regard to McKinsey and Eskom, and both McKinsey and Eskom are fully aware to the relationship between the parties”.
The minutes seen by Business Day also show Eskom’s current acting CEO, Johnny Dladla, interim chairperson Zethembe Khoza and other senior officials who so far have not been subjected to any disciplinary action, attended several meetings crucial to clinching the deal.
Dladla attended a procurement committee meeting on June 22 2015 chaired by Mabelane, when Eskom decided to negotiate an exclusive contract with McKinsey.
Dladla was also present at a feedback meeting four months later, when the committee agreed to recommend a three-year contract to the board tender committee.
Just over a week later, on October 21 2015, the Eskom board tender committee chaired by Khoza approved the deal entitling McKinsey to a percentage of savings achieved and a down payment of R475m “in lieu of project set-up cost and consulting fees”.
Khoza also presided over another crucial board tender committee meeting held on February 8 2017 with Singh and Mabelane in attendance, where it was agreed to pay McKinsey a final settlement of R460m, even though Oliver Wyman had warned against paying.
Eskom said on Thursday that Dladla was a member of the procurement subcommittee but “played no role in the McKinsey/Trillian operational execution”.
Asked if it was appropriate for Dladla to hold meetings with Singh while he was on special leave, as alleged, Eskom said: “As a condition of special leave, Mr Singh is allowed to interface with Mr Dladla on Eskom matters as his immediate superior.”