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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 is 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.

 

Q4, 2018

Q3, 2018

Revenue

$64 million

$73.5 million

Operating profit

$4.3 million

$12.7 million

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 two 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.

Updated Sunday, October 21, 2018:

Net1 responds

Net1 CEO Herman Kotzé says it appears that the panel doesn’t have the “knowledge or understanding” of the company’s South African transaction processing division to arrive at the conclusion that the company “overstated the risk of incurring losses.”

Kotzé says that despite the “enormous losses” that CPS would incur during the last three months (July to September 2018) of the Sassa contract, the company still deployed its social grants payment infrastructure to a reducing number of beneficiaries.

“We continued to deliver the service at a significant loss with the firm belief that the Constitutional Court will endorse the recommendation made by National Treasury, which remains outstanding. It is important to note that the Treasury recommendation was based on CPS paying two million beneficiaries per month – the actual number paid during the last three months was significantly lower …”

Regarding the panel’s views on CPS making profits from other sources, Kotzé says this “clearly demonstrates the panel’s lack of understanding of the various components that make up this business segment as there are several other South African businesses included in this segment that have nothing to do with the Sassa contract.”

“The full extent of the losses we have suffered will become apparent when we file the CPS contract accounts with the court in November and when we file our fiscal 2019 first quarter financial results, which will clearly address the unsubstantiated predictions made by the panel.” 

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I think the PO receives higher fee than Net1 asked for.
The PO’s fees:
Monthly service fee 13.00
Over-the-counter payments 23.49
Cash paypoints 51.77

Whoever charges what doesn’t matter because ultimately it’s the taxpayer who will have to pick up the majority of this tab!

They were already making a handsome profit. This is just plain greed. If I were the judge I’d put some cuffs on people and hefty fines would be applied.

While I understand that people need to be paid for their work, but to milk it so much and this is to help the poorest of the poor, it disgusts me like little else in this world.

What is truly astounding is that Net1 is not yet being investigated for corruption and everything that goes with it.

Or is it that it has been so entrenched with the ANC for the past 2 decades that the consequences that Pandora box would be catastrophic?

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