amaBhungane: McKinsey caught up in Trillian lies
- South Africa
- 30 Jun 2017 04:09 (South Africa)
Advocate Geoff Budlender’s report exposes how global consulting giant McKinsey got into bed with Trillian, in a “sham” contract that would milk Eskom of hundreds of millions of rands. By AMABHUNGANE
McKinsey’s motto is supposed to be, “put client interests ahead of the firm’s”.
So, when the global consulting giant was hired by Eskom in 2015, at an estimated cost of R1-billion a year, it was meant to improve efficiency and cut wasteful expenditure at South Africa’s largest state-owned entity.
Instead the deal McKinsey struck with Trillian Capital Partners mocked Eskom’s problems by handing at least R266-million of Eskom’s money to a company that in the words of McKinsey’s own executives’ was merely there to receive 30% of the contract “in return for not much work”.
On Thursday, advocate Geoff Budlender released his report into allegations of state capture carried out by Trillian, the company majority-owned by Gupta associate Salim Essa.
The report details how McKinsey agreed to subcontract 30% of their Eskom work to Trillian under the guise of “supplier development”, a programme intended to upskill small, black-owned business.
Instead documents from Budlender’s report as well as in the #GuptaLeaks show that Trillian planned to siphon huge chunks of the money it received to a company part-owned by the Guptas and another company in Dubai.
According to Budlender, evidence suggests that “the Supplier Development Programme was, at least from the point of view of some senior McKinsey representatives, a sham. The Eskom contract price included 30% for Trillian, which from those representatives' point of view served little purpose other than to provide a substantial financial benefit to Trillian and its shareholders - and presumably induce Eskom to award the contract to McKinsey.”
McKinsey appears to have been willing to look the other way provided they secured a lucrative contract from Eskom.
How McKinsey opened the door
In June 2015 Eskom was in chaos. Brian Molefe had just become the third acting CEO in just over a year and load-shedding was once again on the cards.
In the midst of this, Eskom decided to negotiate a “risk-based contract” with consulting firm McKinsey to assist with Eskom’s turnaround strategy.
The proposed Master Services Agreement would see McKinsey providing advice to Eskom on everything from buying coal and running power plants to settling insurance claims. In turn McKinsey agreed to subcontract 30% of the work to Trillian.
By early 2016 there were problems.
In an internal memo written in February 2016 and included in Budlender’s report, a former Trillian executive described the open contempt that McKinsey’s senior executives showed towards Trillian, calling the partnership “one of exclusion”.
“There is a general theme emanating from the McKinsey leadership down, that Trillian … is simply a necessary, but unwanted piece of baggage in the awarded contract,” the former executive wrote in the memo. “There is a perception that TMC [Trillian Management Consulting] is only around for the “30%” and will not actually contribute to delivery.”
According to the former executive, McKinsey’s whole attitude to supplier development was “it doesn’t really matter as long as you get your percentage.”
To the former executive’s credit, she appears to have pushed back, insisting that TMC staff be included by McKinsey in the work at Eskom. However, the memo also provides a rare insight into how McKinsey viewed their partnership with Trillian.
At a one-on-one meeting between the former executive and Lorenz Jüngling, the McKinsey partner was frank: “[T]he current McKinsey sentiment is that TMC is not motivated by delivery and growth towards independence, but rather in this partnership purely to receive revenue in return for not much work,” Jüngling reportedly said.
Like Trillian, McKinsey has refused to co-operate with Budlender’s inquiry. In fact, when McKinsey’s Benedict Phiri was approached, he denied that McKinsey had ever partnered with Trillian, saying: “McKinsey did not work on any projects on which Trillian worked as an SDP or a subcontractor to McKinsey.”
When Budlender pointed him to a letter from McKinsey executives that directly contradicted this, Phiri shut down.
“McKinsey's position is that, in light of the informal nature of your inquiry in the context of various legal and regulatory processes around Trillian, it is inappropriate to furnish any further comment,” Phiri told Budlender in an email earlier this week.
AmaBhungane sent a copy of Budlender’s report to McKinsey on Thursday. McKinsey’s Bonita Dordel responded saying: “We continue to investigate this matter and are reviewing Advocate Budlender’s report. We will respond appropriately in due course.”
Enter the Guptas
The #GuptaLeaks show that starting in mid-2015, a Sahara Systems subsidiary called Cutting Edge Commerce was discussing the “McKenzie (Eskom) Project” during monthly meetings and how Cutting Edge could profit from the contract.
Run by Althaf Emmamally, another lieutenant in the Gupta empire, Cutting Edge specialises in providing software to improve procurement processes. At the time, 52% of the company was owned by the Gupta’s Sahara Systems and the #GuptaLeaks show it was run as part of the Sahara Systems group.
Leaked documents obtained by amaBhungane shows that TMC planned to pay a set 80% fee of every rand they earned from the Procurement work stream at Eskom to Cutting Edge – minutes from October 2015 show that Cutting Edge anticipated this arrangement would make them R1.3-million a month, and thereafter R20-million every quarter.
Trillian declined to confirm how much Cutting Edge has been paid but confirmed it subcontracted some Eskom work to the Gupta-owned company. “McKinsey took the lead on the overall programme, with TMC in the supplier development role, providing local consultants to support the team. TMC in turned partnered with Cutting Edge Commerce – a BEE level 2 company [and] specialists in Procurement and SAP,” Trillian said in a written statement on Friday afternoon.
But Cutting Edge was not Trillian’s only preferred partner.
In January 2016, a new company entered the deal. E Gateway Consulting is registered to a PO box address in the Umm Al Quwain Free Zone, a tax and secrecy haven bordering Dubai.
There is no trace of the company online, but according to Trillian: “It’s Trillian’s understanding that E-Gateway India set up the E-Gateway FZC office in Dubai to service their energy clients in the Middle East.”
According to a second former executive that Budlender interviewed, E Gateway was introduced to Trillian staff by Clive Angel, a director of Integrated Capital, a company with close Trillian links, and told that E Gateway would be the preferred partner for the Eskom Generation work stream.
“Mr Angel said to [the former executive] ‘Our boss has found them, and we will work with them’. [The former executive] understood the reference to the ‘boss’ as a reference to Mr. Essa,” Budlender’s report notes.
According to the signed contract with E Gateway, annexed to Budlender’s report, 77% of all revenue that TMC received from Eskom on the Generation work stream would flow to E Gateway.
At this stage, Trillian still did not even have a signed agreement with McKinsey. Despite this TMC had already agreed to divert a large portion – understood to be in excess of R10-million a month – to a foreign company.
According to Trillian, E Gateway added value: “E-Gateway were required to assist with technical solutions to help increase the Energy Availability Factor (EAF) of the power station. They have global technical expertise as energy experts in fossil fuel power stations and enable us to better understand the technical intricacies of the client and improve efficiencies,” Trillian said.
Trillian added that after the contract has since been renegotiated and no payments have been made to E Gateway to date.
It appears the introduction of E Gateway did not sit comfortably with McKinsey though. In a confidential letter in March, the chair of McKinsey’s risk committee asked Trillian to provide them with detailed information about the exact nature of the relationship between Trillian and E Gateway.
amaBhungane put it to Trillian that subcontracting 77% and 80% of the work to other companies, including a foreign company, made a mockery of Eskom’s supplier development programme.
Trillian, which now describes itself as “a consortium”, says the company still believes in supplier development, adding that “it is and has always been Trillian’s vision to be a firm in the league of global consultancies.”
Trillian starts cashing in
By February 2016, the McKinsey-Trillian partnership was on the rocks.
On February 9, McKinsey director Vikas Sagar sent a letter to Eskom, giving McKinsey’s blessing for Eskom to start paying Trillian directly, instead of via McKinsey, as a subcontractor. It’s not clear what prompted Sagar’s letter – this was one of the questions Budlender put to McKinsey that they refused to answer.
From the #GuptaLeaks we know that Sagar already had a connection Essa. In 2014, Sagar asked a McKinsey expert for an opinion on the viability of a uranium and gold mine in South Africa. Sagar forwarded the expert opinion to his private email address and then sent it on to Essa.
By March, McKinsey’s risk committee had decided that they could not go ahead with the Trillian partnership after all. Sources told amaBhungane that after McKinsey dropped Trillian, Eskom’s interest in McKinsey also faded.
“After review of the contract that included queries to the contractor, [chief financial officer Anoj] Singh suggested cancellation of the contract to the Board during the first half of 2016,” Eskom spokesperson Khulu Phasiwe said in a written statement last night.
Although the 6-month arranged marriage between McKinsey and Trillian had now come to an end, Trillian appears to have continued working for Eskom and invoicing them under the guise of a contract that no longer existed.
As amaBhungane has previously reported, over the next 11 months, Trillian submitted invoices to Eskom totalling at least R419-million. (see previous amaB story)
When asked about these payments, Eskom has consistently repeated the line that “Eskom has no contracts in place with Trillian Capital Partners and/or associated companies.”
In a parliamentary reply last year, public enterprises minister Lynne Brown repeated the same assertion, claiming that Trillian had no contracts with Eskom and therefore had received no payments.
Yet when Budlender asked for copies of all the invoices Trillian had delivered to state-owned entities, Trillian handed over invoices addressed to Eskom and marked “paid” confirming that between April and August alone, Trillian received R266-million. (The final invoice that amaBhunagne identified for R153-million was submitted to Eskom after Budlender’s request for the invoices.)
“The information which the Minister of Public Enterprises gave to Parliament was, depending on the view you take of it, either false or seriously misleading,” Budlender’s report concludes.
Phasiwe has previously said that although Trillian was registered on the Eskom payment system there was no record of any payments to them.
Last night Phasiwe finally admitted Eskom had made payments.
Setting out Eskom’s new fall-back position he said: “All payments associated with this contract was subjected to an external review … The report concluded that all payments due to the contractor was based on prudent costs incurred and value created.” DM
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Photo by Gavin Fordham.