Cash Paymaster Services (CPS) – and, more pointedly, its parent company, Net1 UEPS – made far more money out of the social grants contract than even its critics think.
New details about the company’s finances form part of the second report of the Auditor-General and court-appointed expert panel, who are overseeing the transition to a new grant payment system by April 2018.
The report is scathing about the apparently inexplicable incompetence demonstrated by the SA Social Security Agency (Sassa) in managing the transition.
“Sassa’s senior leadership, who are responsible for driving this process – with certain individuals being exempt from this finding – do not seem to have the required knowledge, experience or skills, or even the will, to execute the Sassa mandate,” said the panel. It recommended that Treasury investigate and possibly prosecute Sassa managers.
The panel said it was “virtually impossible” by now to make a smooth transition to a new social grant payment system by the deadline of April 1 2018.
It is possible that CPS will, once again, have to continue operating some parts of the grant system as a “last resort”.
Shockingly, the panel found that the proposed solution involving the SA Post Office (Sapo) as the new pay agent would be “significantly” more expensive than the cost of using CPS.
This, despite the panel also finding that CPS’s service could be a lot cheaper than it is.
The report was prepared for the Constitutional Court last week and includes an annexure exploring the various income streams of Net1, based on the unlawful contract it has with Sassa.
Coincidentally, this report follows an independent report by civil society organisations that City Press reported on last week, alleging that CPS had “understated” its profits.
However, the expert panel had access to CPS’ financial statements and have highlighted multimillion-rand income streams that are inextricably linked to the Sassa contract. These are not reflected in the one-page declaration submitted by CPS to the Constitutional Court on May 30, stating that its pretax profit over the entire five years was R1.1 billion.
PANEL REPORT FINDINGS
According to the panel report:
. More than R1 billion was paid to CPS’s parent in the US for patent and licence fees over the five-year contract. This expense was subtracted from the R1.1 billion pretax profit that CPS declared to the court in May.
. CPS and its banking partner, Grindrod Bank, are earning millions of rands in interest from the social grants that sit in accounts for a few days before being drawn by beneficiaries. In the most recent financial year, Net1 earned R50 million from this.
“CPS argued to the panel that it is entitled to this interest as it incurs banking costs,” read the report. But, added the panel, the agreement with Sassa contradicts this assertion.
. On top of that, the expert panel “remains concerned that Net1 may be earning significant operating profits from bank fees charged to Sassa beneficiaries”. This fee revenue is R1 billion a year, but it is impossible to tell how much of that is profit.
CPS charges ATM fees that are sometimes much higher than the normal interchange fee charged when customers of one bank use the ATMs of other banks, the panel found.
Questions about Net1’s marketing of financial services to the grant recipients will be explored in the next report of the expert panel, which has been tasked with assessing the situation as it unfolds.
SAPO FAR WORSE
The reason the panel investigated the economics of the CPS contract was initially to understand the logic of the proposed takeover by Sapo next year.
“Our initial analysis of the Sapo proposal shows that the cost to Sassa for implementing the full Sapo solution will be significantly greater than the current cost paid to CPS,” said the panel.
The proposed charge per recipient is 49% higher than the current CPS charge.
“The panel believes these proposed price increases are opportunistic and made possible only by the lack of competing bids,” it said.
This hike would mean an additional cost of R2 billion over five years, it added.
By way of comparison, CPS has annual operating costs of R1.8 billion, of which R400 million comprises licence fees to parent company Net1.
Sapo said it needs R2.8 billion in year one – an amount which will escalate to R3.7 billion by year five.
The main reason Sapo needs so much money is that it wants to fund capital expenditure on pay points and ATMs.
The panel wants the court to order Sassa to instead use the existing banking system to pay most grants.
NET1 DEFENDS ITS DISLOSURES
Last week, City Press reported on a study commissioned by human rights organisation the Black Sash Trust and the Centre for Applied Legal Studies that alleged that CPS had very likely massively understated its profits from the Sassa contract.
Net1 has attacked this report for containing “egregious errors” and called on the civil society groups to withdraw it.
The report, by economist Dick Forslund from the Alternative Information and Development Centre, analysed the one-page financial statement CPS had provided to the court in May, using only public sources of information.
Forslund found that CPS’s declared pretax profit of R1.1 billion from the Sassa contract over five years was understated by anything between R214 million to R614 million. Most of this estimate stems from a simple comparison of the declaration to the court with the public financial statements of CPS’s parent company, Net1.
Forslund has now admitted one mistake that would have inflated his estimate: he failed to take into account the fact that CPS already did social grants business with Sassa on a smaller scale before the start of its contentious five-year contract in 2012.
This led him to include revenues predating the five-year contract in his calculations.
It is hard to calculate the scale of this mistake, he told City Press.
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