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- Global consulting firm McKinsey will pay approximately R650 million in consulting fees earned at Transnet and SAA, the Zondo commission says.
- McKinsey’s offer to return the money follows its 2017 decision to return R1 billion in consulting fees earned at Eskom.
- The commission has urged all companies that profited from corrupt contracts to return any fees they have earned, whether they were part of the corruption or not.
Global consulting giant McKinsey is expected to pay roughly R650 million in Transnet and SAA contracts after admitting, for the second time, that it was swept up in state capture.
Today, Zondo’s commission on the state capture issued a statement confirming that it “recently entered into discussions with McKinsey” to return the millions in consulting fees it earned.
“McKinsey has agreed to reimburse all fees paid for work it performed on the Transnet and SAA contracts in conjunction with the Regiments. The amount covered by McKinsey’s commitment has yet to be fixed with Transnet and SAA, but it is likely that 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’s global boss, Kevin Sneader, personally apologized to the South Africans.
“I am very sorry, personally and on behalf of McKinsey & Company, that we have had something to do with any of the problems related to the state capture,” he told journalists and members of civil society in a speech in July 2018. .
However, Sneader would not admit that a similar pattern had occurred at Transnet and SAA, where McKinsey worked alongside Gupta-linked Regiments Capital since 2012.
Today, however, the commission confirmed that McKinsey now accepts that its consulting contracts with these two state entities were also tainted.
His statement read: “In the course of his engagements with McKinsey … the Commission showed McKinsey certain evidence relevant to his contracts in conjunction with the Transnet Regiments and SAA.
“This evidence suggested irregularities in the McKinsey contracts in conjunction with the Transnet Regiments and SAA, but did not implicate any current McKinsey employees or partners in corruption or wrongdoing in connection with these contracts.”
It’s unclear what this new evidence is, but three McKinsey witnesses are expected to testify in commission starting tomorrow.
McKinsey’s new mea culpa It appears to follow some of the outlines of previous amaBhungane reports that raised red flags on the consulting firm’s work for the two state-owned companies alongside the regiments.
McKinsey agreed to partner with Regiments in 2012 to bid to develop a “results management office” at Transnet; the fees would be split 70:30 in favor of McKinsey.
An amaBhungane investigation in 2018 showed that shortly before the contract was awarded, the regiments signed a 12-page “cooperation agreement” with Gateway Limited, a shadowy mailbox company in the UAE that was controlled by the Guptas. In agreement, the Regiments agreed to pay 35 percent of their share of the fees to Gateway. []
This pattern, of regiments paying a portion of their fees out the back door to mailbox companies controlled by the Guptas or their business partner Salim Essa, was repeated with every new contract McKinsey and the regiments received at Transnet.
Most of the consulting work was aimed at increasing traffic on Transnet’s rail network to meet the ambitious targets set by Transnet’s growth strategy. Ironically, it was McKinsey who developed the projections for the rail operator’s “market demand strategy” in the first place. These projections turned out to be overly optimistic for a long period, but were used to justify Transnet’s acquisition of 1,064 new locomotives, another contract that was tainted by corruption.
Despite this, McKinsey and the Regiments earned a total of R2 billion in consulting fees from Transnet between 2012 and 2017. About half went to the Regiments, but up to 60 percent of that figure went to the Guptas and Essa.
It is not yet clear how McKinsey reached the R650 million figure for the work he did together with the Regiments at Transnet and SAA; according to amaBhungane calculations, McKinsey earned at least R900 million from projects carried out with Regiments on Transnet alone.
McKinsey has maintained that he had no idea that the Regiments shared their share of the fees with the state capture captains.
However, the commission made clear that it expects all companies that benefited from corrupt contracts, whether they were aware of the corruption or not, to return the fees they earned.
‘Responsible corporate citizens’
“The Commission expects that companies that do business with the State (including State-owned companies) make it clear that they will not retain the proceeds of contracts that are contaminated by corruption, even if that corruption was the product of processes in which they were not involved. involved, “he declared today. read.
“The Commission urges other companies to follow [McKinsey’s] lead and do the same in all cases where the evidence shows that they have benefited from contracts tainted by corruption, even if they were not part of that corruption.
“The Commission’s procedures are replete with examples that should prompt other multinational and national companies to follow McKinsey’s example. The Commission will be watching closely to see which of these companies do so and which choose not to behave as responsible corporate citizens. . “
There are still unanswered questions about what certain McKinsey employees knew or chose not to see. This practice of looking away, also known as willful blindness, is a crime under the United States’ Foreign Corrupt Practices Act. McKinsey is based in the US and is subject to the law.
In 2017, the civil society group Corruption Watch filed a complaint with the US Department of Justice, asking it to investigate McKinsey’s work in South Africa. The US authorities refuse on principle to confirm such investigations.
McKinsey’s proposed deal also comes after the commission recently questioned former SAA treasurer Phetolo Ramosebudi about suspicious payments he received from the Regiments. Ramosebudi did not respond to these questions and chose not to incriminate himself.
The evidence
The evidence, which was exposed in another 2018 amaBhungane investigation, shows that Ramosebudi leaked confidential information to the Regiments in 2013, while McKinsey and the Regiments were jointly bidding for an SAA contract. The leaked information included prices from rival bidders, KPMG and the Boston Consulting Group.
The SAA contract, which was eventually awarded to McKinsey and the Regiments, was a test of the highly controversial “100% at risk” rate structure that would later be deployed at Eskom.
In terms of the contract, McKinsey and the Regiments would not be paid by the hour, but could claim 7% of the savings they allegedly 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 fees.
Controversially, the contracts also allowed consultants to claim 80% of their fees if their proposals were approved but never implemented.
The documents show that many of the high-value projects come from cost cutting in Ramosebudi’s own department, SAA’s treasury.
SAA eventually rejected the McKinsey and Regiments bill for the work at risk and agreed to agree to a lower rate.
At the time, a McKinsey spokesperson told us: “The joint offering between McKinsey and the Regiments qualified on both technical and commercial requirements. As is the case in some risk-based contracts where the capped fee is based on measures of Success, McKinsey’s return was less than what it invested. “
In 2015, Ramosebudi left SAA and joined Transnet as treasurer where he allegedly played a key role in facilitating questionable payments to the Regiments.
Most of the evidence against Ramosebudi and the Regiments has been in the public domain since at least 2018, so it is unclear why McKinsey decided to act now.
McKinsey works as a partnership, distributing all profits to partners at the end of each year. To announce today’s deal, McKinsey’s global executives would have had to convince partners around the world that they were interested in giving up tens of millions of dollars in fees.
McKinsey’s proposed deal comes less than a week after McKinsey apologized for working with Purdue Pharma, makers of OxyContin, a prescription drug blamed for fueling 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 partially state-owned locomotive maker, has rejected allegations, backed by ample evidence, that it paid bribes to the Guptas and Essa to win contracts from Transnet. Despite their denials, both the Reserve Bank and Sars have frozen CRRC’s local bank accounts to prevent it from taking money out of the country.
Update: Wednesday night, Transnet issued a statement saying it did not agree to accept the R650 million offered by McKinsey as a complete and final deal. “With respect to the contracts associated with Regiments Capital, the fee paid to McKinsey was a total of 688 million rand. In addition, according to Transnet’s calculation, the cost of interest related to these payments is close to 558 million rand. rand. The amount owed to Transnet, therefore, is just over 1.2 billion rand, and that is what we continue to insist on must be fully repaid, “said Transnet.
