Specialised Outsourcing is at the heart of a fraud investigation by Umgeni Water
Alec Hogg and Bruce Whitfield
Reputations, careers and the future of a listed company are on the line as Umgeni Water prepares to release the findings of a controversial report into the awarding of the outsourcing contract of its multibillion-rand treasury.
The final verdict is imminent on one of the most controversial sagas to hit South African business in years. Public utility Umgeni Water has promised Minister of Water Affairs and Forestry Ronnie Kasrils a full report by the end of this month, and details will be made public soon after that. The report is being prepared by a high-powered and independent legal team. The future of the listed company at the centre of the saga, Specialised Outsourcing (Outsors) could be on the line.
Umgeni’s investigation, which focuses on allegations of fraud and corruption, dates back to the award of the contract to Outsors in late 1997. This was the first major contract landed by the company which at the time was run by its founder, billionaire entrepreneur Dave King.
If the investigation finds the original contract was awarded fraudulently, Outsors might be forced to pay back all the fees earned on the contract since inception.
That figure could be as high as R82-million, wiping out more than half the company’s cash pile.
Perhaps even more serious for the current chief executive, Dave McLean, would be a conclusion by the investigators that there was no wrongdoing. If Dave King is cleared, shareholders may vent their anger on his successor.
It had been rumoured that McLean uncovered the alleged fraud and brought the matter to the attention of Umgeni’s no-nonsense chief, Cromet Molepo. But McLean strongly denies it.
“I got a call from Molepo on November 10. The chairman Barry Adams and I went to meet Umgeni, who pointed out I had nothing to do with it,” he says, “I would be only too delighted if the Umgeni investigation found no evidence of fraud, because then Specialised Outsourcing would be able to collect the money. I have no vested interest in the investigation uncovering fraud.”
During McLean’s tenure the share price has plummeted from above R20 to around a tenth of that level. Shareholders are looking for someone to carry the can.
Since McLean has been in charge, Umgeni Water has cancelled its contract with Outsors, embarked upon a protracted dispute with the company over a R30-million invoice and launched its fraud investigation.
It became clear just over a month ago that the relationship between Outsors and its biggest single client had started deteriorating badly. Although reasons for the turnaround remain unclear, statements issued by the parties changed from cooperative to icy.
Umgeni’s Molepo revealed that he’d instructed Outsors to mirror all records and documentation related to its work at the water authority to ease the transition for the company that takes over the outsourcing contract.
Talking on Moneyweb’s Classic Business radio programme, Molepo also revealed that Umgeni Water had appointed a consortium made up of Tri-Linear Asset Management (Pty) Ltd, Johannesburg Stock Exchange-listed financial services group Cadiz and JP Morgan to “provide Umgeni with a strategic platform to evaluate future liquidity, funding and interest rate alternatives”.
The reasons behind that rather dramatic change in the relationship could be revealed in the investigation report.
Could it be that yet another shock awaits shareholders of a company whose seemingly endless share price depreciation has left many reputations in tatters? We shouldn’t have long to wait.