McKinsey gains explained

The letter from Max Leipold (The arithmetic is wrong, July 12) refers. Mr Leipold is quite correct – the arithmetic in my letter is confusing.

Business Day reported per Sikonathi Mantshantsha (McKinsey to repay Eskom R902m and apologise, July 9) an unpaid interest figure of R320m. Mr Mantshantsha applied a fixed rate of 10% per year (presumably as an approximation of the prime rate over the two-year period) to the entire fee paid by Eskom in the McKinsey debacle, being R1.6bn. In doing so he came to R320m, or R160m per year over a two-year period. In my letter I adopted this same logic but applied a rate of 5.5% per year (an estimation of a relatively conservative call rate), and I then rounded down the result to R175m.

I was therefore more generous to McKinsey than Mr Mantshantsha, in that I applied an approximate call rate as opposed to the prime rate. Neither of us, however, compounded our respective rates over a two-year period.

If we had performed our calculations on an amount of R1.6bn over a two-year period (nominal, annual, compounded monthly), the resultant amounts would have been R352.63m (applying 10% as the rate) and R185.6m (applying 5.5% as the rate).

Of course, these calculations are all informed by whether one applies interest to the entire fee of R1.6bn paid by Eskom, or only to the so-called McKinsey portion of R902m (interest would of course be less if the rates were applied only to the latter amount).

I thank Mr Leipold for pointing out the confusion. The more important issue, of course, remains that McKinsey would benefit in an amount exceeding nine figures were it to continue to refuse repaying interest, irrespective of the logic adopted in calculation.

Gawie Malan

Via e-mail