Eskom demands PwC pay back R95m in consulting fees

8 Jun 2020

In 2019, a confidential investigation delivered a damning assessment of PwC’s consulting work at Eskom, describing the fee structure as ‘patently unlawful and stupendously egregious’. Now Eskom has issued PwC with a R95-million letter of demand. It wants the firm to pay back fees for a consulting deal that bore all the signs of State Capture.

On 16 March 2017, 26 consultants from three prominent firms gathered at PwC’s head office in Sunninghill. The purpose of the meeting was to discuss a consulting deal at Eskom which had the potential to earn the three firms – PwC, Aurecon and Nkonki – outrageous fees.

“This is a really important project for us and one where we all stand to make a shit-load of money,” one of the consultants recalled a PwC partner saying. (AmaBhungane asked PwC about this, but it was one of 79 questions the global accounting and consulting firm declined to answer.)

The project they were there to discuss was a cost-cutting exercise dubbed “capital scrubbing” because it involved slashing R65-billion from Eskom’s capital expenditure (capex) budget over the next five years.

Like the controversial McKinsey-Trillian contract with Eskom, the fees were supposedly performance based or “at-risk” and would depend on how much “capital scrubbing” PwC and its subcontractors, Aurecon and Nkonki, could achieve. The more they cut Eskom’s spending, the more they would receive.

Based on the contract, the consultants’ fees were likely to be calculated in billions – “a shit-load of money” by anyone’s definition. (See sidebar below.)

But roughly a year into the 18-month contract, the project collapsed. A hasty settlement of R95-million was cobbled together and PwC and its subcontractors quietly withdrew from Eskom’s Megawatt Park head office.

Until a few weeks ago that is, when Eskom wrote to PwC demanding that it return the R95-million plus interest for a contract that Eskom now calls “unlawful, irregular, unconstitutional, and thus, null and void”.

So why, after three years, does Eskom feel so aggrieved?

The forensic report

In 2019, Eskom’s legal department commissioned G9 Consulting and Advisory Services to investigate PwC’s capital scrubbing contract after whistleblowers and a senior Eskom official raised concerns, among other things that the consultants failed to deliver value for money.

The report delivers damning allegations from senior Eskom officials, including that PwC tried to claim credit – and therefore fees – for work that Eskom’s staff had already done.

According to the report:

A senior official from Generation Sustainability questioned why Eskom was “bringing in consultants to do the work that can be done internally” and argued that Eskom staff had already “done all the hard work” of cutting the capex budget. The same official was later told he was being removed from the committee overseeing the PwC contract because he shared “a different strong view about this project”.

The official who replaced him on the committee told G9 that he also “felt uncomfortable and pressured to sign-up for the savings” despite not having sight of the terms of the PwC contract.

The general manager at Tutuka Power Station told G9 investigators he felt “uncomfortable” being asked to sign off on R4-billion in capex cuts, but “conceded under pressure ... from a more senior official at [Megawatt Park]”.

Another senior manager at Tutuka told G9 he was “very sceptical” of the “savings” the consultants had identified. He told G9 that “most of the projects have not been executed even to this day thus it is impossible to calculate savings”.

A senior official in Transmission told G9 he had 36 highly respected chief engineers in his department who were already tasked with capital scrubbing. He also complained that his team “spent more time empowering, developing [and] training the consultants” than the other way around.

A senior official in Corporate Finance said questions were raised about the PwC contract in meetings, but expunged from the minutes.

“[T]he technical people from different departments were complaining that they have done all the work... They believed that the consultants were not required; because the only thing that these consultants should have to do now is to validate the work that they (Eskom Officials) have done already...” the same Corporate Finance official told G9.

The question of who did the work – Eskom employees or the consultants – is not just a matter of pride. The fee structure allowed PwC to claim up to 7.5% of any “savings” (capex cuts) that it identified.

In other words, taking credit for Eskom work could mean paying the consultants millions for work they had not done or had merely duplicated.

Take, for example, PwC’s proposal on Eskom’s “no load” and “low load” power stations.

In 2017, Eskom had excess power and was considering placing three power stations – Hendrina, Komati and Grootvlei – into cold storage, and cutting capacity at another three stations.

Minutes from PwC’s 16 March 2017 meeting show that Anoj Singh, Eskom’s then chief financial officer, was putting the consultants under pressure to deliver capex-cutting savings.

“The discussion with the CFO was difficult. Eskom is not seeing the urgency from the PwC team (or we are not adequately reporting on the work that is being done),” the minutes read.

By May 2017, PwC reported back to Singh that it had identified how Eskom could cut R9.73-billion from its capex budget by reducing capacity at the “no load” and “low load” stations: major refurbishments that could be cancelled, parts that would not need to be purchased etc.

But when PwC tried to get these savings signed off, Eskom managers refused on the basis that Eskom’s own staff had already identified more than R10-billion in savings at these same stations and that for the most part, PwC’s work had simply verified the work Eskom staff had already done.

Despite this, PwC would later submit an invoice to Eskom for R270-million, largely based on savings identified at the three “no load” stations. Whether these were the same savings or additional ones is unclear, but a scathing eight-page memo compiled by Eskom’s chief legal adviser, Leena Ramprsad, noted:

Eskom’s contract manager “advised that a majority of the risk-based invoice amount (approximately R260 million) is subject to dispute by Eskom... The savings were identified by Eskom but only verified by the Consultant and thus there was NO value added”.

PwC would not speak to amaBhungane for this article, but the G9 report cites three senior PwC officials defending their firm by claiming that, in general, Eskom officials “felt threatened, even embarrassed and perceived themselves to be exposed” because of the recommended cuts. PwC believed “this may be one of the reasons for the push back”.

In the end, PwC did not get the payday it anticipated. In mid-2017, news broke about McKinsey’s equally egregious at-risk consulting contract.

According to a consultant who was involved at the time, “PwC became very hesitant and risk adverse to even trying to bank any of these savings ... because they were ... aware of the building fall-out from McKinsey and ... the obnoxious amount of money they would end up claiming as a success fee.”

PwC director and operations leader Fulvio Tonelli previously told us that the firm “informally” discovered around this time that the at-risk fee structure had not been approved by national Treasury.

“Once PwC became aware of the possibility that, despite earlier confirmations to the contrary, Eskom had not obtained Treasury approval, we … proactively initiated discussions with Eskom to resolve the situation,” Tonelli told amaBhungane.

Shortly after this, PwC agreed to withdraw its R270-million invoice and abandon the at-risk fee structure, which was potentially worth billions, and settle for a much more modest R95-million.

PwC would not speak to amaBhungane for this article, but the G9 report cites three senior PwC officials defending their firm by claiming that, in general, Eskom officials “felt threatened, even embarrassed and perceived themselves to be exposed” because of the recommended cuts. PwC believed “this may be one of the reasons for the push back”.

The G9 report notes: “This is a plausible explanation; but the consistency of the complaints and concerns; including the fact that PwC never challenged a breach of contract with Eskom on the risk-based model, where it stood to gain billions of Rand, suggests to us, that it too was probably never fully convinced on what it was doing.”

But perhaps the most damning aspect of the G9 report is the inference that PwC was swept up in State Capture.

“PwC may have been an unwitting partner to this criminal trend by the same protagonists in Eskom at the time, but its short-sighted ‘greed’ to embark on a patently unlawful and stupendously egregious payment model cannot fully absolve it,” the report noted.

G9 was not the first to raise the spectre of State Capture in the PwC’s capital scrubbing project.

In 2018, amaBhungane published a detailed investigation which questioned the excessive fees PwC stood to earn and the firm’s decision to subcontract 30% of the work to Nkonki Inc, an auditing firm that was in the process of being covertly acquired by Salim Essa, nicknamed the “fourth Gupta brother”.

Eskom takes aim

Despite the explosive contents of the G9 report, Eskom’s legal department did not act on it for almost a year.

This may be in part because Eskom was focused on reclaiming R209-million in consulting fees from Deloitte, another one of the “Big Four” firms. After Deloitte agreed to return R171-million, Eskom trained its sights on a new target: PwC.

“The [G9] report confirms certain allegations and findings pointing to certain unlawful behaviour by some of Eskom employees, and PwC staff. This behaviour resulted in Eskom paying R95 million in fees to PwC, which Eskom has established was unlawful, irregular, unconstitutional, and thus, null and void,” Eskom spokesperson Sikonathi Mantshantsha confirmed in a written response to amaBhungane.

“Eskom’s forensic unit has registered a criminal case at the Sandton Police Station against certain implicated Eskom employees... Eskom enlisted the services of Adv [Vas] Soni SC (former head of the SIU) to assist with financial recoveries against individuals and entities that defrauded Eskom. Adv Soni SC worked on the Deloitte matter and is now working on court papers against PwC.”

The G9 report alone is unlikely to pin State Capture charges on PwC as it appears to contain several inaccuracies. But additional evidence from amaBhungane’s own investigation suggests that PwC has a lot to answer for: how it secured the contract from Eskom, why it subcontracted 30% to Nkonki knowing that the firm did not have the necessary skills, its exorbitant fee structure and the questionable value of the cost-cutting proposals that the consultants made.

amaBhungane asked PwC whether it would defend the case if Eskom went to court, but this was one of 79 questions PwC declined to answer. PwC’s Tonelli did, however, provide a brief statement:

“PwC cooperated fully with the investigative efforts of G9, but has not been afforded the courtesy of considering a draft G9 report, the final G9 report, or the factual evidence supporting the opinions expressed by G9 in the report which you quote. We are, therefore, unfortunately not presently able to provide any comment or respond to any of your questions.

“We also note your quotation of G9’s findings and recommendations that Eskom may approach the court to ‘have the Eskom capital scrubbing contract set aside’ and that PwC was ‘blind to state capture’. Considering that the mandate of the State Capture Commission... is to investigate allegations of this nature and the potential for litigation, it is not appropriate, out of respect for the important work of the Commission and the courts, to comment on these matters.”

Nkonki was placed into liquidation in 2018 but then-chief executive Mitesh Patel has repeatedly denied that his firm was a conduit for State Capture. Aurecon, the other subcontractors on the project, declined to respond to specific questions as it had not seen the G9 report, but provided a brief written statement.

The company said it was merely a sub-consultant to PwC to provide specific technical professional services, for which it was paid on a time and materials basis.

“We remain convinced that our services were of value and remunerated.” DM

AmaBhungane is continuing to investigate PwC’s capital scrubbing project. If you worked on this project or have insight into PwC’s proposals, please visit amaBhungane’s Open Investigations page.

ADDITIONAL INFO: PwC’s elusive ‘at-risk’ fees

Estimating the fees PwC could have earned is complicated.

The contract allowed PwC to claim between 5% and 7.5% of the “savings” (reductions in capex) it identified.

The consultants were initially given a target of R30-billion to R40-billion, but this was soon upped to R65-billion. If the consultants hit this target, they could theoretically have earned almost R5-billion.

PwC refuses to disclose the fees it anticipated earning, but insists this straight-line calculation is inaccurate as identified savings would be discounted to net present value and any reduction in Eskom’s revenue as a result of the cuts would also be taken into account.

By May 2017, PwC had identified R55-billion in potential savings, but was working towards a target of R65-billion staggered unevenly over five years. PwC refused to disclose the applicable discount rate, but an assumed discount rate of between 5% and 20% on R65-billion – if PwC had reached its target and all its initiatives had been approved – could have produced fees of between R1.9-billion and R4.2-billion.

This is in line with the G9 forensic report, commissioned by Eskom, which described PwC’s potential fees as “billions of rand”.

After submitting an initial invoice of R270-million for a portion of the project, PwC agreed to abandon the at-risk fee structure and revert to a time-and-materials basis which resulted in a settlement for R95-million. DM

The amaBhungane Centre for Investigative Journalism, an independent non-profit, produced this story. Like it? Be an amaB Supporter to help us do more. Sign up for our newsletter to get more.

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