amaBhungane

The Nkonki Pact, Part 3: Eskom funded Essa’s capture of audit firm

By amaBhungane 24 April 2018

Two weeks ago Nkonki chief executive Mitesh Patel resigned after amaBhungane revealed that his R107-million buyout of the audit firm was funded by Gupta lieutenant Salim Essa. Now we explore the role that Eskom played in the next phase of its own exploitation by financing Essa in turn. By Susan Comrie and Stefaans Brümmer.

For two years, the Gupta family and their business partner Salim Essa were the Bank of Eskom’s favoured clients.

When they were short of cash to buy Optimum Coal, Eskom obliged with a hastily-arranged R1.6-billion bank guarantee and a 21:00 conference call that delivered a R659-million prepayment for coal.

Now we can reveal how two more Eskom payments totalling R329-million were pushed through in equal haste, seemingly to fund another Essa venture: the acquisition of pioneering black auditing firm Nkonki Inc, which TimesLive reports has taken a decision to voluntary liquidate its Sunninghill operation after an announcement by the Auditor General’s office that it would no longer be making use of the firm.

The payments were made to Essa’s Trillian Capital Partners in late 2016 and early 2017 on the back of a settlement with consulting multinational McKinsey – despite two teams of experts questioning their basis.

In a recently filed court application to have the money returned, Eskom acting chief executive Phakamani Hadebe said:

The various decisions and events surrounding these payments are, in many cases, frankly inexplicable.”

Trillian, now no longer owned by Essa, says it was entitled to receive payment for the consulting work it performed and that making “assumptions or allegations” about what it did with the money would be “unfair and misleading”. It is opposing Eskom’s claim.

But considering that Trillian applied a portion of the money to the purchase of Nkonki, and that potentially very lucrative Eskom consulting contracts flowed to Nkonki thereafter, it looks very much like Eskom was used to fund the next phase of its own exploitation.

Essa and the Guptas have consistently failed to comment.

Nkonki: the new Trillian

The plan to capture Nkonki was put in motion around August 2016, just as Eskom was pulling the plug on its very contentious consulting project with McKinsey, which had brought Trillian along as its de facto empowerment partner.

Both the fact that Trillian worked without a contract and that McKinsey and Trillian were to be paid “at risk” – a percentage of deemed savings, giving them potentially limitless earnings – stoked controversy.

Trillian had hoped to earn around R4.5-billion in fees over three years, but when McKinsey dumped Trillian, Eskom appeared to lose its appetite for the entire contract.

Nkonki, it would seem, represented a way back into Eskom’s consulting pot of gold for Essa.

amaBhungane revealed in part 1 of The Nkonki Pact how Essa, via Trillian, had funded Nkonki director Mitesh Patel to buy out Nkonki’s founding shareholders. The intention was for Patel to hold a majority of the shares as a front while most of Nkonki’s future profits would flow to entities linked to Essa or the Guptas.

In part 2 we showed how, after Patel’s buyout, Nkonki landed Eskom consulting work potentially worth R1-billion or more.

Patel, who resigned as Nkonki chief executive following our story, has denied fronting.

But as cleverly orchestrated as the plan may have been, it almost fell through when Trillian failed to come up with the funding for the Nkonki buyout.

Trillian’s empty bank account

By late November 2016, it must have been clear to Nkonki’s selling shareholders that there was a problem.

The first payment of R43.6-million had come through via Trillian’s attorneys as planned at the end of October, but the 25 November deadline for a second identical tranche came and went without any sign of the money.

[W]e followed up with [Patel, who led the buyout] when the payments were not coming through as promised and he always undertook to resolve the matter. As this was not a hostile transaction, we were very supportive and we were patient with him,” the sellers, Sindi Zilwa and Mzi Nkonki, said in a written reply.

Trillian, it seems, had cash flow problems.

Four months earlier, in August, the Eskom board had given executives the go-ahead to negotiate a R1.8-billion “settlement” with McKinsey following the cancellation of its consulting project. Trillian’s share, if one overlooks the fact that it was not formally contracted, was potentially 30%, or R540-million.

That same month, Eskom paid Trillian R235.5-million. Not satisfied, Trillian chief executive Eric Wood sent Eskom a letter demanding more.

Whether for reasons bureaucratic or principled, the Bank of Eskom was still dithering at the end of November, when Trillian missed the deadline for the second Nkonki tranche.

Lifeline

The consultants from abroad were a blessing in disguise for Trillian.

Although Oliver Wyman and Marsh (OWM), another multinational consulting firm, would eventually deliver a damning report on the McKinsey project, its preliminary report threw Trillian a lifeline.

Oliver Wyman and Marsh had been hired by Eskom to peer review the work done by McKinsey and Trillian and guide the board on whether to approve or reject the remaining portion of the R1.8-billion settlement.

The preliminary report, delivered on 9 December, concluded that in terms of McKinsey and Trillian’s 70-30 fee split, Eskom probably owed Trillian “a further payment of R134-[million]”.

However, Oliver Wyman and Marsh said it was a provisional finding:

These findings will be refined over the next week… [t]here are a number of open issues to be investigated before finalising the range of fair payment.”

Had Eskom officials waited for the final report, which was delivered on 15 December, they would have seen OWM’s additional warning that “there is no contract in place between Eskom and the BBBEE partner” and that the question of whether Eskom was obliged to pay Trillian at all would need to be tackled as part of the legal review that was a long way from being concluded.

But Eskom did not wait for the final report. On 13 December the board tender committee approved paying Trillian R134-million, or R152.6-million including VAT.

Nowhere in the OWM Preliminary Report did OWM expressly recommend that Eskom should immediately pay amounts to McKinsey or Trillian without awaiting the outcome of the final report expected a couple of days later,” Hadebe, Eskom’s acting chief executive, said in his affidavit.

Perfect timing

Things moved fast after Eskom’s approval.

The next day, 14 December, Trillian invoiced Eskom for the R152.6-million – and Nkonki’s selling shareholders signed an agreement rescheduling their missed November tranche and further payments. Now, R10-million was immediately due with more to follow in January and February 2017.

Despite Eskom’s strict policy of paying invoices only after 30 days, Trillian got the R152.6-million six days later, on 20 December.

Hadebe stated: “There is no explanation for the unseemly haste with which this payment was made.”

Perhaps there was. That same day, 20 December, R10-million flowed from Trillian Management Consulting, the Trillian subsidiary that was paid by Eskom, via Trillian’s attorneys to Nkonki’s long-suffering selling shareholders. This data was obtained by amaBhungane from sources with direct access to transactional records.

We asked Trillian whether the money from Eskom was used to fund the Nkonki transaction. In a statement in reply, it denied that it acted in any “manner other than as advisor and arranger of funds” in the Nkonki transaction.

Trillian is concerned that you are now seeking to unfairly report that Trillian’s receipt of payments for work done [at Eskom] was somehow linked to the Nkonki transaction. This is manifestly incorrect…

Trillian reiterates that it billed [Eskom] for work done and was entitled to payment for this work.”

However, the unlikely coincidence was to repeat itself two months down the line.

A final hurrah

On 3 February 2017, Trillian paid the sellers another R10-million, missing the end-of-January deadline and R33.6-million amount agreed when the payments were rescheduled.

The shortfall apart, the deadline to pay a final R43.6-million loomed at the end of February.

Fortuitously, the Bank of Eskom was once again ready to open its vault.

As part of the settlement negotiations with McKinsey and Trillian, Eskom had appointed Sandton law firm Cliffe Dekker Hofmeyr (CDH) in December to conduct a legal review of the controversial consulting contract.

But, two months in, CDH was getting scant co-operation from the responsible Eskom executives.

On 7 February, the lawyers met with Eskom. CDH was unwilling to comment, citing client confidentiality, so what we know about that meeting is second-hand from suspended legal head Suzanne Daniels, detailed in a report to then-public enterprises minister Lynne Brown.

According to Daniels’ report:

CDH had great difficulty in establishing the legal nexus between Eskom and Trillian that would justify any payment to them directly.”

In fact, CDH appears to have told Eskom it was possible that “Eskom would have no liability toward Trillian” at all. It requested more documents in order to compile a proper legal opinion.

But when Eskom’s board tender committee met the following day, there was no mention of the legal opinion CDH had promised. Instead the committee signed off on a final R460-million for McKinsey and Trillian.

On 15 February, CDH delivered a draft settlement agreement to Eskom, but in accompanying notes it raised serious concerns about the utility rushing into a settlement of this magnitude. CDH said a more detailed memo would follow.

One would think Eskom would have waited to find out whether it was legally obliged to pay Trillian a cent. But a senior executive’s response, according to Hadebe’s affidavit, was whether the CDH memo “hold[s] us up from concluding the process with McK?”

The Eskom executive was not the only one in a rush. Before Eskom and McKinsey had even signed the settlement agreement, Trillian submitted an invoice to Eskom for R176.3-million.

Again only a week later, on February 22, Eskom paid Trillian. The next day Trillian transferred R43-million to the Nkonki sellers.

(Although Trillian used a different subsidiary, Trillian Properties, to pay the sellers, financial records show that Trillian had immediately moved the necessary funds from Trillian Management Consulting, which was paid by Eskom, to Trillian Properties, which paid the Nkonki sellers.)

In early March, a final batch of shares was transferred from the Nkonki sellers to Patel, putting him – and, it would seem, Essa and the Guptas behind him – in firm control of Nkonki.

On the trail of Trillian’s millions

Trillian denied that the payments it received from Eskom were irregular, pointing to the legal opinion provided by advocates McCaps Motimele and Mankakane Magagane which concluded that Eskom could pay Trillian on the basis that Trillian was acknowledged as being McKinsey’s partner, even if no formal contract existed.

Trillian’s difficulty is that Eskom itself has vacillated on a number of occasions (as have its various advisors) in regard to payments to Trillian. McKinsey itself has also done so in correspondence to Eskom and to Trillian,” Trillian’s statement said.

But with the Bank of Eskom now closed and the electricity utility under new management, it is no longer wavering. It has asked the court to set aside the previous board’s decisions and to instruct McKinsey and Trillian to repay the R1.6-billion ultimately paid.

There is, Hadebe said in his affidavit, “a reasonable apprehension that senior Eskom officials were biased in favour of Trillian. There is a reasonable apprehension that all of the impugned decisions … were designed, in sum or in part, with the ultimate goal of favouring Trillian”.

Eskom declined to answer detailed questions, pointing to the disciplinary action it has already taken against implicated executives and its High Court claim to return the money, of which Hadebe’s affidavit forms part.

But Eskom are not the only ones laying claim to the R564-million that Trillian ultimately received. The Asset Forfeiture Unit has also filed papers in the High Court in Pretoria, seeking answers to where the Eskom money went.

Soon, they are likely to end up at Nkonki’s door. DM

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