Electricity pylons are seen near the cooling towers of a power station owned by state power utility Eskom, near Middelburg, South Africa, September 8, 2015. Consulting giant McKinsey has been widely criticized for taking the huge payment from Eskom at a time when the company was known to have links to the controversial Gupta brothers.Siphiwe Sibeko/Reuters
In the latest blow to consulting giant McKinsey and Co. in a spiralling political scandal, South Africa's electricity monopoly has announced that it will ask McKinsey to pay back $78-million (U.S.) in "unlawful" payments.
McKinsey has been widely criticized for taking the huge payment from the state-owned electricity company, Eskom, at a time when Eskom was known to have links to the controversial Gupta brothers, the central figures in a South African corruption scandal.
In its contracts for Eskom in 2015 and 2016, McKinsey worked with a smaller local company, Trillian Capital, which was controlled by a close associate of the Gupta family. The Guptas are business partners with President Jacob Zuma's son Duduzane Zuma, and investigations have found strong evidence of their enormous influence over the Zuma government.
The vast size of the payment to McKinsey has sparked an uproar in South Africa. A group of protesters demonstrated in the street outside McKinsey's office in Johannesburg on Thursday, accusing it of participating in government corruption.
Eskom announced on Thursday that it is seeking the equivalent of $78-million from McKinsey and $43-million from Trillian, after paying those amounts to the two companies over the past two years.
"The interim findings from Eskom investigations, into the circumstances surrounding payments made to both the companies, point to certain decisions by Eskom, and resultant payments, as being unlawful," the power company said.
It said it has a legal obligation to "set aside these unlawful decisions" and so it has written to McKinsey and Trillian to "request their co-operation" in returning the money.
"It is in the public interest to do everything we can as Eskom to claw back all the fees which were unlawfully paid, while expediting the disciplinary processes currently under way."
South African media reported on Thursday that Eskom had received legal advice in December, 2015, warning that its payments to McKinsey would be a violation of Treasury rules because the payments would be based on a percentage of the "savings" obtained from McKinsey's work. If Eskom had followed this legal advice, its payments to McKinsey would have been much smaller. But instead it went ahead with the massive $78-million payment.
In response to questions from The Globe and Mail on Thursday, a McKinsey spokesman did not directly address Eskom's demand for the $78-million repayment, or the Eskom statement that the payment had been unlawful. He said, however, that Eskom and McKinsey had agreed to co-operate in an "independent process" to ensure that their financial arrangements were "lawful."
The McKinsey spokesman, DJ Carella, said Eskom's interim investigation had shown that there was no subcontract between McKinsey and Trillian – even though a McKinsey director had sent a letter to Eskom last year claiming that there was indeed such a subcontract.
McKinsey has now disavowed that letter and placed the director on leave. It says the letter "did not provide authorization" for Eskom to pay Trillian.
McKinsey's global managing director, Dominic Barton, is a Canadian who serves as chair of a council of economic advisers to Finance Minister Bill Morneau.