McKinsey Letters Add Twist to South Africa Corruption Scandals

By
Sam Mkokeli
,
Janice Kew
, and
Antony Sguazzin
  • Eskom paid project partner after McKinsey ended relationship

  • South Africa’s power company last week suspended CFO Singh

Eskom Holdings SOC Ltd. continued to pay Trillian Capital Partners Ltd. even after McKinsey &Co. warned the South African state power company that it had concerns over transparency at the project development partner.

Letters written in March 2016 by McKinsey to Eric Wood, the chiefexecutive officer of Trillian, and Eskom’s recently suspended chief financial officer, Anoj Singh, show the U.S. consulting firm wasconcerned about the reputation risk of working with Trillian. McKinsey highlighted the lack of detail given by the company aboutits shareholders and potential conflicts of interest, the letters seen by Bloomberg show.

Eskom is spending billions of dollars on new power plants and is at thecenter of allegations that the Guptas, wealthy businessmen working with South African President Jacob Zuma’s son, used theirrelationship with the president to win lucrative contracts from state companies. The family are business associates of businessman SalimEssa, who sold his stake in Trillian in July.

McKinsey is uncomfortable about Trillian’s transparency on conflict issues,”the U.S. firm wrote in a March 30, 2016, letter to Singh. “McKinsey has material concerns around reputational risk to thefirm,” and, as a result, has stopped working with the company, it said. Trillian said its unaware of any reasons for McKinsey’sconcerns and has denied accusations it did little work for the money it received.

Zuma Scandals

Zuma has faced a succession of scandals, including allegations that heallowed the Gupta family to influence government appointments and the issuing of state contracts. These controversies have spread to global companies including accountants KPMG LLP and McKinsey, which have been accusedby opposition parties and civil-society groups of facilitating, being party to or turning a blind eye to wrongdoing. KPMG’s top eightpartners in South Africa have quit and the company has apologized for its conduct and ordered an independent probe.

Trillian staff completed all the work allocated to them by McKinsey and billedfor the work authorized and approved by Eskom,” Trillian said in an emailed response to questions.
“Trillian is unaware of any concerns which were raised by McKinsey with Eskom.Trillian is not aware of any basis for McKinsey raising concerns with Eskom after the commencement of the joint work for Eskom, or at all.”

While the U.S. company has denied being involved in any corruption, it hasstarted an internal probe into its dealings with Trillian.

This undoubtedly reflects badly on Eskom,” said David Lewis, executivedirector of South Africa-based Corruption Watch. Even so, it doesn’t “allay our profound suspicions about McKinsey,” he said.

Corruption Watch is planning to ask the U.S. Department of Justice to probeMcKinsey, while South African Public Enterprises Minister Lynne Brown has told Eskom to investigate taking legal steps against theconsultant and Trillian. The opposition Democratic Alliance has filed charges of fraud, racketeering and collusion against the U.S. firmand said it also plans to contact the DoJ about the work for Eskom.

Payments Received

In order to keep its consulting contract with Eskom, McKinsey wasrequired to have a so-called supplier development partner and agreed to work with Trillian. The two companies could have earned more than7 billion rand ($515 million) from the state utility over the duration of the contract. By the time McKinsey stopped working withTrillian in about June 2016, the U.S. firm had earned a fixed fee of 70 million rand while its partner was paid about 30 million rand,according to a person familiar with the payments.

McKinsey also earned around 900 million rand for meeting performance targets,the person said, asking not to be identified as the payments haven’t been made public. Eskom has said it paid Trillian 495 million rand,with some of that coming after McKinsey’s letter.

Focusing on Trillian’s ultimate ownership and how this may conflict with itsrole as an adviser to Eskom, the McKinsey letters said that the contractor didn’t answer the firm’s questions. The correspondenceis signed by senior McKinsey executives.

‘Partial Information’

Numerous separate discussions were held by McKinsey and Wood, who orallyoffered “partial information” concerning Trillian’s shareholders and directors, according to the letters.
Singh was placed on leave in July after he was linked to a series of dealsinvolving the Gupta family as well as Trillian and was suspended last week pending a disciplinary hearing. He has denied wrongdoing.

We “are looking into all these issues to determine theirveracity,” Eskom spokesman Khulu Phasiwe said by phone. “In due course, the Eskom board will report how far it has progressedwith its investigation.”

With assistance by Paul Burkhardt