The dirt on Deloitte’s consulting deals at Eskom, Part Two

Read the statement from Deloitte here.

For more than two years, Deloitte had managed to avoid being linked to state capture, while rival firms – McKinsey, KPMG, Bain & Company – were reeling from the scandal’s fallout.

That came to an end in October 2019, when Eskom’s then-chairman, Jabu Mabuza, publicly accused Deloitte of engaging in “pure corruption”, with former Eskom executives to secure consulting deals worth R207-million – a claim Deloitte hotly denies.

In an explosive affidavit setting out Eskom’s civil claim against Deloitte, Mabuza told the court that “certain inferences are irresistible… [B]y early 2016 … Deloitte was to be the preferred Consulting firm” on certain projects at Eskom.

That Eskom executives bent and broke the rules for Deloitte now seems obvious (read The Dirt on Deloitte's consulting deals at Eskom, Part 1). The only question is why?

In Part 2, we leave behind the safety of documentary evidence – chronicled in over 1,000 pages of Eskom court papers – and wade into the murky waters of anonymous and confidential sources. But it is also here where we find person after person insisting that Deloitte’s contracts with Eskom were part of a state capture play.

The cold shoulder

It is worth remembering that before Deloitte, there was another preferred consulting firm at Eskom.

In December 2015, the global consulting giant McKinsey sat down to carve up Eskom’s consulting budget with its new “supplier development” (empowerment) partner, Trillian Capital.

What emerged from the meeting was a spreadsheet detailing how R9.4-billion in consulting fees could be extracted from Eskom over the following four years. McKinsey told us the document was “exploratory”.

But after just three months, McKinsey got cold feet, put off by Trillian’s refusal to disclose that it was majority-owned by the Guptas’ business partner, Salim Essa.

In a March 2016 letter, McKinsey told Eskom’s then-chief financial officer, Anoj Singh, that it could no longer partner with Trillian, but would be happy to pick another empowerment partner.

Sources in Eskom have repeatedly told amaBhungane that when McKinsey dumped Trillian, Eskom officials started giving McKinsey the cold shoulder. By mid-2016, Deloitte was one of several firms whose fortunes were looking up.

The in-crowd

The reason amaBhungane started poking around Deloitte in 2018 was a simple, startling fact: Three of the “Big Four” accounting firms – PwC, KPMG and Deloitte – received lucrative consulting contracts from Eskom at the height of state capture, and all three picked Nkonki Inc as their supplier development partner.

Nkonki was not necessarily a bad choice: The pioneering black-owned auditing firm had a small yet capable consulting division. But the firm was also in the process of being covertly acquired by Essa.

What our investigations uncovered was that starting in August 2016, Essa began transferring his interest (and his money), from Trillian to Nkonki, by funding a management buyout led by Nkonki partner, Mitesh Patel. (For more, read The Nkonki Pact parts 1, 2 and 3.)

“Nkonki was a good, solid, black brand, under the radar. They were the perfect firm to use,” one Nkonki insider told us.

If Nkonki was the new Trillian, we wondered, did that make Deloitte, PwC and KPMG the new McKinseys? Would they be the Trojan horses giving Essa and the Guptas access to the consulting honey pot inside Eskom?

The modus operandi

The consulting industry had long been one of the most profitable sites of state capture.

Between 2013 and 2015, McKinsey and its then-empowerment partner, Regiments Capital, had extracted almost R2-billion in consulting fees from Transnet, where Singh had been the chief financial officer before moving to Eskom.

What went unnoticed by Transnet (and McKinsey, or so it claims), was that Regiments was passing up to 60% of its fees back to Essa.

“The [modus operandi] was to bring in a big entity to bring an appearance of respectability, as [a supplier development] partner and then you suck the lifeblood out,” a source at Transnet told us.

But there appeared to be a problem with concluding that Deloitte’s contracts formed part of the same pattern: Documents filed in Eskom’s court case show that Deloitte partnered with Nkonki in late 2015; in other words, well before Essa was known to have commenced capturing Nkonki.

“We had made a commitment to work with Nkonki when we had submitted our initial bid … When we had mobilised our projects initially, Nkonki was part of the delivery team,” Thiru Pillay, Deloitte Consulting’s managing director for Africa told us in an interview last month.

But to understand “why Nkonki?”, we needed to go back further, two sources insisted.

The fairytale begins

“The end of 2015 is actually where the fairytale begins,” said one of three Nkonki insiders we spoke to for this article. The person added: “I was waiting for someone to ask this question about Karthi, he was a major player in all of this.”

“Karthi” is Karthi Naicker, who had spent seven years as the group forensic manager at Transnet, including while it was acquiring vastly overpriced locomotives from a Chinese manufacturer who paid massive kickbacks to Essa and the Guptas.

(Naicker told us he investigated all allegations that came across his desk at Transnet and the locomotive deal was not among them: “It was never brought to my attention.”)

Naicker was also close to Singh, then still Transnet’s chief financial officer. “He and Anoj had a very tight relationship,” a Transnet insider told us. “Anoj leaves and goes to Eskom. Karthi then is basically told he needs to get out of Transnet.”

As head of forensics, Naicker had requested police to investigate a politically-connected security tender that had been approved by Siyabonga Gama; an investigation which almost derailed Gama’s bid to become chief executive of Transnet.

“Gama gets his henchmen to have a conversation with Karthi: ‘Find your way out, there’s no place for you here,’” the insider said.

Naicker confirmed that in his view, he couldn’t stay after Gama’s elevation.

“[L]et’s just say that my shelf space and sell-by date was over, there ... obviously coming up against these people was not going to be in my best interest so I had to look at new opportunities and that's when I decided to leave,” he told us.

We put this to Gama, who said via WhatsApp that he was unaware of Naicker’s role in the case and reiterated that he, Gama, was never criminally charged. “I have nothing against Naicker, anything that he says was initiated by me leading to his departure from Transnet is a figment of his imagination. It was his guilt for conspiring with a political board to falsely charge an innocent man that would have led him to depart.”

Whether Naicker was pushed out, or left voluntarily, Nkonki saw an opportunity. “They started working to get Karthi over to Nkonki,” a second Nkonki insider told us.

The rainmaker?

In September 2015, Naicker joined Nkonki to head up the firm’s consulting and forensics business. Staff were told that Naicker’s “connections with government would open doors”, the first Nkonki insider told us.

“Karthi was moved to Nkonki to get these contracts,” said Nkonki insider number two. And if proposals came from Karthi, “Anoj would sign it”, a third alleged.

But Naicker pushed back: “I refute any of those allegations that I was specifically put into Nkonki … It wasn't like that.”

Asked about his apparently close relationship with Singh, Naicker said: “He was a colleague of mine. I worked at Transnet, so obviously we had a working relationship.”

Either way, by mid-2016, the flood gates were opening. “Nkonki started getting work out of Eskom – a huge amount of work,” said the first Nkonki insider.

When Patel, Nkonki’s chief executive, later spoke about the firm’s meteoric rise at Eskom, it was his own “close ties”, to Singh, and not Naicker’s, that he emphasised.

During our research, we were handed a recording of a conversation with Patel where he boasted: “I won’t lie, since Anoj moved from Transnet to Eskom the doors opened for us there because I know Anoj.”

Second chances

One of the reasons we found it odd that Deloitte and PwC had picked Nkonki as a partner at Eskom was that Nkonki was not initially eligible for the work.

In July 2016, Eskom established the Strategic, Business and Management Consulting panel, consisting of nine international consulting firms (panel A), and 18 up-and-coming black-owned firms (panel B).

Nkonki had applied to be part of panel B, but with a technical score of 66%, had failed to make the cut.

When both Deloitte and PwC submitted bids in September 2016, they knew their contracts required them to subcontract to “panel B members only”. Despite this, they largely overlooked the 18 firms on panel B and picked Nkonki.

The only exception from panel B was In4Group. Deloitte allocated it just 1% of the so-called Results Management Office project fee – 26% would go to Nkonki.

Then, curiously, days after the bids closed, Eskom’s board tender committee approved the creation of a new panel – panel C – for black-owned companies with a technical score of between 50 and 70%, including Nkonki.

Naicker, the third Nkonki insider told us, took credit: “He said, ‘Nkonki wouldn’t be on the panel if it wasn’t for me.’”

Naicker denies that he said this and insisted that the decision to create panel C was “an Eskom process”, which he was not involved in. Yet the panel was undeniably good news for Nkonki and had the effect of retrospectively fixing the flaw in both PwC and Deloitte’s bids.

“The panel was created for Nkonki to get a foot in the door, so they could legitimately provide work to Eskom,” the first Nkonki insider said.

When we asked PwC last year why it had chosen Nkonki despite the firm not being on panel B, legal head Anton du Randt told us: “[T]he process for panel C appointments were well underway, and we had understood that the panel C appointments would be finalised … imminently, so whether or not [Nkonki] were on the panel on the date that we submitted our first bid I can’t tell you.”

Deloitte Africa chief executive Lwazi Bam, by contrast, told us that Deloitte did not know panel C existed until Eskom formally announced it in February 2017, five months after Deloitte submitted its bid.

According to Bam, Deloitte knew the contract said “panel B members only”, but Nkonki had already worked on the project with Deloitte for several months before the contract was awarded.

“It would have been counter-productive, and would have placed the running projects at risk, to remove Nkonki from these assignments … and neither did Eskom require us to do so,” he told us in a 13-page letter last year.

Betting on Nkonki

The theory, put forward by several sources we spoke to, was that Nkonki was one of the beneficiaries of an unwritten rule. “If you don’t do business … with these entities you ain’t getting any work,” the Transnet insider told us.

“My understanding is they were told to partner with Nkonki, they didn’t have a choice… It was an instruction,” the first Nkonki insider said.

“The big … firms didn’t like partnering, but because Anoj was there he made it clear they had to partner with Nkonki,” the second Nkonki insider said.

Singh declined to answer our questions, merely saying: “I was not part of any of the procurement team[s] that made the award of any tenders at Eskom.”

When we put this theory to PwC last year, Fulvio Tonelli, PWC Africa’s chief operating officer, insisted that Nkonki was their choice. “Nobody said to us you need to use [Nkonki] if you want to secure this work,” he said.

Asked again about the allegations, Tonelli said: “PwC was not instructed to, nor would we accept such instruction to, partner with Nkonki Inc or any other third party at the insistence of a client.” (Read Tonelli’s letter.)

Deloitte also rejected the insiders’ theory. “All the [supplier development] partners used by Deloitte on work for Eskom were chosen by Deloitte,” Bam wrote – adding that Deloitte had also lost bids submitted with Nkonki.

“We did not need Nkonki to sell our work or position our work for us,” Pillay confidently told us.

Naicker also insisted that Deloitte “approached us … they secured the work with Eskom”.

But in the recorded conversation, Patel appears to say the opposite:

“Deloitte and PwC are not happy with us because they’re forced to use us on all these contracts.

“You look at the Capital Scrub” – a reference to the PwC contract that was potentially worth billions – “we’re taking a large chunk out of it. And it’s just because we are panel C, they are panel A. And they were asked to partner with us.”

Although, he later says, “They could have partnered with any firm”.

Twenty minutes later in the recording, Patel says: “Actually, PwC came to us to say, ‘We want to tender for the Capital Scrub’. We said, okay, but we told them we don’t have the skills yet.”

According to Patel, PwC solved this problem by introducing Nkonki to a panel B member that had the necessary skills. Nkonki simply subcontracted it.

Despite their extraordinary outreach to Nkonki, both PwC and Deloitte insist they were ignorant of their partner’s connection to Essa and the Guptas when they partnered with them in 2016. But events would soon change that.

Going nuclear

At the start of November 2016, three things happened in quick succession:

On 1 November, Deloitte submitted an unsolicited proposal to Eskom to develop the business case for the contentious nuclear build programme.

On the same day, Deloitte received a letter from Nkonki, informing it that the firm’s founders – Sindi Zilwa and Mzi Nkonki – had sold their shares to a minority shareholder, Mitesh Patel who would now take over as chief executive of Nkonki.

What few people knew, including the executives at Deloitte, they say, was that Patel’s takeover had been engineered and financed by Essa, who would be entitled to 65% of Nkonki’s rapidly growing profits.

Then, on 2 November, the public protector’s State of Capture report was released and the extent of Essa and the Guptas’ influence at Eskom was laid bare.

“When the State of Capture report was issued, for the first time we understood what was going on at Eskom,” Pillay told us.

Over the next two months, Deloitte conducted what it described as a “rigorous account review”, of its Eskom work and put in place a “separate governance forum”, to monitor work at Eskom going forward.

“Our BEE sub-contractors and their activities were a point of discussion from a delivery, quality and risk perspective,” said Bam.

But the explosive contents of the public protector’s report did not put the brakes on Deloitte’s involvement in the nuclear project. That piece of work, along with its budget of R14.9-million, was simply added as a modification to one of Deloitte’s existing contracts.

Joining the dots

By 2017, Nkonki was one of three firms that was “pumping inside Eskom”, according to the recorded conversation with Patel.

Aside from the PwC and Deloitte contracts, KPMG had picked Nkonki as its partner for another major consulting contract at Eskom.

KPMG told us it selected Nkonki because “KPMG had previously worked with Nkonki on other assignments”, and “Nkonki had the necessary skills and experience”. KPMG also said it sought and received confirmation from Eskom that Nkonki was now an eligible member of the panel. (Read KPMG’s letter to us.)

At Transnet, Nkonki submitted two unsolicited bids – identify cost-saving initiatives and boost sales on the iron ore and coal lines – and, with no tender, was awarded an open-ended consulting contract for “up to R500-million”.

Documents filed with the Zondo commission show Nkonki’s proposal bore astonishing similarities to a scandalous McKinsey-Trillian project that bled R1.6-billion from Eskom.

But by this time, rumours were starting to circulate about who was behind the meteoric rise in Nkonki’s fortunes.

An international consulting firm provided information to amaBhungane on condition that we did not name it. The firm showed us a due diligence report where it had rejected Nkonki, supposedly based on information from “two independent sources” about Nkonki’s connection with the Guptas.

“While it's important to note the sources did not provide hard evidence, or specific allegations of corruption, they both said … that Mr [Ajay] Gupta may have made representations for Nkonki to receive state contracts,” a consultant from the firm told us.

Patel, who denied Gupta connections when we first reported on it, would not answer specific questions for this article. His attorney wrote in reply that we had “irreparably destroyed” his client’s business and personal life and as such “he will not indulge you or the Press any further”.

He added that Patel denied any allegations that may negatively impact him. But the rumours did not go away; in mid-2017, Deloitte was hearing the same thing.

“[W]e had heard rumours,” Pillay confirmed. “[W]e then considered what we were hearing and we terminated the business partner agreement with Nkonki in about mid-2017.”

But, inexplicably, Deloitte did not remove Nkonki from the projects at Eskom. Instead, Nkonki was allowed to stay on at Eskom for another three months to complete the consulting projects the two firms were working on together.

“[W]e were hearing anecdotal rumours. To terminate a contract, you would have needed a little bit more … The view we took was … we can exercise our discretion. So we did and [said], ‘Run out your work’… [B]ack then in 2017, there wasn't enough data to act otherwise,” said Pillay.

Deloitte did not report its suspicions to anyone at Eskom. Instead, it quietly took Eskom’s money, completed the contracts and walked away.

“I think, in hindsight, one could reflect on [the decision not to alert Eskom]. But at the time, we felt the responsible action was to terminate the relationship with Nkonki and let the processes that were running play themselves out,” said Pillay.

Deloitte would eventually receive R207-million from Eskom; Nkonki’s cut was R32.7-million.

In hindsight

There are a lot of things that, in hindsight, Deloitte would have done differently.

For instance, receiving multiple contracts worth R207-million with no competitive bidding process looks bad. (See The dirt on Deloitte’s consulting contracts at Eskom, Part 1.)

“[I]n hindsight things look a certain way,” Pillay conceded. “When you look from 2019’s vantage point as to how did Eskom procure services over the last 20 years, you have a certain view.”

Partnering with Nkonki, a company that was covertly acquired by the architects of state capture, looks bad too – particularly when this appears to follow a pattern of big consulting firms extracting millions from state-owned entities by taking Essa and the Guptas along for the ride, whether inadvertently or not.

“I can see how one might connect those dots, but I think there is no proof or evidence to suggest that that's what happened – that's entirely speculation,” Pillay insisted when we put it to him that Nkonki’s presence may have given Deloitte an advantage.

“Our intent was not to defraud and be corrupt. Our intent was to do the best we could [to] honour the obligation to the client, and to follow their process… I mean, Anoj, when was he CFO of the year? 2014, 2015… we did not appreciate the way the dots have now connected.”

“Were we enriched by the Gupta network?” Pillay asked later, posing one of his rhetorical questions. “Absolutely not.” DM

Additional reporting by Sam Sole

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.