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Did CPS lie about its social grant profits?

Nov 19 2017 06:07
Dewald van Rensburg

A new report commissioned by human rights organisation the Black Sash claims that South Africa’s controversial social grants contractor, Cash Paymaster Services (CPS), and its parent company, Net1 UEPS, may have massively understated their real profits from the unlawful contract.

CPS claims that its pretax profit from the grant contract it signed with the SA Social Security Agency (Sassa) was R1.1 billion over the five years it had been mandated to make the payments.

This may be understated by as much as R614 million, according to the report authored by economist Dick Forslund from the Cape Town-based Alternative Information and Development Centre (AIDC).

That is before you even start looking at the ancillary income that other Net1 companies made from selling financial services to grant recipients over the years.

On May 30, CPS gave the Constitutional Court a specially prepared one-page financial statement, declaring its revenue and profit from the five-year contract that ended in March.

This statement had to be prepared in terms of a 2014 court order, which said CPS had “no right to benefit from an unlawful contract ... and any benefit that it may derive should not be beyond public scrutiny”.

However, the complete lack of detail in the financial declaration raises more questions.

The AIDC report does not definitively assert that CPS lied, but points to how ambiguous and unsatisfactory the declaration was as far as the court-ordered “public scrutiny” is concerned.

The simplest of comparisons with parent company Net1’s public annual reports already raises an enormous red flag.

In the annual reports, the group’s revenue specifically ascribed to the social grants over the contract period is R455 million higher than the R8.94 billion reflected in the declaration to court, Forslund has calculated.

The expenses CPS claimed in its court declaration also include a 2014 BEE deal which Forslund said should really be considered an expense of the parent company Net1, not the grant-paying company CPS.

The value of this share-based “expense” is not stated, but in Net1’s financial statements for 2014 it had been R117.15 million. Forslund adds this to his estimate of possible understatement of CPS profits.

Then there was the apparent inclusion of R41.8 million in bonuses for managers, which Forslund finds questionable, as “expenses under the contract”.

Using different assumptions, Forslund estimates that CPS’s profits from its unlawful contract were R214.2 million to R614.4 million higher than the company told the court.

That gives a high-end estimate of R1.7 billion, or a healthy profit margin of 18%.

Financial statements 

The CPS financial declaration to court came with a KPMG auditors’ note emphatically stressing that “these are not the CPS statutory financial statements”.

They explicitly exclude “income and expenses incidental to, but not arising from” the Sassa contract, said the auditors.

Forslund, however, says that without these, it is impossible to really understand the financial benefits that flowed from the unlawful contract.

The group’s subsidiaries sold insurance, microloans, airtime and prepaid electricity into the grant recipient market it had managed for the state.

“CPS has provided insufficient information for the court to draw a definite conclusion about how much CPS [and its fellow companies in South Africa] profited from the Sassa contract,” said the report.

If it was going to be “fully transparent”, Net1 would have to provide the actual financial statements of its unlisted subsidiary, CPS, as well as CPS’s own subsidiaries in the country, he said.

CPS should also provide itemised income and expense statements, listing anything over R30 million in order to put all suspicions to rest, the report added.

Unlawful contract

There is still confusion over why CPS was made to declare its income to the court in the first place.

The Constitutional Court ordered in 2014 that financial statements covering the income from the entire five-year contract had to be given to the court when the contract ended in 2017.

The judgment seemed to imply that the profits should get repaid to the South African state, but the judges never explicitly said so.

Earlier this year, CPS got law firm Smit Sewgoolam Inc to draft a legal opinion that reiterates that the court never said the company had to repay the profits, despite the court saying CPS was not entitled to “benefit” from the contract.

CPS’s parent company Net1 has, nevertheless, warned its shareholders year after year that it is very possible that someone will sue to recover the handsome profits the company made from running the social grant system in South Africa under an unlawful contract.

CPS still runs the system under a one-year extension after the department of social development infamously failed to put in place a system to take over the paying of grants when the CPS contract ended in March.

Black Sash had gone to the Constitutional Court in February this year, on the eve of the end of the CPS contract, to force the government to reveal its plan to take over the payment of the grants.

The current one-year extension of the CPS contract stems from this court application and is being supervised by the court. The intention is that Sassa and the SA Post Office will take over from CPS next year.

Damage done

Black Sash’s major concern with CPS has long been about the way that social grants have become the foundation of a larger business empire.

The nongovernmental organisation has campaigned against abuses of grant recipients, who lose their grants to deductions for financial services they do not need or want, and allegedly get saddled with, without informed consent.

Recently, Black Sash has been worried about CPS’s new plan in South Africa after it loses the Sassa contract.

The company has been rolling out EasyPay Everywhere, a low-cost bank account and card system that has recruited a large number of social grant beneficiaries.

Last week, the company announced a partnership with Carl Scheible, a former executive of PayPal and MoneyGram International, to take its South African payment system global by targeting “already identified developing economies”.

Net1’s largest shareholder is the World Bank – through its investment arm, the International Finance Corporation, which is an avid investor in microcredit and other “financial inclusion” sectors.

Net1 Responds 

In response to questions, Net1 reiterated that its normal financial statements are not prepared on the same basis as the one-page statement prepared for the court. It also suggested that a calculation like Forslund’s is impossible.

“Net1 does not disclose the CPS revenue in its US parent’s consolidated reports,” the company said.

This is despite a recurring note in its statements every year, saying which percentage of revenue is derived from “CPS’s social welfare grant distribution business”.

Net1 also said that its financial statements reflect its full financial years, while the Sassa contract ended at the end of March this year.

Forslund, however, did adjust his figures to take account of this problem by only using 75% of the last year’s stated numbers.

Net1 also defends counting the BEE transaction as a CPS expense because it meets the definition of a share-based payment under international financial reporting standards.

BEE expenditure was a requirement to bid for the Sassa contract, it added.

“CPS committed to Sassa that it would undertake empowerment activities under the contract.

"The share-based payment transaction evidences the activity resultant from these commitments,” the company said.

“It is clear that CPS received the benefits of the transaction that fulfilled its obligations under the contract, and therefore, in line with the accounting treatment prescribed, the costs are reflected in the CPS statement of profit or loss.”

TALK TO US

If it is indeed the case that CPS understated the level of profit it earns from the Sassa contract, should the company be compelled to pay the money back? Also, how do you feel about a company making so much money from distributing social grants?

SMS us on 35697 using the keyword SASSA and tell us what you think. Please include your name and province. SMSes cost R1.50


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