Avatar photo

By Ray Mahlaka

Moneyweb: Freelance journalist

CPS sees R420m losses under extended Sassa contract

That’s if the National Treasury doesn’t accede to its request to be paid more for distributing social grants for another six months.

Social grants distributor Cash Paymaster Services (CPS) has for the first time revealed the extent of financial losses it might incur if the South African Social Security Agency (Sassa) does not hike the company’s fee to pay social grants for an additional six months.

In an answering affidavit to the Constitutional Court, CPS director Nunthakumarin Pillay said if Sassa paid it the same amount to distribute social grants under the extended contract, CPS would operate at a loss of at least R70 million a month or R420 million for six months.

It expects the losses to be effective from April 1 until September 2018 – the period in which its invalid contract would be extended.

CPS is currently paid R16.44 per beneficiary by Sassa and has not disclosed its preferred amount. Instead, Pillay asked the National Treasury to determine a “reasonable price”.

Sassa’s acting CEO Pearl Bhengu asked the court in February to lift the invalidity of the CPS contract to pay a portion of 10.7 million social grant beneficiaries. Under the extended contract, CPS would be the paymaster for only 2.5 million elderly and disabled beneficiaries.

The court has scheduled a hearing for March 6 to consider Bhengu’s request. Sassa lacks a detailed plan on how the Post Office and commercial banks will pay social grants from April 1, raising fears that the court will be put into a corner to extend CPS’s contract again.

Pillay said reducing the number of social grant beneficiaries under the extended contract (2.5 million and not 10.7 million) and keeping the same price as before (R16.44 per beneficiary) would result in reduced revenue and higher operating costs.

The costs associated with running its grants distribution services includes salaries, security for cash-in-transit vehicles at pay points, insurance vehicles, equipment maintenance and more. “This loss [R70 million a month] will increase as the number of beneficiaries paid at pay-points declines,” said Pillay.

Although civil rights group the Black Sash, which has sounded the alarm on the social grants fiasco, supports the six-month extension of CPS’ contract to safeguard the livelihoods of grant recipients, it has recommended to the court that a number of conditions be attached to the extension.

It recommended that a panel of experts (appointed by the court) review CPS’s profits over the past five years and for the extension period. It has also asked for any increase in CPS’s fee per beneficiary be prohibited “before a proper accounting is done, and independently verified”.

CPS’s Pillay said an audit of the company’s reported profits may take several months to complete. “CPS will then have to wait another month or two for price negotiations to be conducted and completed. CPS simply does not have the capital reserves to cover its operational costs over such an extended period [six months]. Requiring it to do so would place its operations in jeopardy, which could never be in the public interest.”

He added that CPS has sufficient cash reserves to cover its operational costs until March 31, 2018 – assuming Sassa pays its invoice for March. CPS claimed it made a pre-tax profit of R1.1 billion and R705 million after tax from its five-year Sassa contract after KPMG reviewed its financial statements.

However, an analysis of its financial statements by the Alternative Information and Development Centre (AIDC) – on behalf of the Black Sash and the Centre for Applied Legal Studies – concluded that CPS might have understated its profits by R730 million as it didn’t include other Net1 subsidiaries that profited from the Sassa contract.

Pillay said AIDC’s findings are “fundamentally flawed”, accusing it of misreading Net1 and CPS financial statements. He said the earnings of Net1 entities are generated independently of CPS and don’t arise from the CPS-Sassa contract.

Brought to you by Moneyweb

Access premium news and stories

Access to the top content, vouchers and other member only benefits