Global consulting giant McKinsey will pay back roughly R650-million on Transnet and SAA contracts after admitting, for a second time, that it was swept up in state capture.
Today, the Zondo commission into state capture released a statement confirming that it “recently initiated discussions with McKinsey” to return the millions in consulting fees it earned.
“McKinsey has undertaken to repay all of the fees paid to it for work it performed on the Transnet and SAA contracts alongside Regiments. The amount covered by McKinsey’s undertaking has not yet been fixed with Transnet and SAA, but is likely to be around R650-million,” the commission noted.
In 2017, McKinsey agreed to return more than R1-billion in consulting fees it received from Eskom. The following year, McKinsey global boss Kevin Sneader apologised in person to South Africans.
“I am very sorry personally and on behalf of McKinsey & Company for the fact that we have had anything to do with any of the issues surrounding State Capture,” he told journalists and members of civil society in a July 2018 speech.
Sneader did not, however, concede that a similar pattern had played out at Transnet and SAA, where McKinsey worked alongside Gupta-linked Regiments Capital since 2012.
Today, however, the commission confirmed that McKinsey now accepts its consulting contracts with these two state-owned entities were also tainted.
Its statement said, “In the course of its engagements with McKinsey … the Commission showed McKinsey certain evidence relevant to its contracts alongside Regiments at Transnet and SAA.
“This evidence suggested irregularities in the contracts of McKinsey alongside Regiments at Transnet and SAA but did not implicate any current employees or partners of McKinsey in any corruption or impropriety in relation to these contracts.”
It is not clear what this new evidence is but three McKinsey witnesses are expected to testify at the commission, starting tomorrow.
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McKinsey’s new mea culpa appears to follow some of the contours of earlier amaBhungane reports that raised red flags about the consulting firm’s work for the two state-owned companies alongside Regiments.
McKinsey agreed to partner with Regiments in 2012 to bid for a tender to develop a “results management office” at Transnet – the fees would be split 70:30 in McKinsey’s favour.
An amaBhungane investigation in 2018 showed that shortly before the contract was awarded, Regiments signed a 12-page “co-operation agreement” with Gateway Limited, an obscure letterbox company in the United Arab Emirates that was controlled by the Guptas. In terms of the agreement, Regiments agreed to on-pay 35 percent of its portion of the fees to Gateway.
This pattern – of Regiments paying a portion of its fees out the back door to letterbox companies controlled by the Guptas or their business partner Salim Essa – was repeated with each new contract that McKinsey and Regiments received at Transnet.
Most of the consulting work was aimed at increasing traffic on Transnet’s rail network in order to meet the ambition targets set by Transnet’s growth strategy. Ironically, it was McKinsey who had developed the projections for the the rail operator’s “market demand strategy” in the first place. These projections that turned out to be over-optimistic by a long stretch but were used to justify Transnet’s acquisition of 1 064 new locomotives – another contract that was tainted by corruption.
Despite this, McKinsey and Regiments went on to earn a combined R2-billion in consulting fees from Transnet between 2012 and 2017. Roughly half went to Regiments, but up to 60 percent of that figure was passed on to the Guptas and Essa.
It is not yet clear how McKinsey reached the figure of R650-million for the work that it performed alongside Regiments at Transnet and SAA – on amaBhungane’s calculations McKinsey earned at least R900-million from projects conducted with Regiments at Transnet alone. (Update: This figure is also disputed by Transnet. After this article was published, Transnet released a statement saying that it wants R1.2-billion, which includes interest, from McKinsey.)
McKinsey has maintained that it had no idea that Regiments was sharing its portion of the fees with the state capture kingpins.
The commission, however, made it clear that it expects all companies that benefitted from corrupt contracts – whether they were aware of the corruption or not – to return the fees they earned.
“The Commission expects companies doing business with the State (including SOEs) to make clear that they will not retain the proceeds of contracts that are tainted by corruption even if that corruption was the product of processes in which they were not involved,” today’s statement read.
“The Commission urges other companies to follow [McKinsey’s] lead and do the same in all cases where evidence shows that they have benefited from contracts tainted by corruption, even if they were not party to that corruption.
“The proceedings of the Commission are replete with examples which ought to move other multinational and domestic companies to follow McKinsey’s lead. The Commission will be watching closely to see which of these companies do so and which choose not to conduct themselves as responsible corporate citizens.”
There are still unanswered questions about what certain McKinsey employees knew or chose not to see. This practice of looking the other way, also known as willful blindness, is a crime under America’s Foreign Corrupt Practices Act. McKinsey is US-based and subject to the Act.
In 2017, civil society group Corruption Watch laid a complaint with the US Department of Justice, asking it to investigate McKinsey’s work in South Africa. US authorities refuse as a matter of principle to confirm such investigations.
McKinsey’s proposed settlement also comes after former SAA treasurer Phetolo Ramosebudi was recently grilled by the commission about suspicious payments he received from Regiments. Ramosebudi did not answer these questions, opting not to incriminate himself.
The evidence, which was exposed in another 2018 amaBhungane investigation, shows that Ramosebudi leaked confidential information to Regiments in 2013 while McKinsey and Regiments were jointly bidding for an SAA contract. The leaked information included pricing from rival bidders, KPMG and Boston Consulting Group.
The SAA contract, which was ultimately awarded to McKinsey and Regiments, was a trial-run for the very controversial “100% at-risk” fee structure that would later be deployed at Eskom.
In terms of the contract, McKinsey and Regiments would not be paid per hour, but could claim 7% of any savings they supposedly identified, capped at R80-million. For example: If the consultants proposed a more efficient procurement strategy that was projected to save SAA R100-million, the consultants would receive R7-million as a fee.
Controversially, the contracts also allowed the consultants to claim 80% of their fee if their proposals were approved but never implemented.
Documents show that many of the high-value projects came from cost-cutting in Ramosebudi’s own department, the SAA treasury.
SAA ultimately rejected McKinsey and Regiments’ invoice for the at-risk work and agreed to settle on a lower fee.
At the time, a McKinsey spokesperson told us: “The joint bid between McKinsey and Regiments qualified on both technical and commercial requirements. As is the case in some risk-based contracts where the capped fee is based on success measures, McKinsey’s return was less than it invested.”
In 2015, Ramosebudi left SAA and joined Transnet as treasurer where, it is alleged, he played a key role in facilitating questionable payments to Regiments.
Most of the evidence against Ramosebudi and Regiments has been in the public domain since at least 2018, so it is not clear why McKinsey chose to act now.
McKinsey works as a partnership, distributing all profits to partners at the end of every year. In order to announce today’s settlement, McKinsey global executives would have had to convince partners across the world that it was in their interests to give up tens of millions of dollars in fees.
McKinsey’s proposed settlement comes less than a week after McKinsey apologised for working with Purdue Pharma, makers of OxyContin, a prescription drug blamed for fuelling the opioid crisis in the US.
While McKinsey has and will voluntarily return the consulting fees it earned, other companies have refused.
CRRC, China’s partly state-owned locomotive manufacturer, has pushed back against allegations – backed by ample evidence – that it paid kickbacks to the Guptas and Essa to secure contracts from Transnet. Despite its denials, both the Reserve Bank and Sars have frozen CRRC’s local bank accounts to prevent it from taking the money out of the country.
Update: On Wednesday evening, Transnet released a statement saying that it has not agreed to accept the R650-million offered by McKinsey as a full and final settlement.
“In respect of contracts associated with Regiments Capital, the fee paid to McKinsey was a total of R688-million. In addition, according to Transnet’s calculation, the interest cost relating to these payments is close to R558-million. The amount owed to Transnet, therefore, is just over R1.2-billion, and that is what we continue to insist must be repaid in full,” Transnet said.
Transnet pointed out that its demand – the full fees plus interest – is no different to the settlement McKinsey offered to Eskom.