South Africa: Consulting firms, including McKinsey, under fire in ‘state capture’ probe

By Romain Chanson
Posted on Tuesday, 12 April 2022 08:25

Future South Africa members demonstrate outside McKinsey's offices on 5 October 2017 in Sandton © Felix Dlangamandla/Foto24/Gallo Images/Getty Images

"Let me start with a word: sorry." On 9 July 2018, the head of McKinsey came in person to ask South Africans for forgiveness. In a long, contrite speech, Kevin Sneader acknowledged the "mistakes" made by his company, which is accused of having overcharged Eskom for useless expertise. In response to the scandal, McKinsey paid out a billion rand (about $76m). But even today, the state-owned electricity company is financially strapped and its recurrent load shedding is weighing heavily on the daily lives of South Africans.

The scandal has not subsided. In the reports it has published in recent weeks, and as a heated debate has emerged in France in the run-up to the presidential election, the Zondo Commission documents an abusive use of consultancy firms. Its judges investigated the companies and public administrations that were looted under former president Jacob Zuma between 2009 and 2018.

They conclude that firms were hired “even though there were already qualified and competent personnel working in the various public enterprises”. “This redundant use of service providers allowed corruption to flourish in public enterprises,” adds the commission.

Cash machines

McKinsey figures prominently among the companies that facilitated – unknowingly, according to the investigators – the misappropriation of public funds. The multinational went hunting for tenders with two local firms: Regiments Capital and Trillian. These companies are said to have been the Gupta siblings’ cash machines.

In association with McKinsey, they won big contracts. The money was then shared and channelled to front companies that laundered it for the Guptas. The three Indian brothers are accused of having infiltrated the state’s highest echelons and misappropriating large quantities of money, with help from former president Zuma.

Together, the firms won a contract with South African Airways (SAA), the national airline that is struggling to get off the ground after years of mismanagement. The Zondo Commission says that SAA’s treasurer teamed up with Regiments Capital to secure the contract. As a result, a deal worth R12.4m was fraudulently awarded. McKinsey eventually returned this money.

Transnet was another target. The state-owned company that manages some infrastructure (ports, railways, pipelines) was subject to corrupt dealings during the Zuma era. Appointing financial advisers “formed a significant part of the racket at Transnet between 2011 and 2016,” the investigators write. They describe how “Transnet’s funds were syphoned off by paying consultancy contracts which sometimes provided little or no added value for very exaggerated rates.” Again, McKinsey agreed to return money (R870m).

Why did a world-renowned company like McKinsey partner with these dubious and inexperienced consultancy firms? “To ensure that they win major contracts,” concludes the Zondo Commission. The latter underlines the role of an insider and highlights the links that Vikas Sagar, former head of McKinsey’s local branch, has maintained with figures within the Gupta galaxy. McKinsey dismissed Sagar following an internal investigation.

Dismantling the South African tax authorities

A man working at the consulting firm Bain & Company is also heavily implicated. His former boss in South Africa, Vittorio Massone, met with Zuma 17 times between 2012 and 2014. The US multinational is accused of having subsequently participated in the dismantling of the South African tax system, once considered one of the most efficient in the world.

Bain has agreed to repay the R167m it pocketed for its contract with the South African Revenue Service (SARS) and apologised.

However, the firm rejects the findings of the Zondo Commission, which recommends conducting a thorough investigation before deciding whether or not to prosecute. “We remain convinced that we did not in any way knowingly or willingly support state capture in SARS,” Bain wrote in a statement.

Are they perhaps jealous of McKinsey’s fate? The latter is not worried about the Zondo Commission. Its investigators say that they have “no evidence to suggest that McKinsey was aware of the corrupt relationship between it and Regiments Capital.”

No punishment

The NGO Corruption Watch feels argues this is a bit of a stretch. “You don’t pay back such sums just [to show] goodwill,” says executive director Karam Singh. He says that these refunds are akin to a plea bargain, in which the accused pays to avoid going to trial. “The way McKinsey has been treated leaves us wanting more. McKinsey did not have to explain or acknowledge their actions. They stuck to their line: we didn’t know. Which is hard to believe in these circumstances.”

The New York Times, which conducted an investigation into McKinsey’s failings in South Africa, argues that at the root of these mistakes was a new corporate culture focused on access to government contracts. The same spirit can be found at Bain, which according to internal documents had identified government and state-owned enterprises as “strategic priorities”.

But McKinsey swears it will not be caught out again. “We are much more vigilant, almost paranoid,” Jean-Christophe Mieszala, a senior partner at McKinsey, told the Zondo Commission. He says his firm will no longer work for South African public companies. But has this put an end to the bad practices? Corruption Watch’s Singh does not think so. “To date, no one has been held to account.”

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