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Why McKinsey is under attack in South Africa

Economist 2017-10-12 20:20:04

MCKINSEY, a global management consultancy known for its discreet profile and rarefied air, is unused to the sort of tub-thumping popular revolt it is experiencing in South Africa. Such is public outrage over the Guptas, an Indian-born business dynasty accused of growing rich off their relationship with President Jacob Zuma, that a few professional-services firms linked to the family, including McKinsey—as well as SAP, a German software giant—have become targets of Twitter storms and protest banners.

Anti-corruption groups and the opposition Democratic Alliance (DA) have drawn blood in the case of Bell Pottinger, a British public-relations firm accused of orchestrating a racially divisive public-relations campaign on behalf of the Guptas. A complaint by the DA to a British PR industry association set in motion Bell Pottinger’s swift implosion in September. At KPMG, a global audit firm, eight senior executives in South Africa left in the same month because of the firm’s work for the Guptas. Such victories have fuelled the mood. On October 5th civil-society groups picketed McKinsey’s Johannesburg offices.

At the heart of the affair are allegations of “state capture” by the Guptas, who moved from India to South Africa in the 1990s and turned a computer parts business into a conglomerate with properties in media, mining and professional services. One of Mr Zuma’s sons, Duduzane, has worked for the family. A report in 2016 by South Africa’s public protector, an independent ombudsman, detailed allegations that the Guptas had meddled in cabinet appointments and used their connections to scoop lucrative government contracts (they and Mr Zuma have repeatedly denied any wrongdoing).

McKinsey did highly-paid work for Eskom, a state-owned electricity monopoly at the centre of several of the “state capture” allegations. Documents show that McKinsey worked with Trillian Capital, a local consultancy that until recently was owned by Salim Essa, a Gupta associate, as part of winning contracts from the utility.

As an international firm requiring a local partner, McKinsey had previously worked with a related company called Regiments. The consulting firm says that after Trillian emerged from Regiments in late 2015, it carried out a due diligence review and cut its ties with Trillian a few months later. McKinsey says it never entered into a formal contract with Trillian or made payments to the company, and there are letters to show that McKinsey warned Eskom about the risks of doing business with Trillian.

But that has not put a stop to questions about the relationship. A former executive of Trillian, Bianca Goodson, has alleged that Trillian acted as a gatekeeper, using Mr Essa’s connections to land contracts and then passing the work over to “internationally recognised companies” including McKinsey. The firm stands behind its work for Eskom, says Steve John, global director of communications at McKinsey. Neither the Gupta family nor any company publicly linked to the Guptas has ever been a client of the firm, he notes. It has hired a law firm, Norton Rose Fulbright, to carry out a detailed internal investigation.

It is an embarrassing situation for a group that prides itself on operating as “One Firm” across its local offices, says Tom Rodenhauser of ALM Intelligence, a market-research firm that monitors the consulting industry. McKinsey has weathered damage to its reputation before; in 2010 one of its consultants pleaded guilty to passing inside information to a New York-based hedge fund, Galleon Group. McKinsey’s close links with Enron also meant that its reputation was tarnished by the energy company’s collapse in 2001.

Politicians’ scrutiny may drag on. The DA party says it will push for the firm’s executives to appear before a parliamentary inquiry into Eskom this month. The party has also gone to the police to file a complaint of fraud and racketeering against McKinsey, and written to America’s Securities and Exchange Commission and Britain’s Serious Fraud Office (the firm had no comment about the DA’s complaints).

Public anger has also focused on the fees charged by McKinsey to Eskom, a public entity. According to a report by Eskom and G9 Forensic, an anti-corruption consulting firm, McKinsey and Trillian earned 1.6bn rand ($117m) for work done in 2015 and 2016, and expected to make another 7.8bn rand. A second review commissioned by Eskom from Oliver Wyman, another consulting firm, into its contracts with McKinsey, found a “very unusual” fee structure that resulted in costs above industry norms. On October 5th Eskom demanded that McKinsey pay back 1bn rand. (McKinsey said it would support a high court review of the contract and repay its fees if the deal were found to be illegal). Standard Bank, Africa’s biggest lender by assets, is reviewing its relationship with McKinsey. The publicity is likely to test the loyalty of many other African clients.

This article appeared in the Business section of the print edition under the headline "In the eye of the storm"