Why National Treasury slashed CPS’s R1bn bonanza

National Treasury has rejected Cash Paymaster Services’s (CPS) proposed fee increase for the payment of social grants to 2.5 million beneficiaries over the next six months, which would have scored it a R1 billion bonus.

For the first time, CPS has revealed in court papers that it requested Treasury increase its fee to pay social grants from R16.44 per beneficiary to R66.70 (including VAT) under a new contract with the South African Social Security Agency (Sassa).

In March, the Constitutional Court granted a further six-month extension to Sassa’s invalid contract with CPS for the distribution of cash to a portion (2.5 million) of the 10.7-million social grant beneficiaries. The South African Post Office and Sassa are responsible for social grant payments to the remaining eight million beneficiaries from April 1.

CPS’s fee proposal of R66.70 per beneficiary means it would have scored R166.7 million per month or R1 billion for the six months of its contract, which expires in September 2018. However, finance minister Nhlanhla Nene on behalf of Treasury has instead recommended a fee of R51 per beneficiary, reducing CPS’s payment to R765 million. In court papers submitted to the top court on Thursday, Nene said CPS can further lower its fee to R46.46.

The National Treasury used four methodologies to determine CPS’s recommended fee structure. These methodologies included using the total expenditure by CPS in 2016/17 for cash payments and linking the inflation rate to the fee increase (referred to as “top-down”); excluding major capital investments by CPS and factoring in the number of beneficiaries per day (referred to as “bottom-up”); and using the budget Sassa has for the administration of cash payments (referred to as “affordability”).

The last methodology used the inflation rate increase difference at the time when CPS was awarded the Sassa contract in 2012 to the inflation rate projected for the 2018/19 financial year (referred to “adjusted original tender prices”).

See the fee proposal for each methodology below:

Source: National Treasury court papers

“The CPS’s price of R66.70 is higher than any of the used methods, with the highest outcome being R57.25 and the lowest outcome being R45.59,” said Nene.

Sassa’s new acting CEO Abraham Mahlangu, who filed the agency’s first monthly report on Monday as required by the  Constitutional Court, said CPS is yet to sign and agree to Treasury’s fee proposal.

CPS first mentioned the fee increase in March, when it became clear that Sassa had failed to find another service provider that would administer cash payments.

CPS director Nunthakumarin Pillay said if Sassa paid it the same fee of (R16.44 per beneficiary) under the extended contract, CPS would operate at a loss of at least R70 million a month or R420 million for six months.

The 2.5 million elderly and disabled beneficiaries that CPS pays don’t own bank accounts but access their social grants in a physical cash format via armoured vehicles kitted with its biometric UEPS/EMV technology belonging to CPS.

Pillay said reducing the number of social grant beneficiaries under the extended contract (from 10.7 million to 2.5 million) and keeping the same price as before (R16.44 per beneficiary) would result in reduced revenue and higher operating costs.

The costs associated with running its grants distribution services include salaries, security for cash-in-transit vehicles at pay points, insurance vehicles, equipment maintenance and more. “This loss [R70 million a month] will increase as the number of beneficiaries paid at pay-points declines,” said Pillay.

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