Expiring social grant contract 'will take its toll on CPS finances'

NET1's Cash Paymaster Services (CPS) will come under financial strain in 12 months when its contract with the South African Social Security Agency finally comes to an end, after years of controversy around the contract and after months of speculation about whether grants would be paid from April.

In a damning judgment that lambasted Social Development Minister Bathabile Dlamini and Sassa for creating an emergency because they failed to do their jobs, the Constitutional Court ruled on Friday that CPS would continue with the contract under the same terms and conditions as those in the current one, which expires at the end of this month.

CPS had recently said it would negotiate a new contract at a higher fee.

David Shapiro, the deputy chairman at Sasfin Securities, said he suspected that the company would be hurt when the Sassa contract expired

"Of course it is going to hurt them, it will damage their reputation ... I thought that with this kind of scandal they would have had to answer to the American authorities," said Shapiro.

But he added that the final impact might not be "dramatic".

In its financial results in June 2016, Net1 said unless it could replace most or all of the revenue from the Sassa contract, its operations, financial position, cash flows and future growth were likely to suffer materially.

But the company has reduced it exposure to social grants. In 2012, when it was awarded the contract to pay social grants on Sassa's behalf, it derived 41% of its revenue from CPS. The revenue contribution from CPS dropped to 21% in 2016.

In 2014, the Constitutional Court found that the contract with CPS was invalid but suspended that invalidity until March 31 2017, by which time Sassa was meant to have appointed a new service provider for the disbursement of grants or taken over the payments itself.

Allan Gray, the second-largest shareholder in Net1 with just below 16%, said on Friday it would be happy if Net1 relinquished all profit on the contract extension, in order for grants to be paid.

Allan Gray chief investment officer Andrew Lapping said the company had decided to take a more active role with Net1 and hold the company's board and management to account.

But asked if it would consider selling its stake in the controversial business, Lapping said Allan Gray was not going to end its relationship with Net1. It would, in a letter to the Net1 board, reiterate its expectation of serious changes at Net1.

Allan Gray said in a statement it had engaged a third party to help it investigate allegations that CPS illegally deducted funds from grant beneficiaries and that it used their personal data improperly. It also recommended that all recurring monthly deductions for airtime be cancelled and information be given on how beneficiaries can cancel policies.

Lapping said Allan Gray welcomed tighter supervision of the company and enhanced safeguarding of beneficiaries' personal information, which was part of the Constitutional Court's order.

The company's shares, listed on Nasdaq in the US and on the JSE, were down on Friday, falling 1.17% on Nasdaq and 4.75% on the JSE. The share is mostly traded in the US.

CPS had in recent weeks said it wanted to extend the contract by two years, but this was rejected by the court.

But some analysts indicated this week that the 12-month extension of the contract given by the court may be insufficient time for another company to take over the payment of the 17million grants.

South African Post Office CEO Mark Barnes has said Post Bank could manage the distribution of Sassa grants.

But Ashburton Investments fund manager Wayne McCurrie said that given the overall complexity of the system, it would be difficult for another company to take over the payment of grants within a year.

"I think that he [Barnes] is being optimistic ... the whole process of the Post Office being awarded a contract is not going to take days, it is it going to take months," said McCurrie.

Barnes said that Post Bank already had five million bank accounts which processed 20million transactions a month. To add the grant recipients to the bank's databases would take weeks, not months, he said.