OPEN SECRETS: UNACCOUNTABLE

From our vault: McKinsey — Profit over Principle

By Open Secrets 29 April 2020

Big consulting firms take no credit and they accept no blame. This philosophy has enabled McKinsey & Company to profit with ease from work with authoritarian regimes, troubled businesses and corrupt state-owned enterprises. In South Africa, their work at Eskom and Transnet on some of the most infamous State Capture contracts reveals a story of a corporation willing to place profit above principle, and sometimes allegedly even the law. This week Open Secrets focuses on evidence in The Enablers investigative report that shows that McKinsey has not been held accountable for its role in State Capture. While it profited from its role in these contracts it shies away from meaningful responsibility for serious economic crimes.

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See The Enablers investigative report here.

McKinsey & Company is the largest of the so-called “Big Three” Management Consulting firms, which includes Bain & Co and the Boston Consulting Group. McKinsey is, however, the name most closely associated with management consulting. It is a global army of 17,000 consultants operating in 133 cities across 66 countries. For their efforts the firm is handsomely rewarded with a total annual global revenue estimated at over $10-billion in 2018.

McKinsey’s client list includes both top corporations and governments with poor human rights records including China, Ukraine’s ousted president Viktor Yanukovych, and state-owned entities in Saudi Arabia. McKinsey resolutely maintains that it makes a positive contribution in these countries.

McKinsey can boldly make this claim due to a central (and controversial) aspect of management consulting — the industry’s opacity. The “Big Three” operate behind a veil of secrecy. Fellow consulting firm Bain & Company, complicit in the destruction of SARS, has long-held a reputation as the “KGB of management consulting”. This is at least partly because of the complex relationship between consultants and their clients where secrecy and obfuscation of the precise responsibilities of each party are in the interests of both.

In this vein — on 25 February 2020 — Open Secrets received a letter from McKinsey requesting corrections for alleged “errors” in The Enablers and related coverage in the Financial Mail. While we have made some additions to our report, on the whole, McKinsey’s meandering seven-page response reflects a refusal of the firm to fully accept responsibility for its role in State Capture and the related economic and social costs. Rather they lay blame at the foot of unscrupulous public sector actors and inefficient SOEs.

They seek to deflect evidence that in its contracts with Gupta associates, Regiments Capital and Trillian Capital Management, McKinsey were delinquent in their duties in the pursuit of lucrative consulting fees. The evidence shows that McKinsey were essential enablers of gross corruption at Eskom and Transnet, and it is past due that they appear before the Zondo Commission to be interrogated in this regard.

Transnet: Dubious escalations make room for kickbacks

McKinsey began working for state-owned rail agency, Transnet in 2005. While it does not reveal exactly what this work entailed, its website advertises its work in South Africa’s public sector as “advising on industrial development issues in specific industry sectors, such as energy and mining” as well as “advising state-owned enterprises on how to improve operations and delivery of services”.

In 2012, when Transnet began the process of its fleet recapitalisation, McKinsey was contracted to work on the business case. However, because McKinsey is a multinational company, it is required by the Supplier Development Programme (SDP) to partner with a BBBEE business partner who receives a 30% stake in profits.

Anoj Singh, then Transnet CFO and Gupta associate implicated in corruption at both Eskom and Transnet, suggested Regiments Capital to McKinsey. In August 2012, McKinsey signed a R35.2-million contract with Transnet and Regiments Capital became its partner on Transnet’s procurement of 1,064 locomotives. The 1,064 locomotive transactions have since been shown to be riddled with corruption and kickbacks, and this all started with the writing of the business case.

McKinsey and Regiments were tasked with validating the “business case” for the 1,064 locomotives. This process led to the splitting of the tender between four suppliers, and crucially also an unsubstantiated escalation in costs. The Fundudzi report commissioned by National Treasury to look into corruption at Transnet and Eskom, confirmed that Regiments assisted Transnet in rewriting the business case to justify a R16-billion escalation in cost, from an estimated R38.6-billion to R54.5-billion. This R16-billion was then paid as kickbacks and laundered through the HSBC bank accounts of front companies in Hong Kong and Dubai. This story is told in more detail in the 7th instalment of this Unaccountable series focusing on HSBC.

The Funduzi investigation concluded that Regiments altered the business case at the last minute to misrepresent the R38.6-billion as excluding “the potential effects from forex hedging, forex escalation and other price escalations”. This provided the reason for Brian Molefe and Anoj Singh to present an adjusted contract cost of R54.5-billion to the board in May 2014. Rewriting the business case was an essential step that allowed Molefe and others at Transnet to allow for the payment of commissions and bribes worth 21% of the total contract value.

McKinsey was not involved in the last-minute rewrite of the business case, and confirmed to investigators that Regiments did know that the R38.6-billion was an all-inclusive figure. However, they continued to work with Regiments Capital until 2016. Instead of ending this relationship, McKinsey attempted to legitimise it. In 2017, McKinsey’s global leader of Public and Social Sector Practices, David Fine, testified to Parliament’s Portfolio Committee on Public Enterprises. In his testimony, Fine indicated that McKinsey became suspicious of the relationship between Regiments Capital’s Niven Pillay and former Gauteng health MEC Brian Hlongwa in 2014. This followed media reports that Pillay helped Hlongwa purchase a home in order to win an inflated department of health contract for Regiments.

However, despite the alleged involvement of Regiments in corruption in 2014, McKinsey did not cease working with them until February 2016. Instead of terminating the relationship, McKinsey sent a directive to Regiments Capital to change the make-up of the team working with them. It was at this point that Gupta associate, Eric Wood, began heading the Regiments Capital team working with McKinsey. Fine testified that the firm was very happy with Regiments’ work under Wood.

In addition to these concerns, Fundudzi investigators also highlighted that during the period in which McKinsey and Regiments were partnered, particularly 2012-2015, Regiments Capital and McKinsey were paid millions in fees and “reimbursements” by Transnet without any proper documentation. The issues of payments being made without a proper legal basis arose again with regard to McKinsey’s work at Eskom.

The contract that never was: Eskom, McKinsey and Trillian

At the end of 2015, McKinsey entered into a contract with Eskom with the purported goal of developing internal project management and engineering capacity. However, the contract was not subject to a bid procedure, contrary to basic public procurement requirements. The contract had the potential to earn McKinsey R9-billion by its conclusion and was the firm’s biggest ever contract in Africa. Despite objections by some at the firm, the contract was supported by several of McKinsey’s senior partners globally.

At McKinsey’s South African office, the project was led by Vikas Sagar with assistance by Alexander Weiss. Sagar has been described as a popular McKinsey partner. Sagar and Salim Essa — the hand behind countless firms in the Gupta enterprise — had attempted to partner on several projects before McKinsey’s deal with Eskom. In 2014, Sagar asked a McKinsey expert for an opinion on the viability of a uranium and gold mine in South Africa. Sagar subsequently forwarded this opinion to Essa.

Apart from the lack of competitive bidding, the Eskom McKinsey contract should for a number of reasons have immediately raised concern within Eskom management. One was that McKinsey proposed a “no fee, at risk contract”, in which they agreed to forgo payment if they failed to deliver the project’s benefits. On the flip side, if they did deliver these strategies, they stood to receive a massive cut of their client’s upside. While in theory this could look like McKinsey was accepting the project risk, “in practice, it allows consultancies [like McKinsey] to earn billions in fees as a cut of savings that may never be realised”.

This is because the consultant also calculates the saving they have achieved, often using dubious baseline estimates to calculate their own achievements. In the case of McKinsey and Eskom, a review by fellow consultants Oliver Wyman and risk-management firm Marsh found that McKinsey and their new partner Trillian had used highly questionable ways of calculating Eskom’s “savings”, including “charging double the market rate for coal contract negotiations” and using “baselines… that could exaggerate effects achieved”. When asked about this, McKinsey’s global head admitted that they had overcharged Eskom and needed to implement stricter controls which would include “real recognition that there has to be clarity on what performance means”.

This type of at-risk contract also required special permissions from Treasury as Treasury requires SOE consultants to be paid fixed hourly rates. Eskom’s compliance department and legal counsel informed Edwin Mabelane (Eskom’s head of procurement) that the expenditure would be irregular should the requisite permissions not be sought. Eskom’s management ignored the warnings and Treasury was informed of the contract after the fact.

The parliamentary Portfolio Committee on Public Enterprises that heard evidence on the deal made an important observation: it should have been obvious to McKinsey that the deal was deficient and unlawful. As such, their decision to proceed needs to be critically examined. The committee concluded that “it is highly improbable that a company as sophisticated as McKinsey could, in good faith, have acted on the assumption that a contract based on a sole sourcing arrangement and on the applicable remuneration structure was lawful”.

At Eskom, Trillian was McKinsey’s chosen BBBEE partner, just as it had partnered with Regiments Capital for their work at Transnet. In 2016, Eric Wood, who McKinsey had preferred to work with during their work at Transnet and was a director of Regiments Capital, had a falling out with fellow directors Litha Nyhonyha and Niven Pillay. They had objected to Wood’s attempts to sell a 50% stake of Regiments Capital to the Guptas and disputed the terms of his move to Trillian. Wood subsequently became a director of Trillian on 29 February 2016. Salim Essa was the majority (60%) shareholder of Trillian at the time that Eskom contracted with McKinsey and Eskom’s decision to pay Trillian.

McKinsey’s agreement with Trillian envisaged McKinsey paying the latter 30% of its R1-billion-a-year contract with Eskom. However, although a contract between McKinsey and Trillian had been prepared and then edited, it had never actually been signed: no contract was concluded. Despite this, on 9 February 2016, McKinsey partner Vikas Sagar sent a letter to Eskom indicating that McKinsey had sub-contracted Trillian, and authorising Eskom to pay Trillian directly.

This letter by McKinsey’s Vikas Sagar was used as part of the justification by Eskom’s management to pay Trillian R700-million, even though Trillian had no contact with Eskom. It was also used by Eric Wood in attempts to obtain payment from Eskom.

Denials

In its letter to Open Secrets, McKinsey argues that Sagar’s letter did not result in the illicit payment to Trillian as illustrated by a Gauteng High Court ruling in June 2019. It is true that this was not the only reason, and that Eskom proceeded to pay Trillian after McKinsey informed them that their relationship with Trillian was over. Nonetheless, the evidence still shows that McKinsey’s conduct was central to these dubious payments:

  1. McKinsey partner, Sagar, wrote the letter knowing that no contract existed between Eskom and Trillian.
  2. A parliamentary inquiry into the matter concluded that “McKinsey worked as the de facto legitimising vehicle for Trillian’s access to Eskom work and payment”.
  3. Whistle-blower and the former CEO of Trillian, Ms Bianca Goodson made it clear in her testimony to Parliament that McKinsey never expected Trillian to actually do any work to get paid. She states that McKinsey senior partners told her to “just take your 30% and go”. The parliamentary report attributes this statement to Lorenz Jungling, a McKinsey partner.
  4. Due to allegations of impropriety, then Trillian chairperson Tokyo Sexwale initiated an investigation led by advocate Geoff Budlender SC into the nature of the contract or agreements between Eskom, McKinsey and Trillian. Both Trillian and McKinsey declined to co-operate fully with Budlender’s investigation. Crucially, McKinsey repeatedly falsely denied working with Trillian.
  5. The report compiled by Budlender also confirms that Eric Wood used Vikas Sagar’s letter to justify Eskom paying Trillian R565-million, in the absence of any contract.
  6. The whistle-blower Bianca Goodson also provided documentary proof that, for the three months that she was the CEO of Trillian Management Consulting (TMC), she engaged extensively with McKinsey on the Eskom and Trillian contract.
  7. It was only after the release of Budlender’s public findings that McKinsey began divulging the extent of their dealings with Trillian, by which time Sagar had left McKinsey.
  8. McKinsey entered into a contract with Trillian before they had completed the requisite beneficial ownership “due diligence” checks. Despite this, “work” between these two companies commenced in September 2015 and continued until March 2016.

Thus, by the time McKinsey terminated its relationship with Trillian, Trillian had already been paid more than half a billion rand for work they had not performed. The nature of this “work” or consultancy, and why McKinsey was also paid R1-billion (including an over R90-million interest fee), is still unclear.

Following the Gauteng High Court judgment, between Eskom, McKinsey and Trillian, McKinsey agreed to return R902-million to Eskom. It later paid back nearly R100-million more in interest on that sum. McKinsey’s new senior partner, Kevin Sneader, also apologised for its relationship with Trillian, saying McKinsey was “not careful enough about who we associated with”. He added that “we are embarrassed by these failings, and we apologise to the people of South Africa, our clients, our colleagues and our alumni, who rightly expect more of our firm”.

Such apologies ring hollow in the absence of hard accountability. Neither Sagar nor any other McKinsey partner has faced proper accountability for their role in the calamities at Eskom and Transnet. While Sagar left the firm with his full benefits in place, Weiss was allegedly sanctioned, though McKinsey declined to say what this sanction was.

Saudi Arabia

Such an ethos reflects McKinsey’s global strategy. In its February 2020 letter to Open Secrets, McKinsey also challenged the issue of a document prepared by McKinsey which had been used by Saudi Arabia to track dissidents, following the murder of Washington Post journalist Jamal Khashoggi. The New York Times article we cited had since posted a retraction that the document was only meant for McKinsey’s internal use, not the Saudi authorities. McKinsey however, has yet to reveal how this document was shared with its Saudi clients. We have thus written to ask that they provide us the unredacted copy of the report of the internal investigation they said they would be undertaking and reveal how an internal McKinsey document was used to facilitate human rights abuses.

A threat to democracy

The increasingly prominent role of unaccountable management consultants in decisions with massive public impact speaks to a fundamental risk to democracy. The New York Times coverage of McKinsey’s role in corruption in South Africa noted that the role of consultants in these spheres “underscores the risks that arise as governments increasingly turn over responsibilities to consultants who operate mostly in secret, with little or no public accountability”.

It is important to challenge the management consultancy doctrine of no credit and no blame. This veil of secrecy allows those motivated by profit over principle to have deleterious effects on democracy. In this instance, South Africans were the victims of an unaccountable McKinsey & Company.

Open Secrets has called on the State Capture Inquiry to summon McKinsey along with each bank, accounting firm, consultancy and legal professional implicated in State Capture to publicly answer, at minimum, the following questions:

  1. Were they knowing participants in the illicit and illegal activities in question?
  2. If not, did they satisfy the duties required by the law and their professions to stop becoming unwitting accomplices to criminal activity?
  3. Why did they not identify the obviously suspicious nature of many of the transactions sooner, and if they did, why did they not act to stop them sooner?
  4. Do they acknowledge that a reasonable and responsible professional in their position should have done more to identify the criminal intentions behind many of the transactions and deals that they facilitated?
  5. How much have they profited from these transactions, and how much of this illicit gain has been repaid, if any?
  6. What punitive actions have they taken against individual executives and employees identified as being complicit in illegal or unethical activity? Further, what structural reforms have they enacted at their firms to prevent similar conduct in the future? DM

Open Secrets is a non-profit organisation which exposes and builds accountability for private-sector economic crimes through investigative research, advocacy and the law. Tip-offs for Open Secrets may be submitted here.

Previous articles in the Unaccountable series are: 

Unaccountable 00001: Dame Margaret Hodge MP — a very British apartheid profiteer; Unaccountable 00002: Liberty — Profit over Pensioners

Unaccountable 00003: Dube Tshidi & The FSCA: Captured Regulator?

Unaccountable 00004: Rheinmetall Denel Munition: Murder and mayhem in Yemen; 

Unaccountable 00005:National Conventional Arms Control Committee: handmaiden to human rights abuse?

Unaccountable 00006: Nedbank and the Bank of Baroda: Banking on State Capture

Unaccountable 00007: HSBC — The World’s Oldest Cartel;

Unaccountable 00008: FNB and Standard Bank- Estina’s Banks.

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