National Treasury could hardly have been more explicit: lavish consulting contracts using weird and wonderful pricing models would no longer be tolerated.<\/p>\n
For years Treasury had been trying, through memos and practice notes, to drum this into state-owned entities like Eskom \u2013 with little success.<\/p>\n
Investigative journalism takes time and money. Help us do more. Be an amaB Supporter<\/a>.<\/span><\/p>\n Just over a year ago, a damning report warned Eskom that one of these contracts \u2013 where global consulting firm McKinsey was paid \u201cat risk\u201d, meaning it would get a percentage of savings it identified \u2013 had left the power utility open to \u201cexcessive economic exposure\u201d.<\/p>\n Eskom faced a potential R2.8-billion claim for savings that might never materialise, the report warned, and was forced to settled for R1.6-billion.<\/p>\n Taking on another contract like that would be like going back for second helpings of cyanide.<\/p>\n But that is exactly what Eskom did.<\/p>\n In early 2017, Eskom signed a new \u201cat risk\u201d consulting contract with PwC, one of the world\u2019s largest auditing firms.<\/p>\n Tagging along for a potential billion-rand ride was local auditing firm Nkonki \u2013 and standing behind Nkonki, as Part 1 of this investigation showed<\/a>, was Gupta lieutenant Salim Essa. He had financed a \u201cmanagement buyout\u201d intended secretly to make him or others tied to the Guptas the main beneficial owners.<\/p>\n Nkonki is not the first company to score a major deal from a state-owned entity shortly after falling into Gupta orbit. For McKinsey, it was allegedly its partnership with Essa\u2019s consulting firm Trillian that untied Eskom\u2019s purse-strings.<\/p>\n Yet Nkonki\u2019s sudden windfall was mere coincidence, according to its chief executive, Mitesh Patel, who became the firm\u2019s new owner in the Essa-funded management buyout, at least on paper.<\/p>\n Patel, who has denied fronting for Essa or the Guptas, responded to amaBhungane\u2019s latest queries with a lengthy lawyers\u2019 letter<\/span><\/a> labelling our claims \u201cextravagant\u201d.<\/p>\n \u201cYou falsely assert a nebulous \u2018series of events<\/em>\u2019,\u201d his lawyers wrote, \u201cwhich have not been clearly spelled out by you in your biased endeavor to marry consulting contracts with management buy-out. There is no nexus between the two despite your desperate attempt to establish a nexus.\u201d<\/p>\n What follows is the series of events we laid out for Nkonki, PwC and Eskom.<\/p>\n There was nothing particularly unusual about the contracts Eskom signed with the consulting firms in July and August 2016.<\/p>\n When Eskom cancelled the controversial McKinsey contract in June 2016 Eskom executives recommended that the work be \u201credirected to other existing contracts\u201d.<\/p>\n By this stage Eskom\u2019s board had already agreed to appoint two panels of pre-approved consultants. Panel A would be the big firms like PwC, McKinsey and KPMG, while panel B would be made up of smaller local firms.<\/p>\n Each firm signed an enabling contract with Eskom but would still have to bid for specific projects.<\/p>\n The hourly fees in the enabling contract of between R550 and R2 836 were slightly higher than those allowed by Treasury, but as one consultant told amaBhungane, \u201cmost international firms would be unwilling to work with a state-owned enterprise\u201d at those rates.<\/p>\n The new contracts had a simple provision for empowerment, or \u201csupplier development\u201d: Panel A members would be required to subcontract between 15 and 25 percent to \u201cpanel B members only\u201d.<\/p>\n \u201cThis,\u201d the contracts stated, \u201cwill help to increasing the players in this industry creating more jobs and competition in the industry \u2026 [and] is aimed at empowering black owned suppliers [sic].\u201d<\/p>\n Around this time, as we reported in Part 1<\/a>, the Nkonki deal was first put on the table.<\/p>\n Although the precise genesis of the deal is disputed, it is common cause that Trillian was involved. Patel appointed it as transaction advisor on 1 September, and it ended up routing the funding on Essa\u2019s behalf. Nkonki had fallen into the Gupta orbit.<\/p>\n But if Nkonki\u2019s new connectivity was to be turned into dividends at Eskom, it had two problems: It had failed to make the cut for panel B, meaning it was not pre-qualified to partner panel A members on big consulting contracts.<\/p>\n And even if that could be turned around, it needed a panel A member to partner with.<\/p>\n Enter PwC.<\/p>\n That September, PwC submitted a bid for Eskom\u2019s \u201ccapital scrubbing\u201d project, where consultants would be asked to identify capital expenditure that could be scaled back or cancelled in order to save Eskom money.<\/p>\n Even though Nkonki was not on Eskom\u2019s panel B, PwC selected it as its supplier development partner. Aurecon was brought on board as the team\u2019s technical partner.<\/p>\n \u201c[T]o be clear both those parties were our choices\u2026 Nobody said to us you need to use them if you want to secure this work,\u201d PwC Africa\u2019s chief operating officer Fulvio Tonelli told us in an interview.<\/p>\n PwC is the world\u2019s second largest professional services company with $37.7-billion in revenue last year. Nkonki was much smaller but not an unusual choice for PwC.<\/p>\n The two firms had worked together at Transnet and SAA. And unlike Trillian, which was parachuted into the McKinsey contract without a track record<\/a>, Nkonki was known in the industry and at Eskom.<\/p>\n Still, PwC\u2019s contract required it to select a partner from panel B.<\/p>\n A day after the bids closed, Eskom\u2019s board tender committee met and agreed to add a third panel of consultants \u2013 Nkonki would be part of this panel C.<\/p>\n \u201c[T]he process for panel C appointments were well-underway, and we had understood that the panel C appointments would be finalised \u2026 imminently, so whether or not they were on the panel on the date that we submitted our first bid I can\u2019t tell you,\u201d PwC legal head Anton du Randt told us.<\/p>\n As we shall see, soon after PwC selected Nkonki as partner, Eskom started tweaking PwC\u2019s enabling contract \u2013 making the fees more lucrative and expanding its scope \u2013 while at the same time insisting that PwC\u2019s supplier development partner \u2013 Nkonki \u2013 be given a bigger cut.<\/p>\n All of this coincided with the Essa-funded takeover of Nkonki.<\/p>\n There is no evidence that PwC was aware of its partner\u2019s connection to Essa and the Guptas, and for weeks PwC has co-operated extensively with our investigation, providing several written responses and a lengthy interview.<\/p>\n But when we raised questions about Nkonki\u2019s connection to Essa, PwC pushed back:<\/p>\n \u201cUnless and until you provide further support for your insinuations, we request that you refrain from publishing any article containing allegations that PwC knowingly and intentionally conspired with a Gupta-linked individual or enterprise and\/or engineered the award of a contract on any other criteria apart from the merits of the proposal and the deep expertise of the firm. Such allegations are unequivocally rejected,\u201d Tonelli wrote to us two weeks ago.<\/p>\n Read PwC\u2019s full response here<\/a><\/span>.<\/em><\/strong><\/p><\/blockquote>\n Like every major company caught in the Gupta crossfire, PwC denied that it knowingly partnered with a Gupta-linked firm or that the lucrative contract it received from Eskom was dependent on passing back fees to a politically-connected partner.<\/p>\n Whether anyone at PwC knew about Nkonki\u2019s newfound connections remains unknown. What is striking is how many multinationals \u2013 SAP, McKinsey, Liebherr \u2013 have blindly gotten into bed with the Guptas and Essa, collecting astronomical fees in the process, only to wake up in the glare of the media spotlight.<\/p>\n PwC told us that its bid for the capital scrubbing project initially included a \u201cdual fee structure\u201d made up of \u201cfixed fees and risk-based remuneration\u201d.<\/p>\n Then over the course of a week while the bids were being adjudicated in October 2016, Eskom changed the rules.<\/p>\n PwC told us in writing that \u201cEskom\u2019s procurement division advised PwC that given cost pressures and the desire to pay for results, it wished to pursue a risk-based fee arrangement for the capital scrubbing project and asked PwC to submit a revised quote solely on that basis\u2026<\/p>\n \u201cPwC understands that this \u2026 was done as a result of Eskom’s liquidity pressure, and that [Eskom] could only afford to pay consultants for proven savings.\u201d<\/p>\n According to Eskom, \u201cthe risk-based model was selected to incentiv[ise] the service provider to achieve maximum possible savings\u201d.<\/p>\n The deadline was tight. According to PwC, Eskom made the request for a new quote on Thursday 20 October and set a deadline of Monday 24 October.<\/p>\n Over at Nkonki\u2019s Sunninghill offices, the ink was still drying on the sale agreement for Patel\u2019s management buyout, signed just days before on Monday 17 October.<\/p>\n The agreement would give Patel 81.8 percent of Nkonki \u2013 although, as we revealed in Part 1, Patel was to front largely for Essa or others tied to the Guptas.<\/p>\n Two weeks later, at the end of October, Patel received the first transfer of shares.<\/p>\n Behind the scenes, Essa must have been smiling. Nkonki, like Trillian before, was in line for lucrative \u201cat risk\u201d work at Eskom. And the loan agreement Patel had just signed to buy Nkonki\u2019s shares would ensure that 65 percent of Nkonki\u2019s profits would flow towards a Gupta-linked company.<\/p>\n In January 2017, Eskom put out the welcome mat.<\/p>\n The first project contract Eskom signed was with KPMG, another panel A member. It was required to introduce a new supply chain management operating model at Eskom. Total cost: R69.8-million \u2013 40 percent of which would go to Nkonki as supplier development partner.<\/p>\n KPMG declined comment.<\/p>\n The second and far more lucrative contract was the \u201ccapital scrubbing\u201d project with PwC.<\/p>\n But before the contract for the project could be signed, Eskom made two important changes to its enabling contract with PwC.<\/p>\n First, Eskom officially introduced the new \u201cat risk\u201d pricing model it had added during the bidding process.<\/p>\n Eskom told us the same pricing model was intended to be used with all panel A and B members, although internal Eskom documents show that PwC was the only firm that was issued with a contract.<\/p>\n The second change was that PwC would now have to subcontract at least 40 percent \u2013 up from a maximum of 25 percent before \u2013 to a supplier development partner from either panel B or panel C.<\/p>\n This meant that three months after being selected by PwC, Nkonki was finally officially eligible and in line for a bigger slice of the fees.<\/p>\n In a written response Eskom told us the decision to increase supplier development partners\u2019 cut was signed off by Eskom\u2019s board on 19 October 2016. This was just two days after the Nkonki sale agreement was signed.<\/p>\n In other words, within days of the management buyout being clinched, Eskom made two sweeping changes that would benefit Nkonki.<\/p>\n Patel\u2019s lawyers insisted this was pure coincidence: \u201c[Nkonki] is not involved in nor does it control the Board of Eskom\u2026 The PWC Capital Scrubbing Project benefits were not dictated to or influenced by Nkonki Inc.\u201d<\/p>\n It seems fair to say, however, that Essa and and the Guptas still held considerable sway at Eskom. Executives and board members aligned to them were removed in a series of purges starting in September 2017 only.<\/p>\n Exactly how much PwC and its partners stood to earn from the capital scrubbing project remains unanswered, despite amaBhungane receiving 49 pages of responses from PwC, Nkonki and Eskom over several weeks.<\/p>\n The project contract, or \u201ctask order\u201d for the capital scrubbing project that PwC and Eskom signed in February 2017 allowed the consultants to charge between 5 and 7.5 percent of savings identified. Eskom set an initial target<\/a> <\/span>of R30-40-billion in savings.<\/p>\n A straight line calculation puts the potential fees at between R1.9-billion and R2.4-billion over two years, far outstripping Eskom\u2019s R1-billion yearly spend on consultants.<\/p>\n Eskom told us: \u201cThe fee structure was not a simple percentage calculation but was impacted by a number of modifiers.\u201d Eskom refused to provide an alternative figure but conceded there was \u201cno cap on the fees\u201d.<\/p>\n PwC told us Eskom negotiated further discounts \u2013 but how much it would also not say.<\/p>\n \u201cI think that figure would be proprietary and confidential. If that figure had to get out there, competitors \u2026 could understand parts of our business model,\u201d Du Randt said, but in a written response PwC added that it considered these fees \u201creasonable\u201d and in line with \u201cindustry norms and standards for a project of this magnitude and complexity\u201d.<\/p>\n PwC also disclosed that Eskom later upped the savings target to R65-billion. This pushed the straight-line fees (before Eskom\u2019s undisclosed discount) up to R3.6-billion \u2013 a figure PwC also disputed.<\/p>\n The contract required PwC to subcontract 30 percent to its supplier development partner \u2013 which for Nkonki could mean up to R1.1-billion in revenue from a single two-year contract.<\/p>\n To put that into perspective, Nkonki\u2019s income for the entire firm in 2016 was R153-million.<\/p>\n These kinds of miraculous turnarounds for companies that partnered with Essa and the Guptas were not without precedent:<\/p>\n IT company Global Softech Solutions, part-bought by the Guptas, went from a turnover of roughly R53-million in 2015 to, just months later, being picked as German IT giant SAP\u2019s supplier development partner on an R800-million Transnet contract. GSS would have received R500-million had the deal gone through.<\/p>\n Another little-known IT company, Sechaba, was promised its profits would triple within two years of selling a stake to Essa\u2019s wife\u2019s company, the #GuptaLeaks showed<\/a><\/span>. Sechaba maintained that although it was subsequently selected as supplier development partner for T-Systems at both Eskom and Transnet, the deal with Essa\u2019s wife never happened.<\/p>\n See the “triple profit<\/a><\/span>\u201d agreement.<\/em><\/strong><\/p><\/blockquote>\n In April, Eskom tried to sweeten PwC, Nkonki and Aurecon\u2019s deal even further by including a separate project to identify private companies that could form joint ventures with Eskom.<\/p>\n Although the negotiations on fees were never finalised, PwC said the proposed fees stood at a \u201cmarket-related rate\u201d of 0.25 to 2 percent of up to R65-billion in projects.<\/p>\n A straight line calculation puts the potential fees at between R162.5-million and R1.3-billion, but again PwC disputed the figure without providing an alternative.<\/p>\n There is no indication that other consulting firms were given an opportunity to bid for this project although PwC insisted this additional project fell within the scope of the \u201ccapital scrubbing\u201d contract.<\/p>\n The exact nature of the work the consultants did over the next few months to scale back Eskom\u2019s capital budget remains unclear.<\/p>\n PwC told us it involved \u201cidentifying capital projects where expenditure could be deferred, cancelled or de-scoped\u201d, but added:<\/p>\n \u201cFor reasons of client confidentiality, however, we are unable to provide you with a list of savings approved by Eskom. In some instances, for example, there would be staff, suppliers and other stakeholders who may not yet be aware that the deferral, cancellation or de-scoping may directly impact them.\u201d<\/p>\n For Aziz Laher, Eskom\u2019s group compliance manager, the email of 4 August 2017 must have felt horribly familiar.<\/p>\n In late 2015, Laher had warned Anoj Singh, Eskom\u2019s chief financial officer, that any payments to McKinsey using an \u201cat risk\u201d pricing model would be classified as \u201cirregular expenditure\u201d.<\/p>\n Singh ignored him and signed the contract anyway.<\/p>\n And now, almost two years later, Laher had just discovered from a colleague\u2019s email that almost identical contracts had been offered to big-name consulting firms.<\/p>\n \u201cThis is very problematic,\u201d he emailed back.<\/p>\n Within a few days though the true scale of Eskom\u2019s financial delinquency became apparent.<\/p>\n \u201c\u2026I have been advised risk based contracts similar to that placed with McKinsey are being placed with other companies on the Business Consultancy and Financial Advisory Panels. These terms are unfavourable to Eskom and favour the consultant,\u201d Leena Ramprsad, Eskom\u2019s chief legal advisor warned on 7 August, then added:<\/p>\n \u201cI have been advised that Procurement is making a submission to [Eskom\u2019s board tender committee] to approve a R8 Billion budget for risk based contracts.\u201d<\/p>\n What Eskom legal did not know at the time was that PwC\u2019s first invoice for R270-million was already on its way to Eskom.<\/p>\n PwC said it would unfair to liken the McKinsey at risk contract and its own capital scrubbing project and that \u201cone cannot nor draw simplistic parallels\u201d between the two.<\/p>\n But the parallels are hard to ignore.<\/p>\n Like the McKinsey contract, PwC was entitled to an upfront payment \u2013 R60-million. And then it could invoice for 100 percent of its fees as soon as savings were identified and approved by Eskom\u2019s board, but before any scrubbing exercises had actually been implemented. This left the risk that the consultants would be paid regally for savings never realised.<\/p>\n When Eskom\u2019s legal department finally got its hands on a copy of the PwC contract, its assessment was that the terms and conditions of the two contracts were \u201calmost identical\u201d.<\/p>\n In response, PwC provided us with a bullet-pointed list of some of the differences.<\/p>\n See PwC’s response here<\/a><\/span>.<\/em><\/strong><\/p><\/blockquote>\n Nkonki\u2019s attorneys said that our \u201cattempt to tarnish\u201d Nkonki was \u201cfactually incorrect… [Nkonki] expresses its umbridge [sic] at your naked attempt to impugn its integrity in drawing parallels with the McKinsey and PwC contract when there is no nexus or similarity between the two.\u201d<\/p>\n When PwC submitted its first invoice to Eskom for R270-million, it was based on the claim that its consultants had secured R6.5-billion in savings for Eskom.<\/p>\n Spending R270-million to saving R6.5-billion seems like a good deal, but much like Eskom was previously warned that the McKinsey and Trillian consultants might have claimed credit for Eskom employees\u2019 ideas, Eskom officials were skeptical about what the consultants had brought to the table.<\/p>\n In a September 2017 memo \u2013 which reads like an eight-page telling-off to Eskom\u2019s procurement department \u2013 Eskom\u2019s legal team said that almost all of PwC\u2019s R270-million claim was \u201csubject to dispute\u201d.<\/p>\n \u201cThe Work Package Manager has confirmed via e-mail that for the \u2018No loads tech plan and No loads outages [project]\u2019 the savings were identified by Eskom but only verified by the Consultant and thus there was NO value added,\u201d the memo reads.<\/p>\n The whole thing was, Eskom\u2019s legal department warned, \u201cof great concern, not only in terms of the exposure that Eskom faces\u201d but also because any payments \u201cmade in terms of the risk-based remuneration provisions will be classified as irregular expenditure\u201d.<\/p>\n In a worst case scenario this could \u201ctrigger immediate repayment of all outstanding debt obligations to lenders,\u201d Laher and Ramprsad warned.<\/p>\n PwC told us that it was around this time it \u201cinformally\u201d discovered that Eskom had lied about their \u201cat risk\u201d contract having National Treasury approval.<\/p>\n \u201cDuring negotiations, it was made abundantly clear to us by the Eskom procurement team that risk-based contracting \u2026 carried both Treasury and Eskom Board approval.<\/p>\n \u201cOnce PwC became aware of the possibility that, despite earlier confirmations to the contrary, Eskom had not obtained Treasury approval, we \u2026 proactively initiated discussions with Eskom to resolve the situation.\u201d<\/p>\n This was probably a wise choice considering the public backlash to Eskom\u2019s then recent confession that, despite months of denials, it had paid McKinsey and Trillian R1.6-billion.<\/p>\n PwC said that by \u201cmutual agreement\u201d a new invoice was submitted to Eskom using hourly rates as specified by Treasury. \u201cIt would be completely unpalatable for PwC \u2026 and against all the firm\u2019s governance standards and values, to be the recipient of payments that \u2026 could possibly result in an adverse audit finding for irregular expenditure.\u201d<\/p>\n PwC said it ultimately received around R95-million for identifying R56-billion in savings that are in the process of being approved by Eskom.<\/p>\n To access all the documents referred to in this story go here<\/a><\/span>.<\/em><\/strong><\/p><\/blockquote>\n In the end, Nkonki received just R17.7-million from the capital scrubbing project. The hundreds of millions that might have come its way was cut not just by the reversion to Treasury-approved rates. It received less than the 30 percent of the eventual fee as it was paid \u201cin line\u201d with the actual work it performed, PwC said.[sidebarContentQuote align=right]Investigative journalism takes time and money. Help us do more. Be an amaB Supporter<\/a>.<\/span>[\/sidebarContentQuote]<\/p>\n On top of this R17.7-million, Nkonki confirmed it also received R16.1-million from a partnership with Deloitte and R14-million from the KPMG contract signed in January 2017. (The figures provided by Eskom were slightly higher.)<\/p>\n We asked Eskom to provide us with a list of all the contracts issued to the strategic, business and management consulting panel, pointing out that this may show that the contracts Nkonki and its partners benefitted from only made up a fraction of Eskom\u2019s consulting spend.<\/p>\n Eskom declined. Instead Eskom said its new board was committed to rooting out mismanagement and restoring good governance:<\/p>\n \u201c[W]e are currently engaging in an internal review of the various consulting contracts, fee structures and processes followed to engage various consultants with the view to surface any impropriety and address any lapses in governance that may have taken place\u2026 To the extent that any contracts were entered into inappropriately or procurement processes were manipulated, Eskom will follow a legal process to review these.\u201d<\/p>\n *Additional reporting by Craig McKune<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" When auditing firm Nkonki fell in the Gupta orbit via a management buyout funded by Salim Essa, things started going very right for it at Eskom.<\/p>\n","protected":false},"author":6,"featured_media":22081,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[2],"tags":[],"class_list":["post-5110","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-stories"],"acf":[],"_links":{"self":[{"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/posts\/5110","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/comments?post=5110"}],"version-history":[{"count":1,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/posts\/5110\/revisions"}],"predecessor-version":[{"id":30476,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/posts\/5110\/revisions\/30476"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/media\/22081"}],"wp:attachment":[{"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/media?parent=5110"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/categories?post=5110"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/tags?post=5110"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}July 2016: The new McKinseys<\/h5>\n
August 2016: Shopping for a new Trillian<\/h5>\n
October 2016: Eskom bends the rules<\/h5>\n
Early 2017: Eskom increases Nkonki\u2019s share<\/h5>\n
February 2017: PwC starts counting<\/h5>\n
April 2017: The sweetener<\/h5>\n
August 2017: 8 billion nasty surprises<\/h5>\n
September 2017: The memo that ended the party<\/h5>\n
From billions back to millions<\/h5>\n