/ 21 September 2018

Six SOEs paid R3bn to consultants

(Madelene Cronje)
In March, Moody's downgraded Eskom's credit ratings from B2 from B1, citing an absence of concrete plans to place its business on a sound financial footing.(Madelene Cronje/M&G)

South Africa’s state-owned entities (SOEs) and institutions have had a bad run with consulting firms. So bad that, this year, three of these firms — McKinsey, Bain & Company and KPMG — have had to pay back more than R1-billion in fees in a bid to salvage their reputations, harmed by the controversial services they provided the state.

Prior to investigations or alarms being raised, their fees were recorded as being above board. Billions more rands have been spent on consulting fees at some of the country’s biggest SOEs over the 2017-2018 financial year, most of which are cash-strapped.

Last week, disgraced consultancy firm Bain & Company volunteered to repay the R164-million it was paid to develop an operational model that resulted in the South African Revenue Service (Sars) being brought to its knees.

In February, auditing firm KPMG set the precedent by paying back R23-million after it withdrew its findings in its report about the alleged rogue unit in Sars.

The biggest amount repaid was R902-million by consultancy firm McKinsey to Eskom, after it was found that the contract the firm had entered into was unlawful.

The financials of and reports by the six largest parastatals show expenditure of R3-billion for consulting and outsourcing in 2017-2018. These are SAA, Transnet, Telkom, Denel, the SABC and Eskom.

Solly Tshitangano, treasury’s chief director for governance, compliance and monitoring,said a combination of factors was behind the use of consultants at state-owned entities. These include a lack of skills, sometimes through no fault of the SOE, and fruitless and wasteful expenditure, where consultants are brought in even when the parastatal has the capacity to do the job.

“The problem is there is a lot of unnecessary outsourcing in government and where we outsource, some of those prices are inflated. That’s what we have seen with your McKinsey, Trillian, Regiments Capital and now with Bain & Company,” Tshitangano said.

In 2017, state airline SAA spent R74-million on consulting services, 39% of which went to Accenture’s subsidiary, Seabury Corporate Advisors, which was paid R29.3-million.

Transnet, the state’s freight and rail company, spent R701-million on managerial and technical consulting fees.In its breakdown of the fees, Transnet provided nine major categories of what the R701-million was spent on. Of these, the top amounts were fees of R272-million for internal auditing services, followed by R118-million for information technology support, R83-million for costs related to projects under construction, R60-million for financial services and R50-million for “other” services.

The director of the Nelson Mandela School of Public Governance, Alan Hirsch, who has sat on several SOE boards and audit committees, said most of these services would usually be done in-house. He said that although internal auditing is quite often outsourced, overall “the amounts seem extremely high”.

Although it did not provide a breakdown for the figure, Telkom confirmed that it had spent a total of R1.5-billion on “consultancy, security and other items” for the 2017/2018 financial year. The telecommunications company said there were 12 categories that fell under this heading, including “audit fees, insurance, security and legal services”.

“The services are offered by a number of different providers across the country to, among others, safeguard the national network. Network security is a priority area for us, given the continued threat posed by cable theft,” Telkom said in an email.

In the past financial year,the state’s arms company, Denel, spent R25.5-million on professional consulting fees. State broadcaster SABC spent R65.6-million managerial and technical consulting fees.

Eskom’s latest financials show that the energy utility paid R709-million for “managerial, technical, and other fees”. Asked by the Mail & Guardian for a breakdown of these categories and costs, Eskom could not provide a definitive amount at the time of going to print. It said it did not show the amount for consulting services in its annual financial statements, because “this is not a requirement”.

Only SAA disclosed the names and amounts paid to individual service providers;the other SOEs did not, citing“confidentiality”.

Tshitangano said it was difficult for treasury to pick up dubious contracts because, by just looking at the numbers, one was not even able to tell the nature of the work that the companies had done.

He said that because procurement is decentralised, with treasury only coming in at the end of the transaction, collusion between suppliers and government officials often made everything seem above board.

Government officials who may need three quotations for a contract would go out and get two quotations and, once they knew what companies were offering, they would pass this information on to their friends, who would then know exactly what to bid in order to win the contract.

“You will never know unless you conduct an investigation or a review,” Tshitangano said. “Only when there are allegations we will then go and start reviewing;that’s when you pick up the anomalies.”

Hirsch said a generous interpretation for what is behind government’s reliance on consultants was that SOEs were not able to attract talent to occupy full-time positions because of the shadow of “great uncertainty and notoriety” at the parastatals.

“But there may be other reasons such as kickbacks or just incompetence in recruitment processes. Hopefully this environment is now improving,” he said.

Hirsch said it was obvious from better known cases that the state was not getting value for money, adding that “there must be other less known cases too”.

He said: “It is clear that some SOEs have been careless, deliberately or through incompetence.”

Tebogo Tshwane is an Adamela Trust business reporter at the M&G