29 October 2019
Net1, the parent company of Cash Paymaster Services, which ran the social grants payment system for years, may soon have to repay the profits made from the contract which the Constitutional Court declared invalid.
The contract was awarded in 2012, but the court declared in 2013 that the contract was invalid, though it was allowed to run on to avoid disruption of social grants payments. However, in a ruling in 2014, the court noted that CPS had no right to benefit from an unlawful contract and ordered the company to file audited statements of expenses, income and net profit earned under the contract “within 60 days of the completion of the five-year period for which the contract was initially awarded”. Within 60 days after that, the court said, the South African Social Security Agency (SASSA) must obtain “an independent audited verification” of the CPS statements and file this with the court.
The judges considered that the invalidation of the contract should not result in any loss to CPS. But, they pointed out: “The converse, however, is also true.”
“It has no right to benefit from an unlawful contract. And any benefit that it may derive should not be beyond public scrutiny. So the solution to this potential difficulty is relatively simple and lies in Cash Paymaster’s hands. It can provide the financial information to show when the break-even point arrived, or will arrive, and at which point it started making a profit in terms of the unlawful contract.”
When the contract was again extended, in March 2018 the court again ordered Net1 to file an audited statement of expenses, income and profit within 30 days of the completion of the contract.
In its 2019 annual report, filed with the US Securities and Exchange Commission last week, Net1 says it has indeed filed “the required independently audited information with the Constitutional Court as ordered”, and SASSA has appointed auditors to audit the submission. “The independent audit is currently underway and we understand that the independent firm is due to file its report by 31 October 2019.”
In its obligatory warning to investors of the risks facing the company, Net1 notes that the court did not itself provide for the repayment of profits under the SASSA contract, but that “one or more third parties may in the future institute litigation challenging our right to retain a portion of the amounts we will have received from SASSA under our contract.”
“We cannot predict whether any such litigation will be instituted, or if it is, whether it would be successful.”
Freedom Under Law has already argued that CPS should not profit from the new contract. CPS has disputed this, arguing that the new contract is not unlawful.
Just how much CPS and Net1 have made over the years from the contracts with SASSA is not clear. But it must have been a hefty amount, since the loss of the contract has hit the company hard. According to the annual report, Net1’s revenue dropped 34%, from R7.78 billion in the year ended 30 June 2018 to R5.15 billion in the year ended 30 June 2019. Net profit of R815.6 million became a net loss of R4.389 billion.
And South African transaction processing, which brought in operating income of R543 million in 2017-8, made an operating loss of R439 million in 2018-9. This, Net1 says, “was primarily due to the substantial decrease in the number of SASSA grant recipients paid under our SASSA contract as the contract expired at the end of the first quarter of fiscal 2019”.
When the audit is complete, SASSA is to send the information to the National Treasury for approval and then to the court. After that, perhaps, Net1 will have to “pay back the money”.