McKinsey Offers to Repay Fee Billed to South Africa's Eskom

  • U.S. consultancy to set aside fees in ring-fenced account
  • Eskom informs company that it never got consent for contract

A metal sculpture stands outside the headquarters for Eskom Holdings SOC Ltd., South Africa’s state-owned electricity utility at Megawatt Park in Sandton, near Johannesburg, South Africa, on Wednesday, Nov. 11, 2015. A plan to reform state-owned power company Eskom Holdings SOC Ltd. and bring South Africa and its economy out of the dark is starting to show results, according to Chief Executive Officer Brian Molefe.

Photographer: Waldo Swiegers/Bloomberg

McKinsey & Co. said it is willing to repay consulting fees for work done for Eskom Holdings SOC Ltd. if a court finds that the state-owned South African power utility acted illegally when making the payments.

Eskom last week said it will ask McKinsey to return 1 billion rand ($73 million) in unlawful payments and that Trillian Capital Partners refund it 564 million rand. Trillian was the so-called supply development partner of McKinsey for the Eskom work until the relationship between the two companies ended in March 2016.

“Eskom has now advised us that it believes it violated procurement regulations and its internal procedures in the formation of the contract, and that decisions it took with respect to the contract may have been taken without proper authorization,” McKinsey said in an emailed statement on Tuesday. “These requirements were solely Eskom’s responsibility. McKinsey entered into the contract and performed its work in good faith.”

Eskom is at the center of allegations that the Gupta family used their relationship with President Jacob Zuma to win lucrative contracts from state companies. The Guptas and Zuma have denied any wrongdoing. Trillian, a financial services firm, is linked to the Gupta family through business associate Salim Essa, who was its principal shareholder until he sold out in July.

“We’ve received correspondence from McKinsey and Trillian and our lawyers are dealing with the matter,” Eskom spokesman Khulu Phasiwe said by phone.

‘Substantial Value’

The contract with Eskom explicitly required the power utility to obtain the necessary approvals, and McKinsey said it was advised in February 2016 that these were obtained. Eskom now contends the contract should be declared invalid because Eskom did not receive the necessary consent, it said.

“We want this issue resolved and we have no interest in benefiting from an allegedly invalid contract,” McKinsey said. “We believe our work on the turnaround program created substantial value, helping improve operating performance by, amongst other things, increasing plant availability and reducing contractor claims on the new build program.”

The company will support a review by South Africa’s High Court of the program it conducted on behalf of Eskom. McKinsey plans to set aside the full fee earned on the turnaround program in a ring-fenced account ready to comply with the court’s decision, it said.

South Africa is ready to start a probe in contracts awarded by Eskom, Public Enterprises Minister Lynne Brown told lawmakers in Cape Town last week. McKinsey, which said in July it was reviewing documents related to work done for Eskom, has said it didn’t engage in corruption or pay bribes and that the fees it made from Eskom were in line with similar projects.

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