A tale of two consultants: First Bain, now McKinsey, in state capture dock

Days after Boston-based consulting firm Bain & Co was banned from tendering for public work for 10 years by National Treasury, fellow global consulting firm McKinsey faced its own reckoning with justice over state capture allegations.

For Bain, the public sector ban was punishment for the destruction it wrought at the South African Revenue Service (Sars) during the tenure of disgraced former commissioner Tom Moyane.

On Friday, it was McKinsey’s turn, with the National Prosecuting Authority (NPA) Investigating Directorate charging former director Vikas Sagar and current employee Goitseone Mangope with fraud, theft and corruption related to state capture at Transnet. Sagar has since relocated abroad.

Read:
McKinsey, ex-partner added to SA state capture case
SA joins the UK in banning Bain, citing fraud

Both Bain and McKinsey admitted past mistakes and apologised, but neither are likely to accept their punishment without a fight.

The role of consultants featured prominently in the Zondo Commission reports into state capture. It’s not hard to see how they became so entwined in the state capture story.

As trusted counsellors, they absolve senior executives of responsibility and insinuate themselves into critical decision-making processes, such as finance and operations. Think of them as your ‘organisational gynaecologist’. It doesn’t get much more intimate than this.

1 064 locomotives contract

The latest charges relate to a suspicious tender awarded to McKinsey more than a decade ago to advise Transnet in its purchase of 1 064 locomotives, which escalated in price from R38.6 billion to R54.5 billion. An escalation of this magnitude should have raised red flags, but was waved through the approvals process with apparent ease.

Investigations by law firm Mncedisi Ndlovu & Sedumedi Attorneys found Transnet had deviated from proper bidding and evaluation processes, and found lapses in the corporate governance framework established for the transaction.

Read:
Bain ‘regrets mistakes’ but disagrees with the consequences
Bain, Zuma and Moyane colluded to seize and restructure Sars

Sagar and Mangope are the latest in a long line of indicted suspects, including former Transnet CEOs Brian Molefe and Siyabonga Gama, the company’s former finance chiefs Anoj Singh and Garry Pita, and its former group treasurer Phetolo Ramosebudi.

Their private sector partners from Regiments Capital – Eric Wood, Niven Pillay and Litha Nyhonyha – are also in the dock, as are Daniel Roy of Trillian Asset Management, and alleged Gupta fixer Kuben Moodley.

Last year Transnet and the Special Investigating Unit (SIU) applied to the courts to review and set aside the four contracts that made up the infamous 1 064 locomotives deal. Slightly more than half the locomotives were subsequently delivered.

Responding to the NPA’s charges, McKinsey issued a statement saying that it had returned all fees, plus interest, earned from these projects, and that as it learned about the state capture project, it acted against those involved.

The firm says it cooperated fully with the NPA and had three senior partners testify before the Zondo Commission. It repaid R650 million to Transnet and SAA, and R1 billion to Eskom in 2018.

Read:
McKinsey agrees to pay back Transnet R688m, plus over R200m in interest
McKinsey does the right thing
McKinsey warned Eskom of risks at Gupta-linked Trillian Capital

“We remain deeply remorseful that our firm has in any way been associated with the dark era of state capture. We publicly apologised and chose to take accountable action where we made mistakes,” says McKinsey over the latest charges.

“After four years of exhaustive evidence, the [Zondo] Commission did not make any recommendations for further action against McKinsey and praised our ‘responsible corporate citizenship’.

“Given no new information has been presented since the commission, we believe pursuing McKinsey does not have merit and we will defend ourselves against any claims,” adds the consulting giant.

“The commission did reveal evidence that would suggest Mr Sagar had been untruthful with us and also found that McKinsey had no knowledge of this. Where we found issues of concern regarding Mr Sagar’s conduct, we reported them to the appropriate law enforcement authorities, including the NPA, for which he will have to account.”

McKinsey fired Sagar for breach of professional conduct and reported him to the authorities when concerns of his alleged wrongdoing came to light.

Read:
Court victory for Sars whistleblower
State capture scorecard: R500bn looted, zero assets recovered

The final Zondo report suggests Sagar was crucial to the state capture project. He was apparently a popular partner at McKinsey, which initially stood behind their man, before cutting him adrift when the extent of the Transnet wreckage became plain, and it was obvious that Sagar was positioned somewhere in the centre of it.

Sagar’s friendship with Gupta point man Salim Essa was explored in some detail in the Zondo Commission hearings, as was the fact that he had attempted to partner in several other deals related to state-owned enterprises (SOEs).

This was back in 2014, when former president Jacob Zuma was at the political helm and SOEs were magnets for well-groomed carpetbaggers with a good story to tell. State enterprises were ripe for the picking.

The Transnet locomotive deal was the main cash cow that bankrolled so much else the Guptas were involved in. Evidence heard at the Zondo enquiry shows how McKinsey agreed to appoint Regiments as its supplier development partner, subject to Regiments agreeing to share 30% (later increased to 50%) of all income received from Transnet.

Read: How ‘turnaround’ and ‘change’ became the keys to the looting of the state

More than R1 billion was laundered through various shell companies nominated by Essa and his associate, Kuben Moodley. There were no real business activities behind these shells.

Whistleblower and former CEO of Trillian, Bianca Goodson, told parliament that McKinsey never expected Trillian to actually do any work to get paid.

Wood is alleged to have established the precedent of invoicing SOEs without proper agreements being in place and for work not done.

McKinsey chose Trillian to be its BEE partner, just as it had partnered with Regiments Capital for their work at Transnet.

Though Trillian had no contract with Eskom, it was paid R700 million from Eskom alone.

It was then that Trillian chair Tokyo Sexwale, alarmed by allegations of impropriety at the company, brought in Advocate Geoff Budlender to investigate contracts involving Trillian, McKinsey and Eskom.

As outlined in the Open Secrets report The Enablers, McKinsey initially denied any relationship with Trillian, despite considerable evidence to the contrary.

Budlender issued his final report with these words: “I have to say that I find this inexplicable, particularly having regard to the fact that McKinsey presents itself as an international leader in management consulting, and given the widespread public interest in this matter.

“It is difficult to avoid the conclusion that the ultimate McKinsey response was an attempt to avoid dealing with a situation which appears to be embarrassing to the company.

“In my opinion, a refusal to provide the truth ought to be even more embarrassing [than] the manner in which hundreds of millions of rands were siphoned from the state-owned rail, ports and logistics company.”

Read: Zero convictions, nine years after the Gupta Waterkloof landing

The final Zondo report implicates McKinsey’s Sagar in corrupt activities at both Transnet and Eskom. He provided ‘research support’ and ‘supplemented course work using company resources’ while former Transnet CEO Gama was enrolled in the Trium global executive MBA programme. That support cost McKinsey R100 000 on behalf of Gama.

In April 2014, Sagar addressed a letter to then Transnet CFO Anoj Singh, informing him that McKinsey had ceded its rights and delegated its obligations under the advisory services contract between the two companies to an outside firm by the name of Regiments.

Zondo found that McKinsey had no rights to cede to Regiments, which now became the principal contractor on a large locomotive financing tender without being subject to any verification, evaluation or proper assessment.

Investigating Directorate spokesperson Sindisiwe Seboka last week reiterated that Regiments Capital was irregularly onboarded and ended up benefitting from the irregular appointment by Transnet in respect of the locomotive contract.

The value of the Transnet contract and scope of services required from Trillian was escalated, eventually ending up at R305 million. This was the fee for sourcing roughly R30 billion in finance from China Development Bank and other sources.

Quite apart from the reputational damage to Bain and McKinsey, the charges against these two giants of international consulting have done immeasurable harm to consultants not implicated in any wrongdoing.

It is a long climb back to respectability from here.