Regarded as one of the world’s leading management consultancies – and self-described as a “trusted advisor and counsellor to many of the world’s most influential businesses and institutions” – McKinsey & Company are also plagued by allegations of corruption and the company they keep, with names likes the Guptas closely associated with them.
In a South African context, McKinsey & Company has been implicated in corruption scandals linked to State Owned Enterprises like Eskom and Transnet.
McKinsey and Eskom
The Backstory
A report by Open Secrets details that McKinsey entered into a contract with Eskom to develop an internal project management and engineering capacity.
The contract, however, was not subject to a bid procedure, as is required by basic public procurement procedures. The contract had the potential to earn McKinsey US$700 million (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, including Yermolai Solzhenitsyn and Thomas Vahlenkamp.
The Outcome
After entering into the contract, McKinsey was required to partner with a BBBEE supplier. Presented with a list of potential companies, the firm went with Trillian, a company closely associated with the controversial Gupta family. Trillian, of course, was the brainchild of one Mr Wood and Mr Essa, both having very close links to the Guptas. This closeness was what inspired them to set up Trillian to aggressively trade and by 2019 pull out at the end of former South African president Jacob Zuma’s term. After arriving in Trillian’s accounts, the Eskom money was quickly spirited off to various consultancies and shell companies. For example, on August 13, 2016, Trillian got R235million from Eskom. Within five days, R221million of that had been dispersed. On August 12, Trillian had just R8900 in that account.
The Result
Following an investigation launched by the then-chairman of Trillian, Tokyo Sexwale, McKinsey claimed that they had entered into a contract with Trillian before completing the requisite “due diligence” checks. These checks involved investigating the beneficial ownership of Trillian before entering any contract with the company.
In response to the Open Secrets report on the matter, McKinsey claimed to have returned the full amounts it received under the Turnaround Programme, with interest, to Eskom in 2018. The settlement agreement that effectuated this provides that the return of the funds was made “without any admission of liability or wrongdoing by McKinsey”. In doing so, McKinsey has repeatedly emphasised that it returned the fees, not because it engaged in any misconduct, but despite being misled, McKinsey “had no intention of benefitting from a contract that was invalid due to Eskom failing to obtain appropriate approvals and follow proper procurement procedures.”
Mckinsey and Transnet
The Backstory
McKinsey& Company was hired by another SOE, Transnet this time, to advise on the purchase of 1064 locomotives from the Chinese railways company. Bidders were requested to partner with a local, smaller BBBEE company for skills development and capacity building.
The Outcome
As per the contract, McKinsey was responsible for:
- Developing and augmenting the business case for the approval of the locomotives by the Transnet Board of Directors and Department of Public Enterprises
- Calculating the impact of wagons, locomotives infrastructure, optimisation, profitability of each sector and clear capital volume link
- Procurement and legal work, which included “Supplier Development and Localisation strategy”
- Overseeing technical and operations aspects of the 1064 business case
As with the Eskom contract, McKinsey partnered with a company associated with the Gupats, this time Regiments Capital, which already stood accused of money laundering with a number of Gupta family associated entities such as The New Age media company and the Transnet Second Defined Benefit Pension Fund.
The McKinsey/Regiments business case presented to the board of Transnet was altered (by someone who has not been identified) to inflate the value from R38 billion to R54.5 billion. The business case recommended two parcels of locomotives to provide an accelerated delivery schedule.
Werksmans law firm was appointed to investigate any wrongdoing and their report gave a damning opinion of the business case submitted, as well as the calculations supplied by Regiments to support it. In his report, Professor Wainer stated “It would not be an overstatement to describe the Regiments calculations as absurd, obviously wrong and grossly misleading.”
The Result
Multiple reports in the media detailed serious allegations of corruption by the firm. The Mail & Guardian newspaper reported that a “…new forensic treasury report shows how controversial former Transnet and Eskom Chief Financial Officer Anoj Singh enjoyed overseas trips at the expense of international consulting firm McKinsey, which scored multi-billion-rand contracts at the State Owned Entities.” The report reiterates treasury’s recommendations that Singh’s conduct with regards to McKinsey should be referred to the elite crime-fighting unit, the Hawks, for investigations under the Prevention and Combating of Corrupt Activities Act (PRECCA).
The Sunday City Press, meanwhile, reported that the forensic report in turn reported that “multinational advisory firm McKinsey paid for Singh to go on lavish international trips to Dubai, Russia, Germany and the UK, after which their contract with Transnet was massively extended.”
McKinsey would later issue a statement stating that “based on an extensive review encompassing interviews, email records and expense documents, our understanding is that McKinsey did not pay for Mr. Singh’s airfare and hotel lodgings in connection with the CFO Forum and the meetings that took place around the CFO Forum in London and elsewhere in 2012 and 2013.”
Foul play at work
In early August 2018, however, McKinsey admitted to helping Transnet Group Chief Executive Siyabonga Gama prepare a part of his thesis to obtain an MBA degree from TRIUM, a collaborative MBA programme jointly run by the NYU Stern School of Business, the London School of Economics and Political Science and HEC School of Management. Several researchers at McKinsey’s Johannesburg office were assigned to help outline and prepare Gama’s submission to a joint thesis to which he had to contribute at least two chapters.
Despite multiple earlier denials that any corrupt activities had been discovered, a McKinsey’s spokesperson said “… we believe this matter passed the threshold of reasonable suspicion that an offence may have occurred under South African law. As such, we reported it last year to relevant authorities under Section 34(1) of PRECCA.”
The end results
While McKinsey & Company has been implicated in two of the most infamous cases of State Capture in South Africa, they have not been held accountable, nor have they taken any real responsibility for the role they played. Considered the largest Management Consulting Firm in the world, that, according to a Daily Maverick report, boasted a total annual global revenue of over $10 billion in 2018. Yet, to date, they have faced no real fallout, apart from the stain these cases have left on their reputation. But is that enough?
Want to know more?
For more information on State Capture in South Africa, and the role the Guptas and others are alleged to have played, download a copy of our E-book, which along with local case studies, looks at global cases and the legacies they have left. It also presents you with all the information at hand to better detect and fight corruption within your business.
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