Back in 1995, Mzukisi Qobo, now the head of Wits University’s School of Governance, did a brief stint at management consultancy McKinsey as a business analyst intern.
It was a demoralising experience. “It left me with a sense that these major consultancies don’t generate much value for society overall. In many cases, they’re asked to step in and do work which governments should be able to do if they’re functioning well,” he tells the FM.
At the time, McKinsey had just opened its office in South Africa, and was advising on various projects for the government, including the restructuring of state-owned steel firm Iscor, and a strategic plan to turn the SABC into a “formidable public broadcaster”. Another job, this time for the private sector, was to help Standard Bank create a new account to attract unbanked South Africans.
Today, it’s sobering to reflect that Iscor was sold to ArcelorMittal, where its “import parity pricing” policy battered South African industry for years. The SABC has blundered from crisis to crisis, and is due to clock up a R1bn loss for the year to March. And it would take Standard Bank many years to launch a true low-cost account.
“Massive amounts were spent on these projects, but where are they today? It suggests these consultancies don’t deliver much in public value terms,” says Qobo.
It’s a question much on everyone’s mind, after a bruising few years in which the likes of McKinsey, Bain & Co, the Boston Consulting Group (BCG) and KPMG have made the headlines not for how much they’ve built the countries in which they’ve worked, but for how much damage they’ve caused.
A new report, revealed here today from nonprofit Open Secrets, details precisely how much harm the consultants caused to state-owned firms including Eskom, Transnet and the South African Revenue Service (Sars) during state capture. And how little accountability there’s been.
It has cost the country a mint too. Eskom, for one, paid R1bn to McKinsey, including R90m interest (which the consultancy later agreed to return). Bain also made out like a bandit, pocketing R91.1m for work done for Telkom (without bidding for it), and R164m for work done for Sars at the behest of former commissioner Tom Moyane. (Bain also repaid this, plus interest.)
“Despite endless examples of the failure of private consultants in public and private settings, the contractor state continues to grow, and governments worldwide increasingly rely on the services of consultants,” says Open Secrets.
They are able to do this because, unlike auditors or lawyers, the consulting world is “devoid of regulation, with no code of ethics, no oversight, and no mandatory industry-wide professional standards”.
The consultancies lurk in the shadows, taking no credit and accepting no blame.
It has created a crisis of legitimacy that is sweeping management consultancy across the world, recorded in a cascade of new books. Far from it being a South African problem, Open Secrets argues that management consultants have been “integral to state capture the world over”.
Ten months ago New York Times journalists Walt Bogdanich and Michael Forsythe released their book, When McKinsey Comes to Town, detailing the “hidden influence of the world’s most powerful consulting firm”.
The company, created in 1926 in Chicago, even claimed credit for “creating” the post of White House chief of staff for US President Dwight D Eisenhower in 1953. It’s a crisp illustration of how it has spread its tentacles into the most powerful offices in the world.
At one point, the authors detail how, after Disney hired McKinsey in 1997 to “make Disneyland more efficient and increase profits”, it slashed maintenance costs on the amusement park rides. A year later, a 34-year-old Microsoft programmer was killed instantly and his wife disfigured on one of the riverboat rides due, court papers said, to McKinsey’s demands that costs be slashed on the ropes holding the boat steady.
More deaths followed, including that of 22-year-old Marcelo Torres in September 2003, when the axle rod of the Big Thunder Mountain train broke, causing a locomotive to ride over him and crush him.
“McKinsey was not held to account for what happened ... no-one sued the firm. No government agency accused it of wrongdoing. Consultants were simply doing what they were paid to do: give advice, not orders,” Bogdanich and Forsythe write.
It’s a pattern of sociopathic corporate ethics that South Africans will know all too well.
McKinsey’s two car crashes
In one chapter covering McKinsey’s work for Transnet and Eskom — the two institutions most crippled by state capture — a McKinsey staffer in Joburg describes its work in South Africa as “a car crash in slow motion”.
That’s an understatement: actually, McKinsey suffered at least two car crashes in South Africa.
First, it advised Transnet on the corrupt tender to buy 1,064 locomotives from China. The price soared from an initial R38.6bn to R54.5bn, a large part of which ended up in the accounts of the Gupta family.
McKinsey advised on the locomotives deal, but because of the government’s empowerment rules, it was required to have a 30% black-owned partner. It chose Regiments Capital which, Open Secrets says, helped “rewrite the business case to justify a R16bn escalation in cost”.
As the book relates, one McKinsey senior partner was incredulous: “You have an offer on the table and the executive negotiates the price upwards?”
But this was no ordinary relationship. McKinsey’s former resident writer, Colin Douglas, tells of how managing partner Vikas Sagar asked him to “help write someone’s MBA thesis”, as the locomotive deal was being thrashed out. No surprise, that person turned out to be Siyabonga Gama, Transnet’s former head of freight rail.
Douglas, with other McKinsey staffers, duly wrote part of the thesis and were paid $7,000 billed to two different Transnet accounts. McKinsey panicked, and reported this as a possible violation of the Foreign Corrupt Practices Act — but the US government opted not to take it further.
Finally, last year, justice arrived. In May 2022, Regiments’ former partner Eric Wood was arrested on fraud charges, along with Transnet’s former CEO Brian Molefe and former CFO Anoj Singh. And soon enough, McKinsey was added to the charge sheet.
While that case remains up in the air, McKinsey is fighting furiously against it. “We believe pursuing McKinsey does not have merit, and we will defend ourselves against any claims,” it said in a statement.
Instead, McKinsey threw Sagar under the bus, saying Raymond Zondo’s commission of inquiry into state capture “did reveal evidence that would suggest Sagar had been untruthful with us, and also found that McKinsey had no knowledge of this”.
It’s a heroic attempt at deflection, given what this cost the country.
An RMB Stanley report put the potential loss to the fiscus at R15bn last year, as the standoff with the Chinese suppliers meant Transnet couldn’t get spare parts for its trains. The consequence: coal couldn’t be shipped to the ports, and exports dived.
If anything, McKinsey behaved even worse at Eskom.
The story here is that in 2015 McKinsey signed a deal with Eskom, which by then was headed by Molefe and Singh, who’d hopped over from Transnet. Ironically, this contract was meant to help Eskom develop “internal project management and engineering capacity”, and could have earned McKinsey R9bn.
This time, who did McKinsey pick as its 30% black empowerment partner? Trillian Capital, a new firm started by the very same Wood, who’d since left Regiments.
Only, there were so many red flags with that contract that McKinsey might as well have been steering a pirate ship: there was no bid procedure, no contract between Eskom and Trillian, and no upfront fee, but rather a deal that allowed McKinsey to take a cut of “savings”. Even Eskom’s own compliance team had flagged this deal as “irregular”.
As parliament later concluded: “It is highly improbable that a company as sophisticated as McKinsey could, in good faith, have acted on the assumption that a contract based on a sole sourcing arrangement and on the applicable remuneration structure was lawful.”
Bianca Goodson, a former Trillian employee-turned-whistleblower, testified later that McKinsey didn’t even expect Trillian to do any work, but had rather told her company to “just take your 30% and go”.
Finally, in 2019, McKinsey caved. It issued an avalanche of grovelling statements, apologising for its role in state capture, saying it had not been “careful enough about who we associated with”, and that it was “embarrassed by these failings”.
But as Open Secrets argues: “Such apologies ring hollow in the absence of hard accountability. McKinsey continues to attempt to portray its work in South Africa as a case of being duped by a few bad apples, but the evidence suggests otherwise.”
If the management consulting industry comes off looking like the mafia, McKinsey is undoubtedly the godfather. But in every halfway competent racket, there are many families that make up the compromised ecosystem.
The inside track
Two months ago, Mariana Mazzucato, one of President Cyril Ramaphosa’s economic advisers, released a book titled The Big Con, which lays bare how the consulting industry has weakened countries everywhere.
At the launch of the book at Wits University, Mazzucato said consultants “infantilised governments”. But rather than simply criticising consultants, the point of the book, she said, was to send a message to governments that they must “wake up, and start investing in your civil service”.
“This is not a book against advising and consulting ... that’s throwing the baby out with the bath water. If a government has a cancer [outbreak], it would be crazy not to call in the top oncologists in South Africa to come in,” she said.
Rather, she said, the idea is to wean organisations which rely heavily on consultants off their “heroin addiction”.
That’s some ask. In June, auditor-general Tsakani Maluleke reported that 220 of the country’s 258 municipalities had used consultants, paying R1.55bn in fees last year. In other words, nearly 8c of every R1 spent by municipalities went to consultants.
Conspicuously, it didn’t make things better. In 2017, for example, 11% of the municipalities that used consultants ended up with disclaimers on their accounts.
Says Mazzucato: “Saying ‘it’s all crap, government shouldn’t have any consultants, isn’t every academic somehow a consultant’ completely misses the point ... we’re talking about a particular business model that is riven with conflicts of interest.”
The conflicts of interest are manifest — from consultants advising firms they’re also meant to be auditing “independently”, to the fact that their business model relies on contracts being renewed, so there’s little incentive to really fix things.
Mazzucato referenced another of the big three consultants, Bain, which she said “helped your [Jacob] Zuma government actually reduce the strength of the tax authority”.
It’s a case study that Open Secrets delves into. That tale dates back to 2012, when Bain’s managing partner Vittorio Massone began meeting with Zuma secretly, seemingly plotting regime change at Sars, which was then a well-functioning arm of the state.
Alarmingly, it emerged that Massone had actually met Zuma 17 times between 2012 and 2014. And, tipped off by Zuma that Moyane would soon be appointed as the tax commissioner, Bain began providing “CEO coaching” to Moyane.
In May 2014, six months before Zuma appointed Moyane as Sars commissioner, Bain had drawn up a document titled “TM First 100 days”, which outlined the changes Moyane would need to make once he took over.
To everyone’s surprise (but Massone’s), Moyane was appointed in September 2014. Almost immediately, he awarded Bain a R164m contract.
The Zondo commission later concluded that Bain had “weakened and misdirected the revenue-gathering function” at Sars, as the new “operating model” it designed gutted the ability to tax and trace the wealthy and corrupt.
As Open Secrets says: “The firm played its part for the sake of lucrative fees, leaving the people of South Africa worse off. [It] continues to remain unaccountable for its economic crimes and for placing profit over principle and law.”
Unlike McKinsey, Bain has not been criminally charged. Last August, it was banned from participating in any government contracts in South Africa and the UK, but this ban was lifted, bafflingly, in the UK in March.
Stephen York, the managing partner of Bain South Africa, tells the FM in an interview this week that what happened at Sars would never happen today.
“We completely changed our risk practices across the world — under what conditions we’ll take on work, and which projects we will and won’t work on. We’ll be careful in working for tobacco or gambling companies, for example, and look very carefully at all projects to ensure the results are positive from a social perspective. The Sars work would never have got through our risk processes today,” he says.
York concedes that Bain messed up badly. “We should never have known of Moyane’s appointment beforehand, we should never have met with him before he was appointed, we should never have provided input into Sars’s request for proposals. Massone should never have had as much decision-making power as he had — all of these things would have immediately raised red flags today,” he says.
Like McKinsey, Bain reckons the state capture fracas was a “wake-up call” and says it has mended its ways.
In a statement, McKinsey claims it has “implemented remedial actions to hold ourselves to account”. This includes spending $600m since 2018 on “strengthening our risk management teams”; putting in place a new code of conduct; and adopting a new “client service policy” specifying who it won’t work for — a list that includes state defence, intelligence, justice or police institutions “in non-democratic countries”.
It sounds comforting. But would it have pre-empted the disasters at Transnet and Eskom? Well, it depends on how this “risk management” is implemented.
Certainly, Bain’s acknowledgment doesn’t impress Open Secrets.
The nonprofit says Bain provided a “silver-tongued, carefully crafted, and well-spun lament” that it was simply an “unwitting pawn in a political chess game”. It says that while Bain has “acknowledged and apologised publicly”, it “does not accept that its representatives knowingly participated in state capture”.
As a result, Open Secrets believes the Hawks should dig deeper, investigating whether there was any “undue influence” placed on anyone to get the contract at Sars. And it says the US authorities should examine whether Bain’s work in South Africa “might have breached the Foreign Corrupt Practices Act”.
York says he has no problem with that. “We’ve always said we’ll co-operate with any investigation. And if that happens, we’ll gladly do that,” he says.
The Dos Santos poser
While we South Africans like to think of ourselves as unique, Open Secrets points to several other instances across the world of “state capture” driven by consultants.
The Boston Consulting Group (BCG), which made $11bn last year, might have escaped scrutiny in South Africa, but in Angola it took a beating. In part, this was due to the “Luanda Leaks”, published in 2020, which revealed how BCG had helped Isabel dos Santos, the daughter of former president José Eduardo dos Santos, to loot billions.
It contributed to making Dos Santos the richest woman in Africa, with a net wealth which Forbes estimated at $2.2bn in 2018.
In 2014, Dos Santos was appointed as a director to Sonangol, after her father decided the parastatal oil company needed to be “modernised”. Consultants were soon everywhere, and money began to leak out of Sonangol’s accounts to secret trusts overseas.
BCG was paid an estimated $31m, allegedly laundered in part through Dos Santos’s Dubai firm Matter Business Solutions, in exchange for plans to alter laws to “increase Sonangol’s efficiency”. McKinsey was paid $21.4m, while PwC got $15.4m.
It’s cold comfort, but the Angolan government could have been on the hook for far more — documents in the Luanda Leaks reveal that Dos Santos had approved “consultancy fees” of $135m, which weren’t paid.
Again, accountability remains elusive.
Last month a Dutch court found Dos Santos guilty of embezzling €52.6m during her father’s almost 40-year tenure. Like members of another well-known family, she is hiding out in Dubai, claiming the allegations are a vicious “witch hunt”.
It’s a pattern found in many other countries too.
In the UK, for example, the National Health Service spent £371m on “consultancy fees” in 2017. And, during Covid, the British government was flayed for the “eye-watering waste” that was the £1m per day paid to Deloitte and BCG for a failed test-and-trace system.
BCG and McKinsey are also alleged to have researched dissidents in Saudi Arabia, information which seems to have fallen into the hands of crown prince Mohammed bin Salman, who was then linked to the murder of journalist Jamal Khashoggi. It’s a claim McKinsey heatedly denies.
But the worm is turning. Two years ago, a US court ordered McKinsey to pay $573m for its work for pharma firm Purdue, which led to a surge in opioid sales.
“It is accepted that [consultants] only serve the bottom line — whether it be working for kleptocratic regimes in Southern Africa or for authoritarian regimes like Saudi Arabia, or helping to peddle opioids for big pharma,” says Open Secrets.
And while the stand-alone consultancies cop most of the flak, the large audit firms — Deloitte, PwC, EY and KPMG — also run parallel consulting services which, if anything, are more profitable than the auditing services they offer.
This is deeply controversial, since the consulting fees risk compromising the independence of the audit process.
KPMG, for example, provided both “advisory” and “auditing” services to Gupta front company Linkway Trading, which was allegedly used to launder stolen state funds from the Estina Dairy Project. In 2019, KPMG’s auditor Jacques Wessels was struck off the auditors’ roll, but there’s been little consequence for the consultants.
As Open Secrets says: “At every turn, the consultants — whether they be KPMG, Deloitte or PwC — compromised the quality of their audit work or prioritised consulting fees at state capture enterprises [such as] Eskom, SAA and Transnet, and at corporations such as Tongaat Hulett and Steinhoff.”
And, while we may think of the “consultant curse” as a phenomenon of government only, it’s not. Retailer Steinhoff, crushed by a R106bn fraud, spent R6.9bn on “advisory fees” between 2018 and 2022, according to FM and Bloomberg calculations. Throw in the R2.1bn spent on “audit fees” in that time, and soon you’re talking real money.
The case for consultants
Given the picture painted, why does anyone even hire consultants?
“People are hiring us to do the thinking for them,” says one person who runs a consultancy in South Africa. “[There] often aren’t the skills in those organisations, since the state just doesn’t hire competent people. They have other boxes they have to tick first — like cadre deployment.”
York, as you might expect, argues that management consultancies add unquestionable value. In this Darwinian economic environment, he says, if they don’t provide value, they’d swiftly be given their marching orders.
“We bring an external perspective from the work we’ve done across similar situations or sectors, and help accelerate the changes that need to be made. We’re also not beholden to the inherent bureaucracy or the politics of an organisation, which is why we can drive results,” he says.
But he has an important caveat. “Where will having a consultant not work? First, consultants can’t be a long-term crutch for the government or companies when it comes to [compensating] for their lack of capacity or lack of capability. We’ve seen our work deliver substantial results, but only when a parallel investment is made in building capacity and capability,” he says.
It’s a vital point, because many consultants are being hired today precisely to plug a skills vacuum.
York says consulting projects can also fail if there’s a lack of follow-through from the client — and sometimes this is simply because the skills aren’t there. “There’s a lot of talk around the skills shortage in South Africa right now, and that’s one of the biggest challenges facing all organisations,” he says.
Mazzucato herself even mounts a lukewarm defence for “the good consultants”. “These are not bad people ... but the striking thing is, they might be smart students but they often don’t have any knowledge of that particular area,” she says.
One of her friends, she says, left Princeton with a degree in medieval literature, and a year later she was advising IBM on its value chain.
If that sounds benign, it isn’t.
Commentator and former accounting lecturer Khaya Sithole, speaking at that same event, spoke of how the reliance on consultants within government has created an “informal parallel state”.
This, he said, has had profound consequences, including paralysis within the government, where internal capacity hasn’t been built.
“We pay the people who’ve been paid to do the job, then we pay the people they pay to do the job on their behalf. Also, importantly, we enter into an accountability vacuum, where I can get hired to prepare those financial statements, but I do not work for the state — I’m not accountable to a municipal council or parliament at all,” he said.
This accountability gap means that when these consultants are called out, “even criminal conduct isn’t an impediment to them getting business”.
On this point, Qobo argues there may be no other option.
“Look, it’s clear that governments — especially the South African government — don’t have all the skills and capabilities to do their job. And for that, management consultants can play a role. But after the past few years, we need to pay greater attention to how the relationships between the state and consultancies are structured, and how to properly measure the value they provide,” he says.
In its report, Open Secrets lobbies for a number of changes to close the accountability gap.
These include investigating and prosecuting firms that break the rules; reviewing all consultancy contracts with the state to assess not just the cost, but where it provided value; stricter legal rules; new international laws; and even an outright ban on consultants doing business with the state.
Ivor Chipkin, head of the New South Institute, tells the FM it would be reductionist to condemn all consultants as part of some rent-seeking tribe.
“In South Africa, the damage they did during the state capture years was astonishing. But structurally, they do have a role to play in emerging economies, given the institutional constraints. But it must be managed properly. That’s why any call to ban consultants outright would be misguided,” he says.
Chipkin cites the example of Eskom’s build of two new power plants, Medupi and Kusile, after the first round of blackouts in 2008. “Eskom ran the projects themselves, without any management consultants involved — and it was a total disaster. They simply didn’t have the experience to embark on such a big project,” he says.
(Kusile, meant to cost R81bn and be completed by 2014, cost double that at R161.4bn and will be finished only in 2025; Medupi, due to cost R79bn and be completed by 2012, is now set to cost R145bn and be finished only this year.)
This is why, Chipkin argues, the debate needs more nuance and less righteous indignation. He says it may perhaps be useful, in state consulting contracts, to write in defined concrete measures of success, then ask independent researchers to check that the consulting firm is hitting these targets.
A skills crisis
Perhaps the deeper question is why there are so many consultants crawling around every nook of the state.
Qobo reckons it’s about skills. “There’s a systemic skills deficit across different sectors of the economy encompassing everything from leadership succession, to project management, to technical skills,” he says. “And this isn’t just a problem of the public sector, you see it in the private sector too.”
He says the government needs to take skills development seriously because what’s coming out of our education system doesn’t cut it: “There’s a clear mismatch between what’s being churned out, and the demands of the economy.”
Another thorny issue is the extent to which black empowerment rules were abused to appoint “service providers” who basically do nothing other than extract money.
In his final report, Zondo alludes to this. “Procurement has a legitimate transformation role to play in South Africa ... however, evidence shows that the ideals of empowerment were grossly manipulated and abused to advance the interests of a few individuals,” he says.
McKinsey’s cynicism in telling Trillian to “take your 30% and go” reveals just how poorly these rules are understood. And the government’s lack of action against the construction mafia — which runs off the same script — has only made it harder to walk back.
But if consultants are still necessary, how do they rebuild legitimacy and regain their “social licence” to operate in a country deeply sceptical of them?
For York, the only way is to produce results. “Our business model relies on executives telling other executives what a great job we did. And in South Africa specifically, we need to demonstrate that we’re a force for good, by putting our skills to work in solving social problems, including when it comes to things like health care, and transport. We need to demonstrate we’re giving back,” he says.
Given what’s happened, the prospect of McKinsey, Bain or BCG working on the planned National Health Insurance, for example, is the stuff of nightmares.
But it is precisely this road that the consultancies, rightly tarred and feathered for their almost sociopathic assault on the state, will have to walk back to legitimacy.
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