Telkom Hired Bain for Strategy Help Without Bidding Process

Telkom SA SOC Ltd., South Africa’s largest landline carrier, awarded a 91.1 million-rand ($8.6 million) advisory contract to Bain & Co. last year without following an open bidding process, according to a document seen by Bloomberg News.

The March 24 letter, a response by Telkom Deputy Information Officer Anton Klopper to a request under South Africa’s Promotion of Access to Information Act, showed that there was no record of a published or archived competitive process that led to the selection of Bain, the Boston-based management consulting firm.

Companies that count South Africa’s government as a shareholder should procure goods and services in a process “that is fair, transparent, equitable, competitive and cost effective” to comply with the Public Finance Management Act, according to Claire Barclay, a Johannesburg-based lawyer at DLA Cliffe Dekker Hofmeyr. Telkom, about 40 percent owned by the state, would fall under that category, she said.

Pynee Chetty, a Telkom spokesman, declined to comment on contractual arrangements with the company’s suppliers. Cheryl Krauss, a spokeswoman for Bain in New York, didn’t respond to calls and e-mails seeking comment.

Shrinking Demand

Chief Executive Officer Sipho Maseko hired Bain to advise on Telkom’s broadband and mobile strategy as he sought to stem years of sliding sales amid shrinking demand for landline services. Bain was picked within days of the CEO’s arrival at Telkom on April 1, 2013, he told Bloomberg News in an interview in Johannesburg last December.

Maseko canceled an engagement to speak to business people at the Rand Club in Johannesburg tonight to attend a meeting with Chairman Jabu Mabuza, according to Chetty. Maseko wasn’t available to comment for the story. Klopper declined to comment on the letter.

Telkom belongs to “Schedule 2” public entities alongside other partially or fully state-owned companies such as South African Airways and electricity provider Eskom Holdings SOC Ltd. Schedule 2 companies are obliged to comply with the Public Finance Management Act when awarding tenders, according to Barclay, who hasn’t worked for Telkom or acted in any dispute against the phone carrier.

The Auditor-General, an independent state institution, is responsible for auditing government departments and public entities, Barclay said. Telkom’s board is responsible for making sure that the company complies with the Act, she said.

‘Materially Prejudiced’

“The fact that Telkom is the only listed company on the JSE which is listed in Schedule 2 to the PFMA, unfairly distinguishes Telkom from other public listed companies and materially prejudices its ability to compete for capital and business in the open market,” Chetty said in an e-mailed response to questions. The JSE is Johannesburg’s main bourse.

Telkom shares rose 0.8 percent to 49.72 rand at 3:20 p.m. in Johannesburg. The stock has gained 78 percent this year, giving the carrier a market value of about $2.4 billion.

Maseko, 45, regularly visited Bain’s Johannesburg offices in the 10-month period between leaving his previous employer Vodacom Group Ltd. and joining Pretoria-based Telkom, the CEO said in the interview last December. The CEO said he also had meetings with McKinsey & Co., Boston Consulting Group Inc., Accenture Plc and Delta Partners LLC.

Maseko didn’t seek formal proposals from other consultancy firms, according to people with knowledge of the matter. They asked not to be named because the deliberations are private.

“Single sourcing will only be justified if practically no one else can perform a service except the appointed contractor. Otherwise, the constitutional requirement is clear on competitiveness,” Barclay said by phone.

Recent tenders Telkom have conducted include contracts for video-on-demand and audit services, according to the company’s website.

(An earlier version of this story incorrectly described the Auditor-General as an agent under the National Treasury.)

Before it's here, it's on the Bloomberg Terminal.