Net1 accused of overstating financial losses in Sassa fee negotiation

The company’s plea for an increase to its social grant payments fee might be undermined by its profits.

Net1 repeatedly warned that its subsidiary Cash Paymaster Services (CPS), would operate at a significant financial loss if National Treasury didn’t increase the fees paid to the company for distributing social grants on behalf of the South African Social Security Agency (Sassa).

The company is now locked in a dispute with Treasury over the fee it can invoice Sassa for services delivered in the six-month period ending September 30, 2018.

CPS had requested that its monthly fee be increased from R16.44 per beneficiary to R66.70 – an increase of R50.26 per beneficiary per month. It said that without the increase, it would operate at financial losses of at least R70 million per month or R420 million for the six months, which would put its ability to distribute social grants in jeopardy.

In a new twist – and with CPS no longer paying social grants from October 1 – a report by a Constitutional Court-appointed panel of experts has accused CPS of overstating its risk of financial loss.

The panel says the company was able to pay social grants at R16.44 per beneficiary until its contract with Sassa ended.

“This suggests that the risks articulated by CPS in its submission to the court were overstated, and the profits derived by its parent company Net1 from its charges to beneficiaries more than made up for these losses,” the panel said in its 10th report dated October 15, 2018.

The panel – featuring highly experienced individuals, including auditor-general Kimi Makwetu, former Reserve Bank governor Gill Marcus, Reserve Bank national payment head Tim Masela and others– was appointed by the Constitutional Court in 2017 to oversee the process of phasing out CPS’s contract with Sassa.

The contract was initially declared invalid by the top court in 2013 as the correct tender processes were not followed

The fee of R66.70 per beneficiary proposed by CPS was widely criticised as it would cost the national fiscus R166.7 million a month, or R1 billion for the duration of the six-month extension to the original contract. Former finance minister Nhlanhla Nene, on behalf of Treasury, instead recommended a fee of R46.46 per beneficiary.

The panel said that although Net1’s South African transaction processing division, which includes CPS, saw its revenue and profits fall in the third and fourth quarters of 2018 (see below), the extent of the decline was lessened by the company’s other sources of income, including card transaction fees.

Source: Net1 UEPS’s Form 10-K for the year ended June 30, 2018

The decline over the period is associated with the reduction in the number of beneficiaries being serviced by CPS (from 10 million to 2 million), which paved the way for the South African Post Office to play a major role in paying social grants.

The panel said that despite the decline in the number of beneficiaries serviced by CPS, the company still managed to generate profits, which explains why it was still able to distribute social grants at a fee of R16.44 per beneficiary for six months.

These profits include interchange and processing fees charged to beneficiaries using the old Sassa-Grindrod branded cards (Grindrod is a banking partner of Net1). Net1 also profited from Grindrod’s decision on April 1 to increase its fixed monthly bank fees on the Sassa-Grindrod branded cards from R6.91 to R10 for some 5.4 million beneficiaries. Out of the R10 fee, Grindrod earned R0.50 per account per month with the remaining R9.50 paid to Net1.

In determining an appropriate final fee, the panel wants the court to conduct a review of historical profits achieved by CPS/Net1 and to take the profits generated by Net1’s South African transaction processing division into account.

Net1 hadn’t responded to Moneyweb’s request for comment by the time of publishing.

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