CPS may have to return R1bn profit

Cash Paymaster Services (CPS) may have to hand back R1bn in profit it is estimated to have made from the social grants contract over the past five years once the Constitutional Court receives and scrutinises CPS’s audited statements for the period at the end of April.

When the court extended the invalidity of the CPS contract in 2013, it also ruled that the company was not allowed to profit from the contract.

The firm was ordered to file within 30 days of the contract ending an audited statement of the expenses incurred, the income received as well as the net profit earned.

Analysts estimate that CPS made about R1bn profit over the five-year period of the contract. However, the court will only know at the end of April whether it can enforce this ruling.

If CPS has distributed this profit to its parent company, Net1, in the form of a dividend, it may not have the funds to hand over to the court.

In its latest ruling on the

South African Social Security Agency (Sassa) debacle last week, the court made clear its determination to ensure CPS did not profit from a contract that was declared invalid in 2013.

CPS was also required to obtain an independent audited verification of those details.

In last week’s order, the court added new requirements: that the Treasury must approve the audited verification and that the verification must be filed with the court by the end of the month of May.

In addition, to avoid any doubt about its determination to get a full picture of the contract finances, the court ruled that “CPS must permit the auditors appointed by Sassa to have unfettered access to its financial information for this purpose”.

As a wholly-owned subsidiary of a listed company, CPS’s financial statements are not available to the public, including shareholders.

But from information that has been made available over the years, analysts have estimated that CPS, whose sole business is the Sassa-related distribution of social grants, generates taxed profit of about R250m a year.

Given that CPS does not need to accumulate hefty piles of cash, it would ordinarily be reasonable to distribute much of its taxed profits in the form of a dividend to Net1. Unlike CPS, other Net1 subsidiaries do need funds for expansion.

Because few of the circumstances are ordinary, in particular the court’s order, CPS may not have distributed its profit to Net1. However, one financial analyst said if CPS had distributed the profit to Net1, which is a separate legal entity, the court may not be able to claw it back without a fight.

The increasing prospect of having to repay profits does not appear to have hit Net1’s share price, which is holding reasonably steady in low-volume trade at around R169.

CPS MUST PERMIT THE AUDITORS APPOINTED BY SASSA TO HAVE UNFETTERED ACCESS