Allan Gray: We didn’t buy Net1 to profit from Sassa crisis


Johannesburg - One of South Africa's largest asset managers, Allan Gray, says it didn’t buy shares in social grants distributor Net1 UEPS Technologies to profit from a growing crisis facing the welfare system.

Drama has engulfed social grants with the South African Social Security Agency (Sassa) admitting it isn’t ready to assume the payment function to 17 million recipients by April 1, as previously planned.

In 2013, the Constitutional Court declared the R10bn grant payments tender run by Net1’s Cash Paymaster Services (CPS) invalid amid irregularities in the awarding of the deal.

READ: 'We're not holding Sassa to ransom' - Net1

The court ordered Sassa to reissue the tender process, which Net1 ultimately decided not to participate in. But Sassa ended up not awarding a new contract as it said the bids it received were non-compliant.

The situation has sparked a crisis with calls for Social Development Minister Bathabile Dlamini to step down. Meanwhile, the Constitutional Court on Wednesday demanded answers on when exactly Sassa came to the realisation that it couldn’t deliver social grants itself. A court hearing is planned for March 15 on the matter.

And Allan Gray - which holds almost 16% of the issued share capital of Net1 on behalf of its clients - has come under the spotlight in the saga.

Over the year, Net1's share price on the Johannesburg Stock Exchange (JSE) has increased around 20% from R145.50 on March 9 2016 to an open of R175 on Thursday morning. On New York's Nasdaq, Net1's stock has also increased over 40% over the year from $9.11 on March 9 2016 to a close of $13.32 on Wednesday. 

Sygnia CEO Magda Wierzycka wrote in the Daily Maverick this week that the “Sassa saga was an opportunity for Allan Gray and other owners of Net1 to stand up and intervene in the matter”.

But Allan Gray’s chief operating officer, Rob Dower, has defended the asset manager’s investment in Net1.

“There seems to be a sense that we bought Net1 shares for clients expecting to profit from the looming crisis in grant payments. This is simply not true,” said Dower in a note published on Wednesday.

“Our investment case was not based on the contract being renewed after 31 March 2017. From the affidavits filed with the Constitutional Court, it looks as if Net1 has done its best to fulfill its constitutional obligations in terms of the 2014 Constitutional Court Order.

"Like all sensible South Africans, we sincerely hope that a workable solution is achieved to allow for the payment of social grants to continue,” he wrote.

READ: Treasury won't break law on Sassa deal - ANC

Meanwhile, Dower said that Allan Gray has been a responsible investor in Net1.

“We have exerted considerable pressure on the board since investing in 2012 on issues of corporate governance and sustainability,” wrote Dower in a note.

“In management meetings we have asked the tough questions of Net1 that you would expect about its business practices and carefully considered its answers, including references to several external investigations, which have not found evidence of wrongdoing,” wrote Dower.

Dower said while Allan Gray wields “some influence over management and the board” of Net1, the asset manager is “not in control of the company”.

“Our investment is based on the company’s track record of successfully implementing reliable and robust payment technologies, which handle millions of transactions, both on- and offline, across different businesses and countries,” said Dower.

Debit orders, cross-selling

Dower also responded to the controversy surrounding Net1 companies selling the likes of insurance products and airtime to grant recipients.

“Recent opinion pieces have asserted that Net1 used the database of grant recipients to illegally and/or improperly sell a range of additional services to them through a network of subsidiary companies,” wrote Dower.

“This was the specific subject of a consumer tribunal judgment in early 2015, which found no evidence of abuse; and an independent KPMG audit came to the same conclusion,” Dower said.

The Allan Gray COO further said that debate around the sale of services to recipients is one that further touches on the issue of financial inclusion.

“If Net1 doesn’t use the grant data to improperly sell financial products to the poor, then the difficult question that remains is whether it is bad or wrong to sell financial products to the poor at all and / or to allow poor people to pay for these from their bank accounts,” said Dower.

“This is very difficult ethical territory: these products can cause harm but they also constitute financial inclusion, allowing people to access a risk safety net and basic credit at lower cost than from an informal lender.

"On the whole, our society seems to believe that more financial inclusion for the poor is good, despite the harm that can be caused by entry-level consumers buying policies or borrowing money on terms they don’t fully understand."

Dower went on further to say that the law is “aware of the risks” around these issues and that there are “very stringent and evolving regulations that govern how this happens”.

“And, as long as a company is compliant with these, as Net1 and its subsidiaries have repeatedly been shown to be (along with the major SA banks and insurers, for example), we don’t think it should be a general policy of Allan Gray not to invest in providers of financial services to the poor,” said Dower.

“Given the perceived issues with the cross selling of other products by Net1, we would welcome any additional controls or limitations imposed by a potential new contract,” Dower said.

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