JOHANNESBURG - Global consultancy
McKinsey, facing parliamentary hearings over
payments to a firm controlled by a billionaire family, ignored
suspicions raised over several years by local senior staff that
companies it worked with were set up to steer state contracts,
two former employees said.
Since July, when new information emerged about McKinsey's
flagship SA contract, the consultancy has been under
increasing scrutiny in a widening corruption scandal over the
influence of the Gupta family, friends of President Zuma.
The parliamentary committee on public enterprises
is investigating whether McKinsey knowingly let funds from state
utility Eskom be diverted to a Gupta company as a way of
securing a $78 million contract to advise Eskom.
McKinsey denies
wrongdoing and says it intends to cooperate with the authorities
if evidence of any impropriety emerges.
"We hold ourselves to the highest professional standards
wherever we work and stand firmly against corruption. We are
committed to ascertaining the facts and swiftly taking any and
all appropriate action," spokesman Steve John told Reuters.
McKinsey has hired law firm Norton Rose Fullbright to assist
in an internal investigation. Norton Rose said it would not
comment while its probe is under way.
The accounts by the two former employees, who spoke to
Reuters separately on condition of anonymity because their
present jobs do not permit them to speak to the media, could
provide fodder for lawmakers who say they have questions about
the timeline McKinsey has given of when it learned of potential
problems.
McKinsey says it carried out a due diligence review on its
partner in the Eskom deal beginning in January 2016, and cut all
ties with the local firm two months later after it concluded the
company was unfit.
“We carry out checks on suppliers and partners when we work
with them and address issues and concerns when they arise. When
concerns were raised we undertook due diligence,” spokesman John
said in a written response to questions.
But the ex-employees said they had attended meetings in
Johannesburg where problems with that firm and a precursor
company employing the same principal staff had been discussed
much earlier: as far back as 2013.
The ex-employees said they would have expected such concerns
to have been escalated to managers outside SA,
although they did not know if that had happened.
Ultimately, McKinsey accepted the Eskom account in spite of
the warnings, the sources said.
"We turned a blind eye," said one.
McKinsey spokesman John said he could not comment on
meetings that may have taken place without knowing the names of
the participants.
Natasha Mazzone of the DA said the committee would be looking at what McKinsey knew, and
when, about the intentions of its local partners.
“If McKinsey is found to have been deliberately misleading SA and assisting in state capture, they will certainly
be held to account and recommendations will be made to the
portfolio committee.”
"STATE OF CAPTURE"
McKinsey's Eskom contract was huge for the consultancy,
accounting for more than half of its South African revenue,
according to the two ex-employees. The deal coalesced even as a
number of other business services firms were curtailing their
work for SA state firms in the wake of an
anti-corruption watchdog's report into the Guptas.
The 355-page report by the constitutionally-mandated Public
Protector watchdog, entitled "State of Capture", accused the
government of improperly steering hundreds of millions of
dollars in state contracts to Gupta-controlled firms.
The Guptas and President Zuma deny wrongdoing and say the
scandal has been manufactured to undermine Zuma's leadership.
While McKinsey was working for Eskom in 2015-2016, Eskom
paid 30 percent of the deal's value to a firm called Trillian,
which was controlled at the time by a Gupta family ally. The
three parties, McKinsey, Eskom and Trillian, have given
contradictory explanations for the payments to Trillian.
Eskom says it paid because it was told by McKinsey that
Trillian was McKinsey's subcontractor. The utility declined to
answer further questions for this story.
Trillian, in response to Reuters questions, said it "was the
partner of McKinsey and was paid its proportionate share of what
McKinsey and Trillian billed against work done." It said it was
no longer controlled by the Guptas, as longterm Gupta family
business partner Salim Essa had sold his shares this year. Essa
did not respond to requests for comment.
McKinsey has long said it was not responsible for the
payments, never had any contractual relationship with Trillian
and had severed all ties with the company in March 2016.
But in July this year, several newspapers
released a leaked Feb. 2016 letter by a McKinsey director
instructing Eskom to pay Trillian and describing Trillian as
McKinsey's subcontractor.
McKinsey says the letter "inaccurately characterised" its
relationship with Trillian. The McKinsey director who wrote it,
Vikas Sagar, has been placed on leave pending the outcome of
McKinsey's internal investigation.
Sagar did not respond to attempts to reach him on social
media, and McKinsey declined to make him available for comment.
Mazzone of the opposition Democratic Alliance said: “We need
to establish why a firm like McKinsey agreed to a 30 percent
share of work with Trillian in the first place, when exactly
they realised that siphoning to Gupta companies was taking place
and if they alerted the Minister of Public Enterprises to
possible concerns.”
TIMELINE
The two ex-employees said McKinsey's SA office
had been wrestling for years with the question of whether it was
working with local companies that were little more than
window-dressing to get contracts.
Trillian was formed in 2015 by directors from another firm
called Regiments, and employed many of the same principal staff.
Regiments had already been McKinsey's local partner on another
contract since 2012, and the ex-employees said McKinsey's office
considered the new company to be a spin-off of the older one,
intended to play a similar role in future deals.
According to the ex-employees, McKinsey partners in SA told managers in the country that they thought both
Regiments and Trillian had few capabilities, and were valuable
mainly for political connections necessary to secure contracts.
“At least two (Johannesburg-based) partners raised concerns
about using Regiments as a sub-contractor back in 2013. It
seemed clear Regiments was a way of us winning the contract and
if we caused a fuss we would lose business," one of the
ex-employees said.
“We had several meetings between 2013 and 2016 at top level
locally about Regiments and Trillian, where it was asked: how
are these unqualified companies winning us contracts? Why are
the contract amounts so favourable? Why do we have to use them
to get business?”
In a statement to Reuters, Regiments strongly rejected the
suggestion that it was employed by McKinsey solely to win
contracts. Regiments had received "numerous client and McKinsey
acknowledgements of our value add and delivery," it said.
"Regiments was never involved in the procurement process, except
to provide our profile to McKinsey on a few occasions."
According to the ex-employees, as the Eskom deal was coming
together in 2015, there was strong resistance within McKinsey's
SA office to working with Regiments personnel and
their new vehicle Trillian on the Eskom bid.
They said a McKinsey partner approached an Eskom board
member in September 2015 to say that McKinsey did not want to
work with either Regiments or Trillian, due to concerns over the
ownership of those companies and their capabilities. A former
Eskom executive, who also spoke to Reuters on condition of
anonymity, confirmed that conversation took place.
The McKinsey ex-employees said the partner who made the
overture to the Eskom board member was shifted off the project
and replaced by Sagar, who was promoted to the rank of director.
Sagar then wrote his letter to Eskom describing Trillian as
McKinsey's subcontractor and instructing Eskom to pay it.
The Eskom deal was too big to jeopardise by looking too
closely at the role of the Guptas, the ex-employees said.
"Losing a contract of that size would have serious
implications for the business and staff in SA," said
one. "It was considered a risk worth taking."