How to liberate Sassa from its hostage situation

2017-02-03 19:07 - *Bongi Poloma Makeba
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I AM baffled at the political and advocacy silence on the current focus on SASSA’s readiness to handle social grants distribution post March 2017 when the contract with Cash Paymaster Services expires. It is also baffling how the situation was allowed to get to this point, where it has become an emergency.

As typical of discussions around many issues in South Africa, we will quickly start viciously slinging theories and accusations about politics and patronage, instead of debating the important issue, which is another missed opportunity for development, provision of services to our people and fighting poverty.

Government departments are increasingly being held hostage by a handful of huge, often overseas, suppliers of customised all-or-nothing IT systems. These administrative IT systems, which cost 1% of GDP, have become a byword for complexity, opacity, expense and poor delivery.

It would perhaps be asking too much for the hostages to voluntarily dismantle this infrastructure themselves, especially in the absence of an alternative vision. If departments can break free from the straitjackets of their existing systems and begin to procure technology in smaller, standardised building blocks, creating demand for these standard components across government, this will generate opportunity for smaller and less expensive SMEs and will stimulate the local economy to boot.

Unfortunately, hostage and hostage taker have become closely aligned in Stockholm-syndrome fashion (Top Definition. fashion Stockholm syndrome. when u initially think a clothing trend is abhorrent, but after being around it enough u start wearing it.)  Many people in the public sector now design, procure, manage and evaluate these IT systems and ignore the exploitative nature of the relationship.

Supplier resistance and other issues, such as learning the best way to put together a single service based on smaller IT components and reinstating principles of transparency, must be overcome. A platform-based public infrastructure founded on open standards would ultimately deliver breathtaking improvements in our public services. I won’t be not surprised by the negative reaction to the open standards policy from some monopolistic suppliers; it threatens to show their hostages that their interests are not aligned.

The R130bn annual distribution of social grants can be a big engine to drive financial inclusion. The time is now for government to deliver what they promised. The National Integrated ICT Policy White Paper recommended maximising the value of Postbank infrastructure. New Post Office CEO Mark Barnes, an experienced banker, has touted financial services as key to the turnaround strategy of the ailing Post Office. Distribution of social grants would be a good foundation for laying out financial services business for the Post Office through the Postbank. As a government entity, financial services for the Postbank must read financial inclusion, a critical developmental imperative which commercial banks (with the exceptions of Capitec) cannot fully service because it is not profitable to them.

An important aspect of the design of a grant transfer program is the delivery of payments and evaluating the efficacy of current and alternative distribution mechanisms. An effective payment system implies low transaction costs incurred by the program and minimal opportunity costs borne by beneficiaries. Inefficiencies in payment mechanisms may diminish the net value obtained by the recipients.

When planning, designing and implementing a payment system for cash transfer program, the main goal of the payment system is typically “to successfully distribute the correct amount of benefits to the right people at the right time and frequency while minimising costs to both the program and the beneficiary.

The 2015 FinScope survey shows that the percentage of the banked population is 77%, so roughly a quarter of adults do not have bank accounts. But that’s not the main issue, the quality of the financial services, especially to middle class and low income. This refers to high bank charges and loan interest rates, variability of financial products, accessibility of banks and lack of digitization. 50% of the financially included adults are classified as ‘thinly served’. The high level of thinly served amongst the financially included population is driven by low usage of digital payments. For example, only 13.7 million (37%) adults use digital payments on a monthly basis of which 63% opt to use the traditional brick and mortar branches to pay bills, send remittances or transfers. They do not make the best use of transactional products they have to save on transactional cost, time, transport costs and queuing time – thereby not improving the quality of life.

Only 61% of the population know which bank account is best suited to them while 59% feel that banking fees are too expensive. More people are tapping into credit mostly via formal products. Credit increase is mostly driven by the unsecured loan environment – people are using credit for short term immediate needs such as food (26%), emergency (26%) transport fees (12%) bills (10%), and clothes (10%). According to the survey 18.5 million people are insured – however only 6.6 million have non-funeral insurance and 5.5million have two or more funeral cover products.

A business needs clients, if the Postbank wants to build a strong and profitable financial services business, it will need lots of them, and it will need to acquire them cost effectively. SASSA grant distributions will give immediate access to the clients.

The Post Office used to distribute social grants before they lost out to the constitutional court decision in 2011 for what the court considered unfair application of procurement regulations. I also remember the old post office bankbook. But both services were archaic and rendered them uncompetitive. A service model of bricks and mortar and armored vans was obviously inconvenient and too expensive to operate, no wonder the constitutional court ruled that DSD couldn't just give the grant business to them without a competitive bid against cheaper and better operators. When the current service provider was appointed, their card partner MasterCard issued a press release which stated that “The new system is dramatically reducing SASSA’s operating costs. Until now, it has cost SASSA between R26 ($3.25) and R35 ($4.38) per grant to pay beneficiaries. Under the new agreement, disbursement costs will be capped at R16.50 ($2.07) per payment, enabling the agency to save up to R3bn ($375m) in operating costs over the next five years. This means that the agency will be able to spend its budget allocation more effectively in the future, making a meaningful difference in the lives of more South Africans.”

The Post Office need to reinvent themselves if they want to take centre stage in transforming the financial sector. In their favour is what is probably the largest footprint of any organisation in the country. They already have the physical infrastructure which needs to be fully utilized. Against them is archaic systems, in this regard they can partner with a fintech company to get immediate access to world class technology that will enable them to be competitive.

Partnership with a financial technology provider can enable The Post Office to digitize social grant distributions and create digital financial ecosystems in the communities where the beneficiaries spend the money, thereby churning and creating more value of the money within the communities. Digitization can enable recipients of social grants to access formal financial services such as basic bank accounts, savings, micro-credit or even remittance services. Safe, accessible financial services help reduce vulnerability and can support opportunities for income generation and asset accumulation. Since social grant schemes often cater for a critical mass of recipients in local communities, Digitization may also enable the local financial infrastructure to be improved in ways which also benefit non-recipients in these communities.

Before the introduction of CPS’s digitized grant distribution system, South African recipient surveys show that the average recipient took 37 minutes to get to a paypoint (more in more rural provinces) and that 73% walked (Citizen Surveys 2004: 27/28). In addition to travel, in SA, 42% spent longer than 2 hours between arriving at the paypoint and receiving payment.

These are some of the benefits can be realized from a Post Office digitised grant distribution system:

1.  Minimizing the cost—but to whom? In addition to SASSA, the recipient will also save in costs (in time and possibly, transport cost);

2.  Minimizing the risks involved—again whether to SASSA (e.g. loss through fraud and corruption) or to the recipient (e.g. loss through robbery as the result of payment of cash in a known location at a regular time);

3. Maximizing the dignity of the recipient (e.g. through considering the facilities available in the places of payment—if long waits are involved, are the facilities adequate to provide toilets and shelter from harsh weather?)

4. Reducing time to implement at the outset;

5. Enhancing the ability to scale up (for example, if it is expected that the scheme will roll out over time to new areas or categories of beneficiary)

6. Providing additional financial services to the beneficiary (e.g. the opportunity to save a portion of the grant, or access certain types of credit when needed);

7. Providing opportunities for non-beneficiaries to improve their access to financial services.

8. Developing new bank account products. A transactional bank account suitable for social transfer recipients would usually need to have features such as:

  • No minimum balance required to keep the account open;
  • No initial fee and low or no monthly charges (which would deplete small savings balances remaining);

To reduce the costs of financial infrastructure, it is necessary to piggy back on other cash handling businesses, such as local merchants who already have cash in their tills. The point of sale technology necessary to enable financial transactions such as withdrawals from bank accounts is much cheaper to deploy than, say, ATM technology but the result is similar: the merchant becomes a manned ATM. In addition, such an arrangement may bring additional benefits to a merchant such as:

  • Reducing the amount of cash held in the till, which may be stolen;
  • Greater spend in the store by those who withdraw cash there;
  • Receiving some fee income on the transaction.

Now is the time to stop unscrupulous businesses from profiteering on the poor! Based on a disbursement fee of R16 (though A City Press article at the time quoted the figures as twice that much) per disbursement, the incumbent service provider earns more than R3bn per year, that is R15bn for a five-year contract. Over and above that fee, service providers offer other services to grant beneficiaries; such as airtime sales, electricity sales and insurance.

Most worrying are the predatory lending practices. The loan product offered by the incumbent, which is essentially an advance on future grants and therefore almost zero risk to the incumbent (since they control the distribution and pay themselves first), are priced at effective annualized charges (they don't want to call it interest rate) of over 100%. Such high fees are unjustifiable! Such loans are necessary and one argues they could be offered at below prime rate since the risk is very low. The Post Office has the power to stop this exploitation of the poor.

*Bongi Poloma Makeba is a social activist.

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