Eskom is rotten to the core

So Eskom has at last written to global management consultancy McKinsey and its Gupta-linked partner Trillian to demand that they pay back the money. Eskom paid the consultancies more than R1.6bn in “risk-based” fees for just six months’ work on a contract that, it is now crystal-clear, should never have been signed.

It was unlawful, because Eskom had not sought or obtained permission from the Treasury for this deviation from the rules on fee calculations for consultants. There is evidence to suggest the contract, and the payments, were also fraudulent.

Eskom has taken more than two months to deliver the letter of demand, which was drafted by law firm Bowmans after its investigation of the Eskom/McKinsey/Trillian saga.

Eskom’s auditors qualified its last set of annual financial statements because of dodgy procurement. If Eskom cannot get the money back from McKinsey and Trillian, it faces another severely qualified audit report, which will do further damage to Eskom’s ability to fund itself.

But the matter cannot end there. The Bowmans report found evidence of possible criminal wrongdoing. The letter of demand informs McKinsey and Trillian of criminal proceedings in due course “against implicated parties”.

If SA had halfway decent law-enforcement authorities, they would already have launched criminal proceedings — against those responsible at Trillian and McKinsey but also, crucially, at Eskom. At least seven top Eskom executives have been implicated including (now suspended) acting CEO Matshela Koko and chief financial officer Anoj Singh. They must be held to account and charged, and if they are guilty, they too should be paying back money. McKinsey has tried very hard to stay under the radar, but its exotic billing methods have now, it seems, been outed for what they are and the firm owes its clients and the public some answers, in SA and internationally.

The consultancy’s reputation and global standing may now be just as much at risk as those of audit firm KPMG, and appropriately so. When a consultancy charges fees based on its success in achieving savings for the client, it’s no doubt far too easy to specify the measures of success in ways that ensure rich pickings for the consultants, in this case including Trillian, which claimed to be McKinsey’s black-empowerment supplier but was neither black nor legally a supplier.

Legalities apart, it’s hard to see where Eskom made any of the savings that supposedly justified the enormous successbased fees that it paid McKinsey and Trillian.

This is a power utility that has applied to its regulator, the National Energy Regulator (Nersa), for a tariff increase of almost 20% for the coming year, to recover its costs. The regulatory process requires that Eskom show these costs have been efficiently incurred, but one effect of the McKinsey scandal is surely to put question marks over all the costs and the supposed efficiencies that Eskom has included in its application. Nersa should ask Eskom some very tough questions and demand transparency on every line.

For SA, meanwhile, the endless round of musical chairs playing out at Eskom is becoming ever more disturbing. That’s especially so as SA goes into summer, when Eskom does most of its maintenance and has to manage the power system with great care to ensure that the lights stay on.

Managing a power system is a highly technical business requiring formidable skill and experience. It is not something for a series of ever more junior “rotating” CEOs to play with.

SA’s economy depends on a power utility that has been through half-a-dozen CEOs in the past three years as it has gone from crisis to crisis. Ever more evidence has emerged suggesting it is rotten to the core.

We should be afraid, very afraid.

MCKINSEY’S REPUTATION AND GLOBAL STANDING MAY BE JUST AS MUCH AT RISK AS THOSE OF KPMG