The Zondo commission was duped by McKinsey.
After being implicated in state capture, global management consulting firms such as McKinsey are happy to pay some money to the state in exchange for avoiding criminal sanction or being blacklisted from doing business with government.
These companies know their business models won’t be broken. They will make back the lost loot handed over to a government that could have gone after them with more complex legal instruments that carry the possibility of harsher sanction.
In effect, they plea bargain their way out of much tougher sanctions. These arrangements are not always the optimal response to systemic corporate predation on state resources. It can rob society of full economic justice. It can also keep aspects of the hollowed out architecture intact for future scum to come along and exploit.
Let’s examine the McKinsey example in detail. There was a local advisory services company, Trillian Capital, that McKinsey had worked with for a while.
There was a division within it rendering management consulting services that broke off and later became Trillian Management Consulting.
The main shareholder of Trillian was one Salim Essa who is mentioned as a “rainmaker” for the Guptas across the different parts of the state capture reports released thus far.
Apparently, Essa had an uncanny knack for getting contracts from certain state-owned entities.
Work undertaken since 2012 between McKinsey and Trillian or Regiments at Transnet, SA Airways and Eskom earned McKinsey a cool R1.9bn.
After 2012, McKinsey and Regiments started ballooning their invoices. At Transnet, for example, they did so by 70% compared to the previous year and doubling invoicing again from 2013 to 2014 with further escalations to come.
During an 18-month period they also secured no fewer than seven contracts by consignment at Transnet. This is all established by the Zondo commission.
The Zondo report is difficult to read without feeling huge anger as a citizen.
Thieves did not steal as individuals. They typically did so in a pack. Key to the method was political principals, at ministerial level, using board appointments and ministerial advisers to put impossible pressure on anyone within a state-owned entity who was part of procurement to award contracts to Gupta-linked companies such as those in which Essa was the main shareholder.
An example of this was the successful hounding out of Eskom of Tsholo Molefe by the board. In the background to these timelines of workplace bullying were ministers Malusi Gigaba and Lynne Brown.
Tsholo was clear that Trillian is unjustifiably expensive, was not even submitting a proper proposal for work (and doing so uncompetitively anyway) and there was no need for external assistance in the finalisation of a financial sustainability plan. This latter point is crucial.
Even critics of McKinsey and other firms, such as Bain, imagine there are always gaps within the state that require the expertise of these firms. This is often a lie. Sometimes they pitch for work that is not required. They get away with it because they find individuals within the state who are susceptible to being corrupted.
This is why understanding the modus operandi of those involved in state capture is important. It wasn’t mere theft. It was more sinister, a form of economic sabotage that subverted our democratic foundations.
From about page 914 of the Zondo report, in a section titled “Forces align in 2015 to bring Regiments and McKinsey a large contract”, a shocking story is told of how McKinsey had leveraged their relationships with Brian Molefe and Anoj Singh, with whom they had worked on projects at Transnet, to secure contracts at Eskom that they had failed until then to secure.
Molefe and Singh were seconded in April and August 2015 as acting group CEO and acting group CFO of Eskom respectively. McKinsey partner Alexander Weiss even had the audacity to admit they had helped to prepare them for their roles at Eskom before they were officially seconded.
This means they knew, as outsiders to the state, about crucial ministerial decisions before these were even official and public, allowing them to ensure the would-be appointees would need them, McKinsey, in their new roles by disingenuously giving them “free” support in the months leading up to the official secondment dates.
Zondo is onto something when he thinks aloud in the report: “It is strange that outsiders should take it upon themselves to 'on-board' anyone when, surely, this role should have been played by people within Eskom.”
The commission extracted concessions from Molefe and Singh that this was inappropriate, leading the commission to conclude: “That Mr Brian Molefe and Mr Anoj Singh accepted this may be an indication that they were already listening to someone outside Eskom on what they should [do] in Eskom.
“That would happen when you are captured. This is more so because neither Mr Brian Molefe nor Mr Anoj Singh said it was someone within Eskom who said they should let McKinsey give them the analysis or induction that McKinsey appears to have given them.”
The commission is even more blunt a few paragraphs later when it states baldly that: “This conduct was irregular and impermissible.”
The commission mistakenly only really roasts Molefe and Singh in this analysis.
Crucially, McKinsey and Regiments are unethical corporate citizens who intentionally groom these executives with the confidence that they will be rewarded for doing so by finally having the most powerful people at Eskom beholden to them.
Zondo woefully under-describes the actions of McKinsey and Regiments here, forgetting that as serious as the irregular conduct of the acting GCEO and GCFO was, it was located within a nexus of unethical behaviour of which McKinsey and their faux supplier development and localisation partner, Regiments, were crucial.
It takes two to tango. Both parties must be wholly sanctioned.
This is as chilling as Bain grooming Sipho Maseko before he became Telkom CEO and then doing the same with Tom Moyane before he became Sars boss, as detailed by Athol Williams in his compelling account of state capture implicating Bain, “Deep Collusion: Bain and the capture of South Africa”.
The parallels are crucial and Zondo missed them. Or, rather, Zondo documents obvious parallels but goes on to treat what is before the commission rather oddly. It is a failure to see conclusions that jump out at you. More about that gaffe — at SA Inc’s expense in the end — shortly.
By the time Brian Molefe was fully in charge, McKinsey could try its luck again with a nebulously formulated Master Services Agreement (MSA).
They basically wanted to do a range of things from setting up some sort of internal consulting unit at Eskom to training engineers in a top engineers programme. They offered to do so “at risk”, which was a sneaky pretence to be nice to the client by, on the face of it, not charging anything until the project had created value for the client.
Such value might include, for example, huge cost savings on their operations after which McKinsey can be paid. This is an approach McKinsey loves selling to clients by telling clients the project “pays for itself”.
But Zondo spotted the obvious flaws with this plan: “The risk-based approach was not permitted under Treasury regulations. Furthermore, the amount of fees that could be charged was neither quantified nor capped and such a system could easily be abused.”
Again, Zondo does not fully grasp the enormity of the point he gifts himself. The commission casually articulates what is, in fact, a stunning indictment of McKinsey, deserving more examination than what Zondo offers.
McKinsey’s predatory interactions with Molefe, to set up this phoney at risk arrangement, tells us something very disturbing about the business ethics — or lack thereof — of McKinsey. The company was fully aware that it could milk the public purse later by essentially delaying invoicing. There was nothing admirable about saying you are providing services “at risk” as if you are uncertain about whether you will generate income for yourself on the project.
They knew the upfront resources they would spend on the project actually would not be very much — they draw on their enormous, internal stored knowledge and global experts, resulting in a few decks of slides as deliverables after some workshops and a few conference calls to one or two “thought leaders” within the company.
We should also not be fooled into thinking there is always a genuine problem to be solved.
Whistle-blower Mosilo Mothepu testified to the fact that Eskom had the capacity to work on the problems that were being stuffed into a MSA.
Firms such as Bain and McKinsey are highly skilled at convincing an unsuspecting client that they have a problem they were not aware of and the sole solution is to let McKinsey or one of the other big firms in (to generate a few decks of slides).
These firms remain a bureaucracy within the bureaucracy. At any rate, as Zondo correctly points out, getting McKinsey in on such a turnaround project on a sole-source basis is disingenuous when there are many SA firms capable of bidding.
This, too, McKinsey knew, but played along to avoid open competition. Should such a predatory corporate citizen do business with our state?
Let’s be clear about a number of McKinsey sins that are unforgiving. They knew the legal opinion obtained internally within Eskom, and externally by themselves and Eskom jointly, indicated that Treasury approval is needed to deviate from the regulations that did not allow for the sole source contract and doing so on an at risk basis.
In December 2015 McKinsey knowingly ignored this legal position and entered into an unlawful arrangement with Eskom, commencing work in January 2016. There was no contract as such, just a letter of acceptance signed by McKinsey that had been sent to them by one of the Eskom executives.
McKinsey and Regiments eventually raked in lots of cash with several dodgy deals (both the MSA, for example, and a hastily arranged “Corporate Plan"contract, splitting profits between them 70% and 30% respectively).
The idea is that Regiments was an empowerment partner. But the Regiments-Trillian nexus was just a way of funnelling money to Gupta-linked Essa.
This, too, is a McKinsey sin. Why did they partner with Regiments so readily? Greed. Why else start the work first and only later sheepishly evaluate the partner company's technical skill and political exposure? Greed.
As for the Corporate Plan contract, Zondo confirms that McKinsey partner Mr Safroadu “Saf” Yeboah-Amankwah admitted no gap-analysis was done to determine that Eskom lacked the skill to perform the work itself.
At any rate, he — Mr Yeboah-Amankwah that is — was of the view that Eskom had the relevant expertise. Again, how on earth can Zondo note this and swiftly move along to focus on the board of Eskom?
One of the most senior McKinsey partners admits that they were a silent witness to the flouting of the law and the commission does not reflect on what this reveals about the corporate DNA of McKinsey? Zondo does not pause to think about possible legal culpability?
No wonder McKinsey worked with Regiments as their subcontractor without there being a subcontract in place to regulate their relationship.
They did work of “questionable additional value”, Zondo concludes, which implicates McKinsey because it means they intentionally did not mind our hard-earned taxpayer money going to a bogus partner so long as their cut was big enough to keep headquarters happy.
Trillan Management would invoice for more than R30m despite not even being a supplier development partner to McKinsey. In fact, that was one payment. They received R592m in total without a contract in place.
Vikas Sagar, a McKinsey partner, had written to Eskom asking it to settle the Trillian invoice. He was dismissed by McKinsey, but the circumstances and the deal possibly struck between him and the company remain unknown.
In my view, Sagar was so senior, experienced and well-respected within McKinsey that it is fanciful to imagine he was acting as a lone ranger. McKinsey is obsessed with team work. No-one acts this unilaterally.
Only by end of March 2016 did McKinsey officially tell Eskom that Trillian would not be its supplier development partner.
By then the political exposure forced McKinsey’s hand, clearly, not least because Salim Essa is a politically exposed person. (It is worth noting that Sagar was gone when they still dithered about Trillian which underlines how disingenuous it is to imagine you can drive a wedge between McKinsey and Sagar. He only took the fall because he happened to have his name on the note sent to Eskom.)
Singh then got rid of McKinsey but wrongly allowed them to invoice for work done thus far despite no actual MSA ever being concluded in the end.
Where does this leave us? In the end McKinsey repaid R1bn in unlawful earnings. That does not constitute economic justice for SA Inc.
Given how intrinsic McKinsey was to the “on boarding” of the former Transnet executives to Eskom, readying them to loot from Eskom, how can Zondo be so brilliant in eviscerating the Eskom board and executives who broke the PMFA and other laws but say nothing about McKinsey in the conclusions beyond noting that “The McKinsey, Trillian and Regiments contracts were not specifically mentioned in the 'State of Capture' report”?
It is lazy to pretend that corporate sins are beyond scope. The kleptocratic relationship between McKinsey, Molefe and Singh (until these guys became annoyed with McKinsey) is such that McKinsey deserved to be considered for blacklisting — the same with Bain — even if for a specified period of time.
Also, the possibility of pursuing a criminal case against particular McKinsey partners should not have been left unengaged.
As for the true total cost of McKinsey’s actions and inactions you need not be an economist to know that the nominal money McKinsey repaid is obviously not the true total economic cost of the corruption they are implicated in.
McKinsey never laid charges against Sagar because they know each other's sins and it is a case of mutually assured destruction that binds their deal.
He has reinvented himself in London. And we, in turn, lack a full understanding now of who else in McKinsey is directly culpable in addition to the moral and possible legal culpability of McKinsey as a firm.
They woodwinked Zondo. But given the commission's point, they should have been rigorous in their engagement with McKinsey’s role in state capture.
Bluntly put, Zondo let McKinsey off the hook.
