Net1 on the ropes over R10bn deal
Court orders Sassa to redo unlawful social grant tender
THE Constitutional Court has delivered a potentially fatal blow to Net1’s R10-billion contract to handle social grant payments to about 21.6 million beneficiaries.
In a damning ruling on Thursday, Justice Johan Froneman said the SA Social Security Agency (Sassa) “must initiate a new tender process for the payment of social grants within 30 days”.
He slammed the agency’s “irregular” conduct, calling it “unhelpful and obstructionist”.
This followed the court’s finding in December that the tender awarded by Sassa to Net1’s grant arm, Cash Paymaster Services (CPS), in January 2012 was “unlawful”.
The news sparked a R729-million plunge in the value of Net1’s stock on the JSE. Net1’s shares, listed in Johannesburg and on New York’s Nasdaq exchange, plummeted 28% on the JSE before recovering some ground to close 12.8% down at R85.50.
Jittery investors were unnerved by the ruling, which now means there is uncertainty over whether Net1 can retain the contract, which makes up 60% to 70% of the company’s revenue.
Despite slamming Sassa’s shoddy process of selecting Net1, the Constitutional Court left open the back door for the company to continue administering the grant contract.
Froneman said the court had to balance the imperative to ensure grant beneficiaries are not left in the lurch against the fact that there was a need to remedy the “irregularities” which had led to the tender being “invalid”.
While the court ordered that the tender be rerun, it also said the “decision on the proposed final solution lies with Sassa” — which may opt not to cancel its existing contract with Net1.
“If the tender is not awarded, the declaration of invalidity of the contract will be further suspended until completion of the contract,” it said.
One financial expert, who asked not to be named, said this get-out-of-jail free card might give Net1 a free pass, enabling it and Sassa to perpetuate a contract, which the court ruled was unlawful.
“A new tender process has to be commenced, and that could take between 12 and 18 months, and Sassa has the right to decide whether or not to agree to a winner of the new tender or to retain the existing contract,” he said.
The losing bidder, Absa-owned AllPay, has repeatedly slammed the controversial tender.
Suspicions revolved around President Jacob Zuma’s lawyer, Michael Hulley popping up as a “strategic adviser” while playing no obvious role and allegations that bribes were paid.
It has also caused ripples across the Atlantic in the US, where Net1 is being investigated
In court papers, AllPay said Sassa employee John Tsalamandris knew that people “took money” to swing the tender in Net1’s favour.
What also raised red flags was that scores awarded to AllPay by the agency’s tender committee were mysteriously lowered at the last minute while requirements for the tender were altered.
This case has also caused ripples across the Atlantic in the US, where Net1 is being investigated by the US Department of Justice and the FBI.
Last year, Net1’s US shareholders lodged a class action against the company, claiming it made “false or misleading statements or failed to disclose that its practices to secure contracts in SA were in violation of the Foreign Corrupt Practices Act”.
These shareholders in court documents that these practices include “engaging in a scheme to make corrupt payments to officials of the government of SA”.
On Thursday, flamboyant Net1 CEO Serge Belamant sent a statement to Business Times saying the company “cannot predict what the timing or outcome of the new tender process will be, or if a new tender award will be made at all after the new tender process”.
Belamant continued to defend his company, saying he was “convinced” its system was “the most appropriate product to service millions of South Africans who are reliant on this vital service”.
While Justice Froneman was scathing in his criticism of Sassa, he said Net1’s CPS “has no right to benefit from an unlawful contract”. If the existing contract remained in place, Net1 would have to provide audited financial statements to the court detailing how much profit it is making from the deal.
In the judgment, Froneman said that Sassa had behaved “contrary” to its obligations.
“It failed to furnish crucial information to AllPay regarding the implementation of the tender and to Corruption Watch in respect of steps it took to investigate irregularities in the bid and decision-making processes.
Froneman said Sassa’s “conduct must be deprecated, particularly in view of the important role it plays as guardian of the right to social security and as a controller of beneficiaries’ access to social assistance.”
Anthony Norton, who represented Absa in the proceedings, maintained “it is a really important judgment,” as the court has “clearly set out the law of public procurement”.
If the tender is re-run, however, Net1’s wider dealings may come under the microscope.
Locally, the company has also come under fire for allowing loan deductions from municipal payrolls, leading to the cancellation of its contract with the City of Tshwane following a Business Times exposé of the problem.
Social Development Minister Bathabile Dlamini has also said her department was considering “legal action” against CPS after reports surfaced that it was “illegally deducting” while administering social grants, leading to beneficiaries receiving only a few rands a month.