Sassa scandal: Much more beneath the surface

Most insidious are Net1’s micro-loan profits – Magda Wierzycka.

SIKI MGABADELI:  We’re taking a look at this Sassa story. You know of course that by 16:00 today Sassa and the Minister of Social Development Bathabile Dlamini had to account to the Constitutional Court. They gave them various questions. I suppose it’s what we essentially in journalism call the five “Ws and an H”. It was “who knew, what did they know, when did they know it, why did they do nothing, where did they find out, and how did they find out?”. Those answers were expected by 16:00 today. We heard in the news that they did eventually file that particular response to the Constitutional Court. We’ll get more details for you in the news here on SAfm.

But we are looking now a little more broadly at who else may or may not have been involved, or at least have benefited from this muddy situation. Asset management entrepreneur Magda Wierzycka, has highlighted that investors in the Allan Gray Fund appear to be beneficiaries of the dealings that impact on the country’s most vulnerable. The Sygnia founder has questioned why Allan Gray, which is a large private asset-management house, hasn’t done more in trying to help to resolve the crisis.

Allan Gray’s chief operating officer, Rob Dower, speaking to one of the financial publications, stood his ground and was adamant that the idea to invest in Net1, the company at the centre of the scandal, was not to ride on the backs of impoverished citizens.

But let’s speak to Magda. She joins us now. She is CEO of Sygnia Limited, an investment-management company. Magda, thanks for your time today. I think let’s take a few steps back. Explain to people how Allan Gray is invested in Net1.

MAGDA WIERZYCKA:  Allan Gray is one of the two largest shareholders in Net1. Net1 is a listed company, listed both on the JSE and on the Nasdaq Stock Exchange, which is quite useful because the listing on Nasdaq means that they have to disclose quite a lot of information, which they don’t necessarily disclose in South Africa.

But there is a lot of information available about Net1, about their business objectives and about their revenue lines and profits and so on. Allan Gray obviously feels Net1 is an investment opportunity. Their whole substantial shareholding in the business I think was 15.6% on the last count.

Now I don’t want to single out Allan Gray, because many managers hold many shares. But I think in this instance they probably should have paid more attention to the manner in which Net1 conducts its business with respect to South African grant recipients, because things are not all that they seem.

SIKI MGABADELI:  There has been that investigation by US authorities into Net1. I can’t remember if it was an SCC investigation. But then, from what came out of that, are there things in there that should have made fund managers and asset managers in South Africa ask some questions?

MAGDA WIERZYCKA:  Well, I think the US investigation after the 2012 tender was awarded, was undertaken by two separate bodies, and it actually involved investigation into possible corruption or whether the payments were made to South African government officials to secure that payment. The SCC seemed to have suspended its investigation. The US Department of Justice has not. That investigation remains open.

So certainly there is a question mark over that. I think that Net1 has been involved in numerous cases that have been brought against the company. But I don’t think you need to even look at the legalities of it, just look at some of the business practices, to realise that potentially from a kind of governance/social perspective, this is not a desirable investment proposition.

SIKI MGABADELI:  Let’s talk about that, because that relates to things like cross-selling to poor and vulnerable people. It does of course have a bearing on any company that says that they have social responsibility practices at the heart of their governance.

MAGDA WIERZYCKA:  Agreed. So let’s look at Net1 and how they make their money. The stuff that is in the press has to do with the cash payment offices, which is the arm of Net1, and deals purely with the administration of the grant payments, for which they charge government an administration fee. That revenue, as per their own financials, amounts on an annual basis to R1.9 billion.

The profit from that contract is under dispute right now in the Constitutional Court. They still haven’t disclosed those numbers today. What they did disclose is that their CPS contract constitutes 21% of their revenue. If  one was to apply the same 21% to their profit, that would imply that they make a profit of roughly R290 million from that contract. But that is small change in this whole equation.

What one needs to understand is that Net1 owns a number of subsidiary companies. It really is a network of companies, which provide different services and they make their money in different ways. So if you look at grant recipients, each grant recipient has a bank account open to its Grindrod Bank and the recipients are issued with a Sassa-branded MasterCard. They can use that MasterCard at CPS pay-points to withdraw their grants, or they can use them at ATM machines.

Now again, Net1 owns some ATM machines. The holders are charged transaction fees for withdrawing their money. And they are charged transaction fees every single time they use their Sassa branded card. Every time they pay for something, every time they do a balance enquiry at an ATM machine, there are transaction charges. And every time they pay for something with that card there are transaction charges.

So Net1, in terms of transaction charges, there might be some numbers in there which are not related to grant recipients, although they do say that the entire client base is purely beneficiaries – so you can draw some conclusions from that. But the revenue from the transaction charges alone is R1.2 billion – that’s in addition to the R1.9 billion in the public domain.

So then again, if one applies profit margins to it, they appear to be making a profit of roughly R350 million a year.

I think that’s only part of the proposition. The biggest issue has to do with what additional services Net1 provides to grant beneficiaries. And those that surface – the largest by far – are the micro-loans, followed by life insurance policies – funeral insurance and some life cover, followed by sales of electricity and airtime. Plus the revenues from that, what they call their financial inclusion sectors, make R3.6 billion in revenues a year, and a pre-tax profit of R791 million.

So if you add up all the profits made by Net1 in South Africa, that amounts to R1.5 billion in profit before tax. And you can assume that a large percentage of that profit has to do with grant beneficiaries and provision of services to grant beneficiaries.

Then what’s so insidious about it is the micro-loan situation. It’s based on research done – and these numbers are quoted in various reports. The type of micro-loans that they provide range from R410 to R1 050. The duration is between three months and six months. They don’t charge “interest” on those loans, so they market them as “interest-free” loans. They charge a service fee. Now on a R1 000 loan, the service fee is R330.

SIKI MGABADELI:  Wow!

MAGDA WIERZYCKA:  So when you annualise it and reflect it as an interest rate, that is equivalent to an effective annual interest rate of 164%, which is just astronomical by any standard.

SIKI MGABADELI:  I have no words.

MAGDA WIERZYCKA:  There are no words. A R410 loan for three months attracts a service fee of R100, so converted into an effective annual rate, that’s 280%. Remember, there is absolutely no risk of non-payment here, because they deduct it from the grant payment and they also issue it with a basic life insurance policy underpinning this account. So the money that’s being made by Net1 is huge, and I can’t help feeling that in all of these cost proceedings one issue has been raised.

Everyone is focusing on CPS as being the company that is quoted in all the legal papers that we are seeing coming out, and in the Constitutional Court, whereas in fact all these legal proceedings should be brought against Net1 and all its subsidiary companies, and not just CPS, because the revenue is being flipped between different companies.

This is the situation. When you look at the investment place, yes, absolutely, this company from a financial growth potential perspective makes sense, but from an ethical and moral perspective not so much.

But to give credit to Allan Gray, they did come out this weekend, the chief investment officer was quoted as saying that they potentially have been misled by management and they will now investigate the micro-loan situation.

SIKI MGABADELI:  I think it also raises the need for investors across different companies in South Africa, across different sectors, to ask more questions, for shareholders to be more active about what their money is actually being invested in.

MAGDA WIERZYCKA:  Absolutely. I think shareholder activism in South Africa is virtually non-existent. And the accountability from asset managers that investors should be asking for is also non-existent. So many asset managers have these E&C policies on their websites, but really that is just a PR exercise. People don’t really refer to that in any meaningful way.

I think what’s useful about this Net1 situation is that for the first time it brings this issue to the table, and people are truly looking at it and saying, hold on, how is my money being invested, why am I supporting Net1 with my money where it’s clear that they are targeting the poorest of the poor.

SIKI MGABADELI: We’ll leave it there. Thanks so much, Magda, for putting the spotlight on this and for your time. Magda Wierzycka is CEO of Sygnia.

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290m profit on the contract x 100/21 = 1380m total profit from all sources ; so it seems unlikely that 1500m is attributable to SA ?

But that’s a quibble really, the abuse is clear enough.

Surely the regulation of microlenders should have dealt with the service fee wheeze by now ? The Capitec rollover story was another high-profile example, but I’m sure it’s the tip of the iceberg. I’ve even come across it in schemes sanctioned by unions.

I’m still not clear where the beneficiary database resides, who has rights to it ; and presumably large parts of it must by now be replicated in the ‘service-providing’ subsidiaries.

I wonder whether the question of cross-selling even came up explicitly in the original tender award – it seems to create a lot of opportunities for, um, participation at one remove from the contract itself.

Clever people will always make money out of stupid people.
Rich people will always make money out of poor people.
That’s how it is.

End of comments.

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