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Now McKinsey’s R2-billion Transnet bonanza is in the...

South Africa

Days of Zondo

Now McKinsey’s R2-billion Transnet bonanza is in the spotlight at State Capture Commission

Base Photo: South African bank notes January 17, 2013. REUTERS/Siphiwe Sibeko

Global consulting firm McKinsey & Co has repaid Eskom close to R1-billion because it didn’t want tainted money emanating from an off-grid partnership with Gupta-linked Trillian Capital Partners.

Now the firm has come under scrutiny at the State Capture Commission over an additional R2.1-billion in deals, this time awarded by Transnet under a system of multiple confinements, essentially making it the sole bidder each time.

While the parastatal’s governance and procurement protocols allow for confinements under special circumstances, there are also warnings to avoid abuse of the system as it entrenches monopoly.

Transnet’s governance executive manager, Peter Volmink, testified as to how McKinsey had scored eight contracts through confinement over several years.

Eight confinements are concerning,” said Volmink.

Those confinement requests were usually motivated by urgency or that it involved the procurement of highly specialised services but Volmink said he was not convinced about the credibility of this as planning would have identified the company’s needs over a period of time.

Had public interest been considered, it would have taken us away from repetitive contracts like those the McKinsey case,” Volmink said.

And, there is an overwhelming public interest in open, fair tenders and the avoidance of creating monopolies and to protect the interests of Transnet.

But McKinsey appears to have had allies within Transnet in the form of former CEO, Brian Molefe who signed off on approval to confine some R600-million in deals to the company at one stage.

The figure was above his pay-grade so the deal was “parcelled,” in breach of Transnet policy, into four smaller deals signed over the course of just four days, Volmink said.

These were all for related services linked to the company’s work on iron ore, manganese and coal contract efficiencies, among others, Volmink told the Commission.

Breaking a deal up into smaller pieces to avoid higher levels of scrutiny or authority was considered an unethical breach of policy, he said.

Molefe, he said did this over four days between 21 March 2014 and 3 April that year.

And upon reviewing the McKinsey confinements, Volmink said the motivation almost always spoke to the need to save time and money and that a new supplier would have to familiarise itself with Transnet and its systems or processes.

We refer to it as school fees because we spend time and effort training new suppliers in our business.”

At this point Commission chairman deputy chief justice Raymond Zondo jokingly remarked: “It sounds like in this case you did more than pay school fees, you may have paid for university as well.”

He said McKinsey’s multiple confinements were noteworthy because a former Transnet CEO had previously expressed concern about it, having said it exposed the parastatal to serious risk.

Once McKinsey was on a confinement roll, the company scored payment in some cases even before the adjudication of its lone bids were completed, Volmink said.

He told the Commission how former CFO, Anoj Singh, had commissioned the company to start working prior to this process in violation of Transnet’s procurement policy.

Once approval was obtained for a particular contract to be awarded through confinement, either because it was an emergency or because it involved a highly specialised product, a bidder still had to submit a pitch in line with a request for a proposal.

This was then subjected to various internal processes of scrutiny for among other things, functionality, price or BEE scoring.

However, in the case of McKinsey, the Commission heard that staff were asked to effect payment to the company prior to this process even being concluded.

He referred to a chain of emails illustrating how a staff member had written to former chief procurement officer, Edward Thomas, on 11 July 2014.

I refer to your email instructing us to make payment to McKinsey where no contract exists…. I require a written request as this is a deviation from process.

It is my understanding that the payment is due to be made by Anoj Singh as CFO. We assume risks have been considered before release of the payment,” the staff member wrote highlighting concerns that evaluations of work performed had either not commenced or were still in progress.

Kindly be advised that we do not recommend these be paid as the scale of the risk is significant in relation to the payments being made.”

This was after McKinsey had started performing work, allegedly at the request of Singh, before a request for proposal was issued.

This, Volmink said, was a fundamental breach of process.

Thomas later responded that a contractual obligation began as soon as the confinement was approved.

Volmink said that Thomas, in the responding email, had said McKinsey had been given a letter to start work while the RFP was underway and that Transnet had committed to paying until the decision was made.

Volmink said the content of Thomas’ emails are “patently incorrect” as approval for confinement does not create a contract.

It is unheard of that one can conclude a contract and then, evaluate a supplier’s bid later, even in case of confinement. “

A bidder, even a lone one pitching for a job on confinement, could still be excluded if it fails on, for example, functionality or other specifications later on.

In this case, staff had made their point, but someone higher up in the food chain instructed them to make payment.

They did this, but under protest, he said.

There should have been no confusion about this because Transnet’s 2013 procurement manual specifically states that no employee shall anticipate the approval of acceptance of bids.

And, that no orders may take place before the adjudication of a bid has been done.

This McKinsey early payment resulted in Transnet’s governance unit issuing a directive outlining that confinements were still part of the tender process and that no one should jump the gun – that there can be no engagements with a bidder until that process is concluded and the delegated authority has awarded the deal to pave the way for contracts.

It was most irregular (of Singh) to engage McKinsey before conclusion of the tender process. This creates the impression that the confinement amounted to little more than an ex post facto justification.

Why go through the pretence of a confined tender process when the team’s already on the ground,” Volmink stated.

H also unpacked the circumstances around T-Systems bagging just under R5-billion through a deal that ran for nine years at Transnet.

This contract too was given longevity through a series of variations to an original contract, he said.

The Commission resumes next week with testimony by Transnet’s acting group CEO, Mohammed Mahomedy. DM

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