McKinsey looks to court over refund

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But there is a caveat, a court must first determine if the contract was unlawful.

The consultancy made the dramatic announcement and pledged "to support" a court review of its R1.6bn contract in a media statement on Tuesday, the day Eskom had set for it to pay back the money.

Eskom last week demanded that McKinsey, together with its partner, the politically-connected Trillian consultancy, repay the fee in full.

Eskom said it would ask a court to review and set the contract aside as it did not meet legal stipulations.

Bizarrely, McKinsey will "support" a court review of the controversial contract even as it absolved itself of any wrongdoing.

"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 authorisation. These requirements were solely Eskom's responsibility," McKinsey said.

Eskom paid McKinsey and Trillian - then majority owned by Gupta family friend Salim Essa - for six months of work up to early in 2017.

McKinsey received just more than R1bn, while Trillian was paid R600m.

The contract was for McKinsey to help train Eskom engineers to develop internal consulting capacity, which it said would save it cash.

It offered to pay McKinsey and Trillian - with which it had no contract, although it had been introduced as a local supplier development partner - a portion of the savings.

The power utility has conceded it did not get the required approval from the Treasury to deviate from accepted procurement regulations.

Instead of paying McKinsey by the hour - as required by the Treasury for procurement, which would be more cost effective for the utility - Eskom instead agreed to share the purported savings achieved from McKinsey's work.

"We were advised by Eskom on 5 February 2016 that it received National Treasury approval and we have reviewed Eskom's steering committee minutes from 9 February 2016 that confirm that fact."

It did not say who at Eskom gave that assurance.

Furthermore, Eskom paid the fee to McKinsey and Trillian despite numerous legal opinions warning against the contract.

Its own officials were overruled by senior executives, who went out of their way to give the contract to the politically connected firms. Trillian was paid a third of the fee, although it did not have a contract with Eskom or McKinsey.

Eskom admitted later that it did not know if Trillian had done any work for it.

Five senior managers and executives at Eskom - including chief financial officer Anoj Singh, generation unit head Matshela Koko and chief procurement officer Edwin Mabelane - have been suspended as a result of their involvement in the deal.

Lawyer Matodzi Ratshimbilani of TGR Attorneys said that now that McKinsey had conceded it might not have been entitled to the funds, the probability was higher that a court would agree to reverse the contract,

"The court can't on its own refute the facts that Eskom will put on the table," Ratshimbilani said.

As a company governed by the Public Finance Management Act, Eskom was legally obliged to reclaim the money if the contract did not meet procurement requirements.

"It then becomes illegal and no director of Eskom can undo the demand to pay back if it did not require a board resolution to effect the demand in the first place," Ratshimbilani said. McKinsey's offer to repay the money had put Trillian in a tight spot. It came into the deal as a junior partner on the McKinsey contract.

"Trillian would have to demonstrate it was legally entitled to the money," Ratshimbilani said.

"McKinsey entered into the contract and performed its work in good faith," McKinsey said.

McKinsey said that it would set aside the whole contract fee until the court had ruled.

Legal experts said that McKinsey would have to stump up Trillian's portion as well, as it was the main contractor to the deal.

Source: Business Day