McKinsey, the global consultancy that had to refund Eskom almost R1bn in fees, will continue to pursue state-sector work in SA using the same controversial pricing model that landed it in hot water.
The firm and its local Gupta-linked partner, Trillian, were paid R1.6bn from a 2016 contract that was invalid as it had not been approved by Treasury.
McKinsey joined a string of household names including audit firm KPMG, software giant SAP and public relations firm Bell Pottinger, whose reputations were battered after being embroiled in state-capture scandals involving the Guptas.
McKinsey reached an agreement with Eskom and the asset forfeiture unit on Friday on returning the fees, but has denied any criminal wrongdoing. On Monday McKinsey’s new global head, Kevin Sneader, conceded that the firm had overcharged Eskom with fees that were "weighted towards recovering our investment" at a time when the utility "was on a financial cliff edge".
McKinsey and Trillian originally stood to earn R9.4bn from a three-year advisory contract concluded with Eskom in January 2016 against the power utility’s own legal advice.
Sneader was speaking at a panel discussion hosted by the Gordon Institute of Business Science. He apologised for having had "anything to do with any of the issues surrounding state capture" and its "horrible effect on SA, its economy and its people".
Eskom said in a statement on Monday it had received the firm’s payment of R902m, and that it and the prosecuting authority would pursue Trillian to recover fees paid to it.
Trillian, which was majority owned by Gupta associate Salim Essa at the time, has denied any wrongdoing and insists the R595m it was paid was for work done despite having no contract with either Eskom or McKinsey.
McKinsey and Trillian originally stood to earn R9.4bn from a three-year advisory contract concluded with Eskom in January 2016 against the power utility’s own legal advice.
Internal memos, leaked by whistle-blowers, showed McKinsey partners Vikas Sagar and Alexander Weiss had discussed in December 2015 how the firm planned to divide up the Eskom spoils with Trillian.
McKinsey was to earn R5bn and Trillian R4.4bn.
Eskom’s fee was reduced to R1.6bn when the contract was cut short after six months because the pricing model did not have Treasury’s blessing.
These astronomical sums were only possible because Eskom concluded an at-risk contract with McKinsey, with fees calculated as a percentage of savings. Treasury rules stipulate that state entities must pay consultants fixed fees at an hourly rate. Special permission is required from the Treasury for at-risk contracts.
While conceding on Monday that McKinsey’s "commercial approach led to a fee that was too large", Sneader defended the controversial pricing model.
"Performance-based fees are far from unusual in management consulting," he said.
"They have benefits for both sides. If the client does not achieve a saving or improvement, it does not pay."
In theory, with this pricing model advisers take the risk of committing resources without a guaranteed return. In practice, it allows consultancies to earn billions in fees as a cut of savings that may never be realised.
A peer review of McKinsey’s contract with Eskom by consultancy Oliver Wyman and risk management firm Marsh raised serious questions about how the savings McKinsey and Trillian based their fees on had been calculated. The report cited instances of charging double the market rate for coal contract negotiations and cases when baselines were set that could exaggerate effects achieved.
Despite these risks, Sneader told Business Day McKinsey would continue to pursue at-risk contracts in SA, but under stricter controls. "We are not going to be massaging numbers to extract large fees. Let’s be very clear on that," he said.
"The standards will have to be higher than they were in the past and include a real recognition that there has to be clarity on what performance means."
McKinsey would introduce a cap on fees for future at-risk contracts. "Any contracts we’ll be doing her [SA], we’ll exercise a lot of caution and a lot of oversight," he said.
Sneader stressed the firm had "disciplined colleagues that have done wrong". Sagar left the firm "before our disciplinary procedure had been concluded". Asked why Weiss had kept his job, Sneader said: "On the basis of the evidence we’ve got so far, he remains a partner of our firm. That’s all I’m going to say."
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