US management experts advised Eskom to stop paying McKinsey

A US risk management firm advised South Africa’s state energy utility last year to withhold tens of millions of rands in payments for advice from McKinsey, because the global consultancy’s very unusual payment model allowed it to charge fees in excess of market rates.

Despite the warning by US management consultancy Oliver Wyman, Eskom continued to make payments to McKinsey, two sources with direct knowledge of the matter said.

Privately held McKinsey, the world’s largest management consultancy, is under parliamentary investigation in South Africa for fraud over a R1.7-billion contract to advise energy utility Eskom from late-2015 until July last year.

A third of the fees were paid by Eskom to Trillian, controlled at the time by associates of the Gupta family.

McKinsey said it was cooperating with the authorities and had ordered its own investigation into the operations of its South African office.

The Guptas deny wrongdoing. The full payment terms of McKinsey’s contract with Eskom have not previously been made public.

They were examined last year by the Oliver Wyman, which was commissioned by Eskom to investigate the deal.

Of the outstanding balance, Oliver Wyman had advised Eskom to withhold payment of 45%, nearly R407-million, and subject the rest to a legal review to see if it could be reduced.

Two sources said Eskom made the remaining payments to McKinsey and Trillian for the full amount anyway, despite Oliver Wyman’s advice to withhold the funds.

McKinsey was hired by Eskom to carry out a turnaround plan, which involved saving the utility money through improving efficiencies.

Under the terms of the deal, McKinsey worked 100% at risk, meaning it was not paid a flat fee but received a percentage of savings Eskom achieved as a result of its advice.

Oliver Wyman had criticised this model, saying it resulted in Eskom paying far more for work than industry norms.