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McKinsey apologizes for ‘mistakes,’ calls for probe of Gupta-linked partner in South African rail deal

Duduzane Zuma, son of former South African president Jacob Zuma, leaves the court, where he faced corruption charges before being released on bail on July 9, 2018 in Johannesburg.

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Global consulting firm McKinsey & Co. is calling for an investigation of the role of its former South African partner in a controversial US$5-billion locomotive deal in which Bombardier Inc. was awarded a quarter of the contract.

In a lengthy apology for “mistakes” in its South African business activities, McKinsey announced on Monday that it had repaid US$69-million to South Africa’s state electricity utility for excessive consulting fees that the utility has called “unlawful.”

McKinsey’s global managing partner, Kevin Sneader, said he is “deeply sorry” for the company’s role in the corruption scandal that centred on the Gupta family, who were business partners of the son of former South African president Jacob Zuma.

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He denied that McKinsey had paid any bribes for its lucrative contracts in South Africa, but he admitted that it had failed to do proper background checks and failed to notice that its state clients may have been “compromised” in the corruption scandal. The scandal has become known as “state capture” because state companies fell under the heavy influence of the Guptas and their lieutenants.

Mr. Zuma’s son, Duduzane Zuma, appeared in court on Monday on corruption charges. He is accused of helping the Guptas offer a multimillion-dollar bribe to a deputy finance minister in exchange for helping the Guptas in business deals.

“I am very sorry personally and on behalf of McKinsey & Co. for the fact that we have had anything to do with any of the issues surrounding state capture,” Mr. Sneader said in a speech in Johannesburg on Monday in which he used the words “sorry” and “apology” more than a dozen times.

“State capture has had a horrible effect on South Africa, its economy and its people,” he said.

Until this month, McKinsey’s global managing partner was Dominic Barton, a Canadian who heads the Canadian government’s advisory council on economic growth. Over the past year, Mr. Barton has travelled six times to South Africa to respond to issues relating to the corruption scandal and McKinsey’s business with state companies, a McKinsey spokeswoman said.

One of McKinsey’s clients was Transnet, the state-owned freight company that awarded the locomotive contract to Bombardier and three other suppliers in 2014.

McKinsey’s local partner was a Gupta-linked company, Regiments Capital, which assisted Transnet in awarding the locomotive contract. The contract was nearly 40 per cent more expensive than McKinsey had estimated just a few months before it was awarded, and this has sparked investigations by the new government of President Cyril Ramaphosa, who replaced Mr. Zuma in February.

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In his speech, Mr. Sneader said McKinsey did not decide the locomotive contract’s price or winning bidders, and it had withdrawn from its consulting work before the contract was awarded, but he acknowledged that there are “questions” about the role of Regiments in the locomotive contract.

“We should have conducted a more thorough and professional due diligence of Regiments in 2012,” he said.

“There were times in 2014-15 when our team sought and received the written and spoken word of Regiments’ executives around compliance with anti-corruption laws. We assumed those assurances were truthful. The exact role of Regiments at Transnet is still unclear to us and we hope it is fully examined by the authorities.”

Senior executives of Regiments later formed Trillian Capital, which was run by a close associate of the Guptas, and which worked with McKinsey on a major contract at Eskom, the South African electricity monopoly. Eskom said last year that its payments to McKinsey were unlawful.

“We should have questioned Trillian with greater skepticism and greater urgency,” Mr. Sneader said.

He said McKinsey came across as “arrogant or unaccountable” in its response to the corruption scandal.

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“To be brutally honest – we were too distant to understand the growing anger in South Africa. ... The trust of our clients and the public in South Africa is now, understandably, very low.”

Bombardier, which received US$1.2-billion from the Transnet locomotive contract, has denied any wrongdoing in the deal. The deal was supported by US$450-million in financing from the federal export bank, Export Development Canada.

An investigation by an outside law firm, at Transnet’s request, concluded that the locomotive contract was “cloaked in corrupt and reckless activity.”

Most of the investigation’s focus was on two Chinese suppliers that had links to the Guptas, but it also found that Transnet made “vast and peculiar” advance payments to Bombardier and one of the Chinese companies for hundreds of locomotives that have still not been delivered. These were examples of apparent “impropriety” and illegality in the locomotive deal, it said.

The Globe and Mail asked Bombardier for comment on Mr. Sneader’s speech, but the company had not responded by Monday afternoon.

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