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McKinsey apologises for overcharging Eskom

Jul 09 2018 13:08
Paul Burkhardt, Bloomberg

McKinsey & Company has apologised to South Africa again over how business was handled with state-owned enterprise Eskom, saying it overcharged the utility and was slow to admit wrongdoing.

The consulting firm admitted in October to failing to follow its own procedures while doing business with the power company when it worked alongside Trillian Capital Partners, a business linked to the Gupta family. McKinsey reached a settlement last week to repay almost R1bn in fees to Eskom.

“The trust of our clients and the public in South Africa is now, understandably, very low,” Kevin Sneader, global managing partner of McKinsey, said Monday at a business school in Johannesburg.

“We did not communicate well enough how seriously we were taking this, or how sorry we were for our involvement.”

McKinsey became embroiled in claims that the Gupta family used their friendship with former President Jacob Zuma to win lucrative contracts from state companies, particularly through Eskom, which provides more than 90% of the nation’s electricity.

The Guptas and Zuma deny any wrongdoing. Financial-services firm Trillian is linked to the Gupta family through business associate Salim Essa, who was its principal shareholder until he sold out.

Process failure

Sneader, who became global managing partner at McKinsey this month, gave a speech at the Gordon Institute of Business Science to “confront our mistakes,” saying governance processes had failed and due diligence should have been done earlier.

“They were not attentive enough to the fact that Trillian was a new entity or to the scale of the challenges facing Eskom,” he said.

The mistakes, illustrated over the past year as various investigations and reports emerged, have had a significant material effect on McKinsey’s business, Sneader said in an interview.

Clients including Coca-Cola’s South Africa unit and petrochemicals company Sasol have said they’re awaiting results from corruption probes before they’ll award new business to the firm.

While acknowledging that correct procedures weren’t followed, Sneader reiterated that a review of records including millions of emails and dozens of interviews showed there’s “no evidence our firm engaged in corrupt activity.” 

In May, South Africa’s National Prosecuting Authority’s Asset Forfeiture Unit filed a lawsuit aimed at recouping R1bn in consultants’ fees it said were unlawfully paid to McKinsey by Eskom, after talks with the US firm about voluntarily repaying the money stalled.

“The fee was weighted towards recovering our investment rather than being in line with Eskom’s situation,” Sneader said. “In that context the fee was too large.”

Trillian was the so-called supply development partner of McKinsey in an agreement it had to provide services to Eskom until the relationship between McKinsey and Trillian ended in March 2016.

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