AIDC answers Net 1: Statement of Clarification
Net1 has contested the veracity of our report to Black Sash and CALS at Wits University. Our report focused on the inadequacy and inaccuracy of Net1’s subsidiary Cash Paymaster Services (CPS) Statement of Incomes, Expenses and resulting Net Profit to the Constitutional Court.
Our contention was three fold. Namely:
1) CPS inflated costs and underestimated incomes to provide a reduced picture of the actual profits made.
2) CPS made greater profits from the 5 year SASSA contract than what they declared to the Court.
3) That the Statement to the Court has insufficient detail and should be resubmitted.
To reach these conclusions we examined Net1’s annual reports. We found a R455 million mismatch in revenue compared to the Statement. It indicated that CPS’ net profit should be upgraded by between R55 and R455 million. It would now appear that this additional revenue is related to an earlier contract of CPS to distribute social grants before 1 April 2012.
The R117 million plus book-entry
We also reported that a R117 million book entry from a BEE deal had been deducted from CPS’ profits in 2014. We contended that this was a fictitious cost. We asked how it could end up in the books of CPS. The 12.5% BEE ownership in CPS was given up by Net1 SA, not CPS. The 1% of shares in Net1 was issued by Net1, not CPS.
This happened two years after the 5 year SASSA contract was won. and the “Subscription and Sale of Shares Agreement” indeed seems to indicate that this transaction is unrelated to the five year SASSA contract. The Agreement notes that SASSA after the judgement in 2014 plans to issue a new tender. In relation to this expected new tender the Agreement states in the recitals: “The Parties are in agreement that it would be mutually beneficial if BVI holds shares in CPS, so as to bolster CPS’s tender submission in relation to its black economic empowerment scoring.”
Thus, we reiterate our opinion: When CPS erroneously includes this book-entry in its Statement, CPS’ net profits becomes underestimated by R117 million.
Additional billions earned from SASSA contract in report from the Expert Panel
Nevertheless, the upward adjustment of CPS’ net profits earned from grant distribution may be even higher than the R117 million we mention above.
Last week, the Auditor General and a Panel of Experts filed their Second Report about the SASSA contract.
- It shows in Annexure “I” that the net profits declared by CPS were “net of patent and license fees paid to CPS’ parent company Net1”. These fees “exceeded R1 billion” over the five year contract. This means that about 13 percent of the R7.85 billion of CPS’s declared Expenses to the Court is an inter-company transaction where Net 1 is paying fees to itself from CPS, which it controls.
Like most transnational corporations, Net 1 has firms registered in well-known tax havens (Luxembourg, Netherlands, British Virgin Island, Mauritius and Malta). Given that SARS is struggling for tax revenues, the public should inquire what the final destination of this more than R1 billion is.
- The Panel has concerns about interest earned and shared between CPS and Grindrod bank. This comes from the monthly funds from the Treasury. Alone, during the 2016/17 financial year “CPS disclosed to the Panel that Net1 SA earned R49.9 million of interest”, because the account at Grindrod was in its name. What took place “under” the 5 year contract and what was “derived” from it and not accounted for is not defined in CPS’ Statement. We must assume that more than R200 million in interest income has been “derived” from the grant distribution business and therefore not declared to the Constitutional Court.
- The Panel reports that CPS “earns significant income from bank fees charged to SASSA beneficiaries”. “CPS confirmed that it earned R1 billion in fee revenue” during one year alone (2016/2017). This is “in addition to the revenue earned under the SASSA contract”. The Panel reports that CPS has an operational profit margin of about 30% on a withdrawal of R1500. Cautiously assuming a profit margin of 25% on bank fee incomes of only R4bn over the 5 year contract period, it can be estimated that CPS made at least R1.25 billion in net profits from bank fees. These amounts were also not declared in the CPS Statement.
- Finally, the Panel “is concerned that Net1 derives significant financial benefit from SASSA beneficiaries for services unrelated to its core transaction processing businesses”. These benefits amount to billions of rand, as also indicated in the AIDC report. A background to this concern is given in Net1’s 2012 annual report: “[I]f we cannot successfully leverage an expanded beneficiary base to provide recipients with additional financial and other services, our financial performance may suffer.”
AIDC drew one conclusion in our Critical Review. It was that “CPS has provided insufficient information to the Constitutional Court to draw a definite conclusion about how much CPS (and its fellow companies in South Africa) profited from the SASSA contract”.
This conclusion stands, as well as the long list of issues that require full disclosure of the CPS and the Net1 financial statements relevant to the SASSA contract.
Further comments: Brian Ashley, Director at AIDC: 0820857088; Dick Forslund, Senior Economist at AIDC: 0828957947.
 Form 10-Q filed by Net 1 in 2014: http://ir.net1.com/mobile.view?c=73876&v=202&d=3&id=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTk4ODQ2OTQmRFNFUT0yJlNFUT0mU1FERVNDPVNFQ1RJT05fRVhISUJJVCZleHA9JnN1YnNpZD01Nw%3D%3D (2017-11-24)
 Full Report URL: http://www.blacksash.org.za/images/docs/2nd_report_signed20november2017.pdf
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