Inertia will cost Sassa, and us, dear
CPS holds the winning hand
‘HOW did you go bankrupt,” Bill asked. “Two ways,” said Mike. “Gradually and then suddenly.” This exchange, from Ernest Hemingway’s novel, The Sun Also Rises, is perhaps the most poetic assessment of the crisis unfolding in the South African Social Security Agency (Sassa).
The agency, as the custodian of social grant payments, faces a dilemma over how grants will be paid from April 1. In South Africa, more than 30% of the population — about 17 million people — receive various social grants available to marginalised citizens.
In a country that is so paralysed by massive inequalities, social grants are the most direct transfer of wealth from the better-off to those stuck on the fringes of the economy. For beneficiaries, grants are their only source of income. The provision of grants is therefore a moral imperative for taxpayers — no matter how burdensome it may feel.
Due to the large number of people who depend on the grants, the social security net is by far the biggest line item in the national budget — R170billion in the 2017 budget.
Sassa provides seven sorts of grants, including for children, the elderly and war veterans. Its biggest problem has always been those people who don’t qualify but access the system through fraud. The need to ensure the integrity of the payments process is Sassa’s biggest responsibility. And this has unfortunately led to the current crisis.
Sassa has had a contract with Cash Paymaster Services since 2012. The CPS contract was signed after a tender process that included one other significant bidder, AllPay, GRANTED: A pensioner gets her grant at a paypoint in Jeppes Reef, Mpumalanga which lost the bid. CPS’s bid offered a biometric service that would ensure those who enrolled for social grants were the right people and fraud would be eliminated.
CPS evidently offered this all-in service for a fixed cost of about R16.50 a beneficiary for a five-year period. The AllPay bid was marginally cheaper, but lacked this critical biometric feature. The cost to taxpayers includes the actual grants plus the administration fee payable to CPS.
The complications in the contract relate to two aspects.
In the 2012 bidding process, CPS appeared to have made misrepresentations that aggrieved AllPay, and were cited in court documents as the reasons for AllPay losing the bid.
After a long court battle, the Constitutional Court ruled that various steps in the bidding process had been compromised. These were serious enough for the court to declare the contract invalid.
However, due to the indisputable importance of continuing social grant payments, the court allowed Sassa to continue using CPS under the illegal contract on the proviso that an alternative solution would be found.
The administration fees paid to CPS are more than R2-billion a year. CPS has therefore been able to benefit from an illegal contract since 2012 — and it has made more than R10-billion as a result. A secondary problem relates to the conduct of CPS in facilitating deductions from social grants.
Essentially, CPS created a new business stream using its exclusive access to grant recipients, thus generating additional billions for CPS.
Once this was identified, the Social Assistance Act was amended to limit this behaviour to funeral policies for the elderly, with the proviso that deductions could not exceed 10% of the grant amount. This meant CPS had to discontinue its practice of deductions for as long as it remained bound by the invalid contract.
Since then, statements by Serge Belamant, CEO of Net1 UEPS, which owns CPS, seem to indicate that CPS would much rather forfeit the contract for grant payments in favour of its alternative business.
In the process of correcting the constitutional invalidity of the contract, Sassa requested bids from service providers to replace CPS. But the uptake was so poor the process was abandoned.
The key feature of the request related to biometric data, which only CPS seems able to supply.
After the failure to issue a new contract, Sassa committed to developing an in-house solution to replace CPS from April 2017. It had the better part of four years to do this. But apparently no such solution exists. As a consequence, Sassa now needs to negotiate with CPS for an extension of the contract.
The key issue, however, is that CPS seems — on the surface at least — not interested in simply rolling over the contract but prefers to enter into a new one. The sticking point is that the current contract — constitutionally invalid as it is — is subject to the R16.50 fee for beneficiaries plus the prohibition on deductions.
In recent weeks, CPS has indicated that any negotiations it enters into will have to make financial sense for it. Core to that is the need to increase the fee. This week, in parliament, it was revealed that Sassa is considering offering a R25 fee to CPS.
The Sassa representatives said this simply reflected the inflation rate of 6% over five years. This incorrect calculation was roundly rejected by MPs. The new fee would represent a 50% increase on the current fee and cost the taxpayer an additional R1.3-billion a year.
Depending on its duration, the new contract would cost the taxpayer billions in administration fees for as long as CPS remained the service provider.
In addition, CPS would prefer not to be bound by the prohibition on deductions but would rather engage with beneficiaries to market and sell its various products. Such deductions mean essentially that the funds aimed at alleviating the plight of the poor are diverted elsewhere, which is at odds with the very principle of social security.
The tragedy for taxpayers is that Sassa had four years to implement a solution.
As the crisis loomed closer, Sassa failed to take the necessary steps to ensure that the grant-payment process would be taken over from CPS next month.
And now, suddenly, weeks away from the deadline, there is mayhem and Sassa is negotiating with CPS from a position of absolute desperation, which as we know means all the leverage is with CPS.
CPS will probably get a better deal from these negotiations — and you and I as taxpayers will be worse off, and by inference so will the beneficiaries over time.
The social grants system remains one the last fragments of the fabric of unity that has kept our fragile society from imploding. The idea that grants might not be paid in April should scare us all. The fact that we will likely overpay for the service should anger us all.
Khumalo is chief investment officer of MSG Afrika and presents “Power Business” on Power 98.7 at 5pm, Monday to Thursday