ESKOM implies in court papers that its own employees may have stolen McKinsey’s ideas and offered them to Deloitte, which then charged Eskom inflated fees for their implementation. Of course, this is not to say McKinsey might be a victim of corruption. Quite the contrary. It might just be a case of there being no honour among thieves — the scammers being scammed.
In contravention of its own processes, electricity supplier Eskom paid a unit of Deloitte just under R60 million (US$4,1 million) for only three weeks of work three years ago, after having awarded the contracts illegally. This is Eskom’s version in a claim to recover R207 million ( US$ 14,1 million) from Deloitte Consulting, a unit of the Big Four auditing firm, for work of dubious value done on two projects for the electricity producer.
Deloitte denies any wrongdoing and is defending the matter at the high court. While the corruption claims have nothing to do with Deloitte’s audit function, it is one of many scandals the Big Four audit firm is having to navigate and may further erode its credibility if the charges stick.
In a contract that mirrors two other cases in which Eskom has already tasted victory and recovered some money from international consultancy McKinsey & Co, the utility wants the high court to set aside and declare the Deloitte “CFO Transition Laboratory” and the two Task Order contracts of June and September 2016 unlawful and unconstitutional. The Eskom affidavit is deposed and signed by the interim chief executive and chairman Jabu Mabuza.
This makes Deloitte the second multinational firm to be accused of corruption involving the South African public sector and dragged to court by Eskom. In 2018, under pressure from the media and the public, Eskom hauled McKinsey to court to recover R1,6 billion (US$109 million) it had paid to the management consultancy and its partner Trillian Capital Management for consultancy work that the public utility admitted produced no value.
Trillian was McKinsey’s local supplier development partner and was paid just less than R600 million (US$40,9 million) by Eskom despite it having no contract with the company, then majority-owned by Salim Essa, who was known as a Gupta family business ally.
In the face of the court case, and after civil society outfit Corruption Watch laid charges of fraud and corruption against McKinsey in New York, the financial and management consultancy paid back R1 billion (US$68,2 million) plus interest in an out-of-court settlement with Eskom. It also publicly apologised for the scandal.
Trillian denied any wrongdoing and defended Eskom’s claim in the high court. In June 2019 the Gauteng high court declared the contract illegal and ordered Trillian to repay its portion of just under R600 million (US$40,9 million). On October 1 2019 a full bench of the same court dismissed Trillian’s bid to appeal against the June judgment. Trillian has not yet paid the money to Eskom.
In both the Deloitte and the McKinsey and Trillian corruption scandals, Eskom’s former chief financial officer Anoj Singh, among other employees of the utility, played a central role. He resigned under a cloud in January 2018, after eight months of suspension.
But as the old adage goes, there is no honour amongst crooks — Eskom has drafted McKinsey on to its side in the case. Eskom seeks no order against McKinsey, which is the fourth respondent in the claim against Deloitte.
Says the utility: “It (McKinsey) is cited because it may wish to raise concerns about the use that Deloitte appears to have made in its proposals, of two proposals that McKinsey had sent to (Prish) Govender (of Eskom). Deloitte’s proposals appear to have some striking similarities to proposals that McKinsey had sent to Govender.”
This implies Eskom’s Govender, who resigned on 23 January 2018, shortly after the current Eskom board was installed to root out corruption at the embattled parastatal, stole McKinsey’s ideas and offered them to Deloitte, which then charged Eskom inflated fees for their implementation.
The management consultancy had itself employed underhanded tactics to win a major contract from Eskom, including partnering with the shady Trillian to win the contract. The two entities had worked together at another state-owned entity, Transnet, where they also extracted an estimated R3 billion ( US$204,5 million) in fees for work of dubious value.
If Eskom succeeds in declaring the Deloitte Consulting contracts corrupt, it would add to the many scandals Deloitte’s audit unit has been navigating over the past three years — the biggest of which is the massive accounting fraud that has rocked multinational furniture retailer Steinhoff since the resignation of its chief executive Markus Jooste.
Earlier this year, and just like Steinhoff, sugar producer Tongaat Hulett launched a forensic audit after it uncovered what it said were “certain past practices” that may have inflated the company’s real performance. African Bank collapsed in 2014, accused of understating its customer debt levels and inflating financial performance.
Deloitte had for many years been auditing all three.
Let us go back to Eskom.
The utility alleges its own Anoj Singh, the disgraced former chief financial officer who admitted to paying the Gupta-linked Trillian hundreds of millions for doing no work for the utility, conspired in “off-the-record” meetings with Deloitte Consulting’s Shamal Sivasanker to rig the two contracts before they were put out to tender.
In these meetings, Sivasanker offered to Eskom employees Singh and Prish Govender proposals of services it could render to help the electricity producer meet its challenges. Deloitte also told them what it would charge for the services, according to Eskom’s affidavit before the court.
Eskom says Singh and Govender then adopted these and put them out as Eskom’s tender for services. Deloitte then tendered to provide the services.
Singh and Govender are cited as respondents number two and three after Deloitte. Eskom also alleges it derived no value from the work, but that only Singh personally derived some benefit from one of the contracts.
“On account of the price that Deloitte had quoted in its respective bids, in terms of the PPPFA (Preferential Procurement Policy Framework Act) regulations it would have been ranked last. But price was designedly not factored into the assessments that were undertaken,” says Eskom.
This was a deliberate “gross impropriety,” done in order for Eskom to award the tender to Deloitte, which happened on September 29 2016. Exactly three weeks after the tender was awarded, Deloitte submitted two invoices totalling R58,8 million (US$4 million) to Eskom.
These were paid the same day, according to Eskom’s claim in court. Eskom’s policy is to pay out suppliers 30 days after it received an invoice.
Of the two contracts, Deloitte charged Eskom R79 million (US$5,4 million) and R88,8 million (US$6,1 million).
For the first contract Eskom says two other companies had offered to perform the same job for much less; one for just less than R16 million (US$1,1 million) while another would have been satisfied with just more than R9 million ( US$613 000).
Three other bidders had offered to perform the second contract for R14,59 million (US$993 000), R13,25 million (US$902 000) and R6,59 million (US$449 000) respectively.
These “off-the-record” briefings by Deloitte, and the actions of Eskom officials Anoj Singh and Prish Govender, constituted “gross impropriety” and subverted the constitutional requirement for fairness, transparency and competitiveness of the tender process, rendering the awarding of the contracts to Deloitte unconstitutional, says Eskom.
The procurement regulations under which Eskom operates also require it to implement procurement policies that serve to advance previously disadvantaged (black) groups, which was ignored in the contracts in question.
Shortly after the R58,8 million (US$4 million) Deloitte invoice was paid, Deloitte submitted another proposal to Eskom, which resulted in Eskom modifying its existing contracts to increase the amount it would pay Deloitte by a further R30 million (US$2 million).
Eskom seeks relief in the high court in that Deloitte must be ordered to pay back the R207 million (US$14 million) it was paid as a result of these contracts.
If it opposes the court review, Eskom wants the court to impose a punitive costs order against all the three defendants, including Singh and Govender.
Deloitte denies any wrongdoing and has welcomed the court process where it says it will oppose the matter and provide the court with its own version.
Deloitte Africa chief executive Lwazi Bam told Talk Radio 702 on Tuesday night that there was nothing sinister about “off-the-record” between his colleagues and Eskom officials.
“These were briefings to Eskom officials to show them what services we can offer,” Bam told radio presenter Bruce Whitfield. — Business Maverick.