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McKinsey halts work with state firms, insists Eskom must share blame

Oct 17 2017 11:41
Yolandi Groenewald

Johannesburg - Global consultancy firm McKinsey announced on Tuesday it has suspended its work for state-owned enterprises (SOEs) in South Africa until further notice, adding that Eskom also has to shoulder blame for how it handled the controversial contract. 

In a lengthy statement on Tuesday the firm admitted to a lapse in judgement, but denied it was involved in any acts of bribery or corruption, or had made payments to Gupta-linked company Trillian.

McKinsey, mired in allegations of state capture in South Africa, said it could now pronounce on its involvement as an investigation into its activities in South Africa nears completion.

Four steps

The consultancy announced four steps to address the issues its probe had highlighted, including ceasing work for state enterprises. It also said it wanted Eskom to clarify how it could conclude a contract with McKinsey if it did, in fact, receive the necessary approvals.

The other steps involve McKinsey setting aside its full fee for Eskom’s Turnaround Programme for repayment, improving how it functions with supplier development partners, and strengthening the governance and capabilities of McKinsey’s South African office.

The firm admitted that the probe found violations of its professional standards, but stated that it never made payments directly or indirectly to secure contracts, nor did it aid others in doing so.

McKinsey also stated the firm did not introduce Trillian to Eskom, nor vice versa.

Commenting on its future relationships with SOEs, McKinsey said it would not begin any work for state firms until it has been thoroughly reviewed and approved by the newly-formed and independent South Africa State-owned Companies Risk Committee. 

The firm will also commit to greater transparency with National Treasury and relevant shareholder departments.

“We will ask state enterprises for detailed documentary evidence that they have all the appropriate approvals in place before we begin work.”

Eskom must take responsibility

Eskom earlier stated that it wanted McKinsey and Trillian to return R1bn and R564m respectively, “which appears to have been unlawfully paid out in 2016 and 2017”.

Last week the McKinsey announced it would pay back in full a R1bn fee to Eskom if a court determines that the power utility had acted unlawfully.

"We will support a review by the high court of the validity of the Turnaround Programme contract," it stated again on Tuesday. “We invite Eskom and Trillian to submit themselves to this process too.”

While McKinsey said it had set aside its full fee for the work it did at Eskom for repayment, it believes that Eskom has to take the necessary responsibility for its bad decisions.

Eskom advised the consultancy that it believes the state utility violated its procurement regulations and internal procedures and that decisions it took with respect to the contract may have been taken without proper authorisation, McKinsey stated.  

“These requirements were solely Eskom’s responsibility. McKinsey entered into the contract and performed its work in good faith,” McKinsey said.

“Our contract with Eskom for the Turnaround Programme was approved by Eskom. It explicitly required Eskom to obtain the necessary approvals or consents required by the terms of the Public Finance Management Act.

“We want this issue resolved and we have no interest in benefiting from an allegedly invalid contract.”

McKinsey's Eskom business accounted for more than half of its South African revenue. It emphasised that the firm stood by its work at the company.

“We believe our work on the Turnaround Programme created substantial value by helping to improve operating performance and contain costs,” it stated.

Tom Barkin, McKinsey’s global chief risk officer, said McKinsey was "not careful enough about who we associated with. It did not understand fully the agendas at play, and should not have worked alongside Trillian, even for a few months, before completing our due diligence”.

In future, the consultancy stated, it would put in place a more rigorous approach to its engagement with SOE clients and its contracting, monitoring, and compliance processes with them.

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