Open Secrets Radio

In this episode of Open Secrets Radio, we discuss the key issues surrounding the potential implementation of a Basic Income Grant in South Africa and ask, who stands to profit? Tune in as Open Secrets investigators Abby May, Zen Mathe, and Michael Marchant dive into the concept of a basic income grant as a form of social protection; its potential to address poverty and inequality; and concerns around the digitization of South Africa’s grant system. We also discuss what the potential for a basic income grant is given South Africa’s new Government of National Unity (GNU).

This podcast is based on a 3-part article series by Open Secrets, published in GroundUp.

The post Open Secrets Radio – Universal Basic Income Grant: Who stands to profit? | Q&A with Open Secrets investigators appeared first on Open Secrets.

South Africa can learn from Brazil

First published in GroundUp

13 May 2024 | Abby May, Zen Mathe and Michael Marchant for Open Secrets

What should an effective social grant payment system look like?

In the first two instalments of this series, we examined the weakening of the social grants payment system in South Africa and how private companies are entering the space looking to profit from access to a still largely untapped market.

Access to online platforms for grant application and payments can reduce the time and money recipients spend applying for and accessing their grants and make it safer to do so. Many grant recipients have keenly taken up the chance to use new digital channels to apply for and receive grants – especially when these are accessible, low-cost, and user-friendly.

However, many social grant recipients, especially in rural areas, are still eager to receive their grants in cash, as close as possible to where they live. Civil society organisations that work closely with social grant recipients in South Africa have stressed the need to maintain a hybrid payment system in the short-term, to make the system as fair as possible.

The March 2024 Black Sash documentary Broken Promises showed the consequences of the Department of Social Development’s (DSD) decision to close some 10,000 cash pay points in 2018. This followed the transition to the South African Post Office (SAPO) for the payment of grants, and SAPO’s failure to do the job.

Some pay points were reopened in 2019, following pressure from Black Sash. But in late 2023 it was announced that all such points would be phased out and closed by March 2024, and that recipients would have to start using retailers, ATMs, or other means to receive their grant.

Broken Promises reveals that many grant recipients have been forced into longer, often dangerous, and more expensive travel to access their grants since their local cash pay points have been closed. One grant recipient who used to walk to a local pay point must now spend R130 on a return taxi trip to collect the grant. Many beneficiaries have to borrow money to pay for that transport, and sometimes there is no money when they arrive, leaving them not only without the grant but also with new debt.

SASSA says having so many cash pay points is inefficient and costly. This may be true, but for many grant recipients living in rural areas a locally available cash pay point remains the most effective way for them to access their grant. For many, access to a digital system or bank account is still impractical, and Black Sash argues that grant recipients’ constitutional right to social security would be better protected by continued access to a local cash pay point.

Then there is the question of communication.

#PaytheGrants’ Elizabeth Raiters told Open Secrets that general communication by the South African Social Security Agency (SASSA) about issues and updates regarding grant payments has been very poor. The responsibility is passed on to beneficiaries themselves to stay informed and share information. Organisations like Black Sash and #PaytheGrants do much of this work and help many people navigate the grants system.

Amandla.mobi’s Koketso Moeti and Tlou Seopa pointed out continued lack of diversity in the language options for grant recipients in the system. For example, consent forms for the bank verification processes are almost always only available in English.

State entities need to provide consistent and easily accessible communication channels for grant recipients on updates regarding payments. When it comes to the informed consent by grant applicants and recipients, all forms and online application and payment platforms must be available in multiple official languages.

As #PaytheGrants and the Institute for Economic Justice (IEJ) have pointed out, grant recipients receiving the R370-a-month Social Relief of Distress (SRD) grant directly into a bank account are subjected to greater financial surveillance by SASSA, which checks the balance and inflows to their bank account every month. This has allowed SASSA to exclude millions of people who are in fact eligible for the grant. In their court application to challenge the constitutionality of the regulations governing the SRD grant, the IEJ and #PayTheGrants provided evidence that the bank verification process used to monitor grant applicants has resulted in the unfair exclusion of many applicants.

Also, due to the automated system for both applications and appeals against rejection, less than 1% of appeals against this exclusion are successful. A system like this, that does not provide clear reasons to grant recipients for their application or appeal being dismissed, is a violation of the right to just administrative action.

Then there is the danger of the predatory use of information about grant recipients by private companies. How can we offer recipients the benefits of technology while still protecting their rights?

There are global examples that South Africa can look to. One of these is the system used in Maricá in Brazil, a small city close to Rio de Janeiro. The city, run by the Brazilian Workers’ Party, introduced a Renda Básica de Cidadania (RBC) – a “citizen’s basic income” – in 2013. Though not yet universal, the RBC is paid to anyone who has lived in the city for at least three years and who has a “moderately low income”, defined as three times higher than Brazil’s minimum wage (237 US dollars a month, about R4,350). Today, more than 25% of the city’s population receives a grant of 39 US dollars which is more than 95% of the individual poverty line in Brazil.

In 2018, the RBC grant was switched to a new fintech platform and digital currency with great success. Grant applicants who meet the qualifying criteria, receive their grant in a digital community currency called ‘Mumbuca’, via a pre-paid credit card or a dedicated mobile phone application. The Mumbuca is tied to the national currency to ensure confidence in it, and can be used to pay many local bills. The 2018 move to the fintech platform improved the efficiency and reach of the grant, and lowered costs for all parties involved.

The key distinguishing feature of the use of fintech in Maricá is that the fintech platform and Mumbuca currency are regulated and issued by a community owned bank – the Banco Comunitário de Maricá. This has led to a radically different approach compared to investor-driven fintech applications. For example, the bank offers services at a lower cost than its commercial competitors. It also charges businesses per transaction and uses these fees to ensure that RBC beneficiaries face no costs when accessing their funds.

Two other crucial differences are:

• Banco Comunitário de Maricá does not sell purchase-related data to third parties like most fintech companies do. This means that RBC recipients are not constantly bombarded with calls and messages offering extortionate loans, goods, and other financial services; and
• Any surplus made by the bank is returned to the municipality rather than paid to shareholders. This means that there is little financial incentive for the bank to push financial products, such as loans, onto grant recipients that cannot afford them.

The RBC model in Maricá shows that fintech platforms can be rolled out in a way that improves operational efficiency, reach, and costs of accessing a basic income grant. This is because it is designed to benefit the community rather than a narrow group of shareholders. The communal and local nature of the ownership changes the incentives of the platform, maximising its impact, and minimising the risks of abuse.

A Universal Basic income Grant cannot be possible without a functioning grant payments system. This payments system must not only be efficient; it must also be safeguarded against predatory profit-seeking practices. Civil society organisations in South Africa have the basis of where to start and examples from across the world show that it is possible. Our call to action is that policy makers and political parties vying for the 2024 elections prioritise a just and equitable grant payment system, now and in the future.

Open Secrets sent questions on the administration of social grants to the Department of Social Development, SASSA and the Postbank. They have yet to reply.

This is the third article in a series of three.

Part one: Universal Basic Income Grant: who should run it?

Part two: Universal Basic Income Grant: who will profit?

The post Universal Basic Income Grant: What should a payment system look like? appeared first on Open Secrets.

There are risks in using a private company to pay the grants

First published in GroundUp

10 May 2024 | Abby May, Zen Mathe and Michael Marchant for Open Secrets

The Post Office and Postbank have failed to manage the social grants payment system. But the private sector is not an easy fix either.

The failures of the Post Office and then Postbank have led to suggestions that the private sector should play a larger role in the payment of social grants. In this article we show that South Africa’s social grants history reveals the dangers of thinking private companies are the easy answer.

Fintech companies – old and new – are entering the grants payments space with little oversight, many of them through the promised benefits of ‘financial inclusion’.

Under the guise of financial inclusion, private financial companies can and do target grant recipients for exploitation and extraction. If a Universal Basic Income Grant (UBIG) is to be successful in South Africa, then the grants payment system must be safeguarded from private actors seeking to make big profits at the expense of grants recipients.

‘Financial inclusion’?

In 2013, the contract with Net1 subsidiary CPS to administer grant payments for SASSA was found to be unlawful by the Constitutional Court. What was not decided by a court but was arguably more devastating, was the way Net1 and CPS made profits off their unfiltered access to the private personal and financial information of social grant recipients. Net1 and CPS made millions by attaching loans, insurance policies or airtime deals to social grant recipients accounts, then deducting the payments when the grants were paid at the end of each month, sometimes without recipients’ knowledge.

These extractive practices are often obscured by the promises of ‘financial inclusion’. Financial inclusion broadly means that people and small businesses have access to financial products and services including credit, transactions, savings, and insurance. It was ‘financial inclusion’ that was the impetus behind Net1’s foray into social grants payments. Net1 partnered with Mastercard to implement a system that promised grant recipients easy access to their grants without the need to queue.

As others have argued, this was Net1’s way of turning social grants – already guaranteed by the state – into collateral for financial products they pushed onto the poorest South Africans. This meant a steady stream of income for Net1 and its subsidiaries with no risk. It also meant that these now ‘financially included’ people were often in a financially worse off position than before.

Unfortunately, such predatory tactics continue to plague grant recipients. In February 2024, Daily Maverick journalist Lerato Mutsila, reported on the ways in which social grant recipients were not receiving their grants. One of the recipients who shared their story with Mutsila was 83-year-old, Maureen Robbie, whose sole income source is the old age grant she receives.

In 2019, she realised that she was not being paid the full amount. Rather than receiving the full R2,910 old age grant, she was only getting R1,910. Upon following up with SASSA on the matter, she discovered that this was because Transnet was deducting payments from her grant for a Transnet policy that she never consented to. The deductions continued even after she had cancelled the policy. Though Robbie was eventually successful in stopping the deductions, the money owed to her is yet to be repaid.

This is not solely a South African issue. In 2022, the Transnational Institute published a study that examined experiences of fintech activity around the world. It found evidence that fintech interventions (such as M-Pesa in Kenya) had led to an explosion in over-indebtedness for many individuals that increased poverty and vulnerability.

Notably, the study also found evidence that many fintech companies, driven by pursuit of short-term gain, were ushering in a “new form of digital extractivism” that uses access to new markets in poor communities to reward shareholders and global investors by making profits. These profits are drawn from ‘digital mining’ whereby companies enjoy extraordinary profits from extracting “a small tribute from almost all of the tiny financial transactions made by the poor”. In this way, poverty has been reframed as a “new frontier for profit making” by fintech firms.

Despite the risks, policy makers like the National Treasury and the World Bank continue to see financial inclusion as a means of addressing poverty. In its 2023, Financial Inclusion Policy Framework for South Africa, the Treasury makes direct recommendations that social grants distribution must be leveraged to increase financial inclusion in South Africa.

This has already been set in motion by the closure of cash points for the collection of grants, forcing grant beneficiaries to receive their grant through a bank account.

Treasury and SASSA have another interest in grant recipients using bank accounts; conducting financial surveillance on grant applicants. Those applying for the R370 SRD grant have to allow SASSA to check the funds in their account. As we discuss in the final instalment in the series, this practice has led to the unfair exclusion of many people who are in fact eligible for the SRD grant.

After a decade of experimentation in countries like South Africa, even the World Bank was forced to conclude that it is “neither certain nor well understood” that financial inclusion can resolve poverty.

New entrants

A new actor in the social grants payment space is Tymebank. Tymebank is an exclusively digital South African retail bank. South African billionaire Patrice Motstepe’s African Rainbow Capital owns a controlling stake in the bank which was soft launched in 2018. As a digital only bank, it does not have any physical branches. It has partnered with Pick in Pay and Boxer as sites for its yellow card printing machines where customers can print their cards. 

One of the core business objects for Tymebank has been financial inclusion. Young, rural, low-income women are among the most financially excluded and underserved individuals in South Africa and are an important target market for Tymebank. 

In March 2023, The Citizen reported that Tymebank was offering interest-free early grant access to social grant recipients. In other words, Tymebank would offer grant recipients a portion of their grants before the grants are paid into their accounts. Though it claims to be an interest-free service there is a catch. The article explains: 

“Grant beneficiaries whose grants are paid into a TymeBank EveryDay Account can access R500 from their grant before the grant payment date…. Account holders do not pay additional fees or interest, provided the advanced amount is repaid when the next grant payment is received from Sassa. Whatever money was withdrawn will be deducted from the EveryDay account when the account holder receives the grant payment from Sassa.” [emphasis added]

This Grant Advance Service was also marketed on Tymebank’s official X page. This service applies to all grants except the R370 SRD grant. Though Tymebank executives claim that this is not a loan because there are no interest fees, there are still risks that these types of offers could contribute to over-indebtedness. The experience with Net1 also shows that without proper oversight and accountability, there are risks that more exploitative practices could be introduced.

In response to questions sent by Open Secrets, Tymebank Communications Manager Pontsho Ramontsha confirmed that the Grant Advance service does not apply to the SRD grant and that only recipients of other grants can access the service.

On the issue of protecting grant recipients from fraud related to their grants, Ramontsha said Tymebank has ‘stringent process controls to prevent and detect fraudulent activities; this is to protect all our customers across the economic spectrum’ including grant recipients. The bank also ensures that Grant Advance is offered to the rightful grant recipient by making it available only to customers that have a FICA verified EveryDay Account (bank account with biometric verification).’

On its role in the social grant payments, Tymebank stated that “SASSA went out to tender in March 2022, inviting banks to participate in the distribution of SASSA SRD grants. TymeBank was appointed as one of the participating banks to distribute SRD grants.” However, Ramontsha confirmed Tymebank does not have a relationship with Postbank.

TymeBank will be competing with more established South African banks as many grant recipients use traditional bank accounts to receive their grant. The biggest player in this regard is Capitec bank. In 2023, 26.5% of all social grant payments went to Capitec bank accounts.

Bank Zero had previously expressed interest in social grant payments but in response to questions by Open Secrets said it had no current role in payments.

Retailers join the game

A characteristic of financialisation is the growing role of retail companies in providing financial products and services. In South Africa, some of the large retailers – particularly Shoprite and Pepkor – are prime examples of this.

Shoprite is one of the largest companies in South Africa, and billionaire Christo Wiese remains its largest shareholder. Shoprite retail stores across South Africa are some of the primary spots where social grant recipients collect their grants using their SASSA cards. In March 2022, the Shoprite Group announced that it would offer SRD grant payments at 1,286 supermarket outlets following the extension of the SRD grant. 

Shoprite has thus become a distributor of social grants for the state. Researchers have argued that this proximity to low-income groups has allowed for Shoprite’s operations to become more diversified and financialised. It is also a helpful way for Shoprite to get consumers into stores where they can spend their grant money.

Shoprite has its origins in Pepkor, another company built by Christo Wiese that is now Africa’s largest clothing retailer. Pepkor, in turn, has its own interests in the world of social grants through Flash, a company owned by Pepkor as part of its Fintech business. Flash is a technology company that provides hardware to informal traders around the country to enable them to sell data, electricity, facilitate bill payments, or even receive social grants.

In 2023, amidst its own struggles to manage grant payments, Postbank entered a contract with a company called Tembo Investment Group (TIG) to assist in grant distribution. TIG sub-contracted Flash, and Flash has become a key avenue for the payment of social grants via around 200,000 merchants. Grant recipients can present a Smart ID with an embedded microchip containing biometric information like fingerprints, and then receive the grant in cash at no charge. Flash has stated it had seen a rapid uptake by grant recipients thanks to the ease of collecting the grants.

Flash has become important to Pepkor’s business. While Pepkor reported largely disappointing profit in 2023, Flash processed R37.1-billion in transactions and contributed a 20% increase in revenue for Pepkor’s fintech unit. That unit now accounts for 10% of the group’s total revenue, and 67% of that comes from Flash.

In response to questions by Open Secrets, Shoprite’s media team stated: ‘The Shoprite Group facilitates grant payments for hundreds of thousands of beneficiaries across its network of 914 Shoprite, Checkers and Checkers Hypers supermarkets across South Africa.’ Shoprite confirmed that it has a contract in place with the Postbank for SRD pay-outs and that there is no contractual agreement in place between SASSA and Shoprite Group.  However, it stated that, ‘The [Shoprite] Group attends a monthly operational meeting – facilitated by the CEO of SASSA and attended by various retailers, banks and cash agencies – where relevant stakeholders discuss important matters pertaining to grant payouts. A bi-annual meeting with SASSA and DSD [Department of Social Development], which consists of a physical process walkthrough and insights feedback session, also takes place.’

Where is the oversight?

These companies may not currently be engaging in predatory behaviour, but the risks are clearly there. To address this, it is imperative that the state – particularly through SASSA and the DSD – provide the necessary oversight of the private companies involved in the social grants ecosystem. This is currently not the case. In 2023, Open Secrets, Black Sash and the Centre for Applied Legal Systems (CALS) reported that the mechanisms set up to provide oversight of the grants system had not been functioning for nearly four years. One of the largest social welfare systems in the world has been operating without adequate oversight.

In this context, it is little surprise that systemic problems in the payments system have gone unaddressed. In the next and final instalment in the series, we consider alternatives to the current system, and the perspectives of grant recipients on what the payment system should look like.

*Open Secrets sent questions on the administration of social grants to Flash and the Postbank. They have yet to reply.

This is the second article in a three part series: Next: What should a payment system look like?

The post Universal Basic Income Grant: who will profit? appeared first on Open Secrets.

The sad history of Net1 and the Post Office shows that this is an important question

First published in GroundUp

8 May 2024 | Abby May, Zen Mathe and Michael Marchant for Open Secrets

Public debate around a Universal Basic Income Grant (UBIG) has focused on fierce disagreements about its economic benefits, whether it is financially feasible for South Africa, and if so, what the value of the grant should be. As UBIG campaigning takes centre stage in the 2024 elections, Open Secrets asks an equally important but often overlooked question: who will administer the payment of those grants?

Any proposed UBIG in South Africa must address the issue of the grants payment system if it is to be fair and effective. The current failures of state administration of grant payments and the history of exploitation of grant recipients by private company Net 1 show the dangers of such an omission.

This article is the first instalment of a three-part series exploring this question. In it we focus on the debates surrounding the potential implementation of a UBIG, how the recent failure of state entities administering the grants payments system is an obstacle to a UBIG, and how the lack of recognition of these failures by political parties in their calls for a UBIG is a glaring gap.

The need for a Universal Basic Income Grant

A UBIG is a payment made to all people to help them meet basic needs. A truly universal income grant is made unconditionally, granted to all without requiring any work, activity, or means tests. Ultimately, it is a payment by the state, irrespective of a person’s situation or status.

The more common global practice is a basic income grant that is not universal, but that is paid to all people who fall below a certain income level. This is the current practice in Brazil, the first country in the world to have a law requiring the progressive implementation of a UBIG, and where the current basic income grant benefits over 50 million people.

International experience, including from Brazil, suggests that the grant is a highly effective means of addressing poverty, reducing inequality, and improving education, health and nutrition.

Arguments against the introduction of a UBIG – made most loudly by the National Treasury – are often linked to its alleged “unaffordability”. Senior Researcher at the Institute of Economic Justice (IEJ), Kelle Howson explains that: “One of the big arguments against a UBIG that comes from Treasury is the narrow view that increasing grants would mean they would need to increase tax, which would affect investment in South Africa and make the economy unstable”.

However, as the IEJ has argued, Treasury tends to overstate the cost of a UBIG while understating the resulting economic benefits that flow from a UBIG, including inevitable growth in local economic activity and the resulting recouping of many of the costs by the state.

Another argument is that a UBIG will create a reliance on state provided grants and lower the incentive to look for work. However, in places where a basic income grant has been introduced – including Namibia and Kenya – the opposite has occurred. The grant has helped people look for jobs or earn income through self-employment. In turn, this has contributed to local economies.

The South African government is using the R370-a-month Social Relief of Distress (SRD) grant as a testing ground for a proposed UBIG. However, this grant has only increased by R20 in April 2024 for the first time in four years, lagging far behind inflation, largely because National Treasury has insisted it was unaffordable.

The future implementation of a UBIG in South Africa will be complex. Even those advocating for a UBIG, differ in opinions on how it should look like. However, there seems to be a general consensus that the introduction of a UBIG must amount to or stand above the national lower-bound poverty line, which according to 2023 figures, currently sits at R 1,058 a month.

2024 election promises

Political parties across the ideological spectrum make mention of a UBIG or conditional income grant in their manifestos.

The ANC’s manifesto promises to increase the SRD grant with the intent to expand this to become a basic income grant over time.

The DA’s manifesto claims it will increase the SRD grant so that over time it becomes a basic income grant. However, the party has elsewhere said it would only investigate a BIG to determine if it was ‘affordable and viable’.

Rise Mzansi makes no mention of a UBIG in its manifesto but rather a “three month conditional job-seekers grant”, and says it prefers more “targeted” social assistance.

The Freedom Front Plus (FF+) manifesto states that the “masses have to rely on social grants” but do not outright commit to provide the grants, and elsewhere have described them as ‘unaffordable’.

ActionSA claims it will incrementally introduce a UBIG ‘stimulus’ over a period of 3 years.

The IFP promises to introduce a grant for unemployed graduates amounting to R3 000.

The EFF goes furthest, promising a R5,000 grant for unemployed graduates, and is making calls to double all current social grants.

Many of these manifesto claims are vague and the parties’ public comments usually go no further than a commitment to consider a basic income grant. Even where the positions are more concrete, none of the political parties go into detail about how they will fund these grants, nor do they provide any response to National Treasury’s apparent reluctance to increase grants.

Another important omission from these party promises is any analysis of who will be responsible for administering the payments of grants to recipients. Recent events have shown that the current grant payments system is in crisis, yet no political party’s manifesto mentions a way to address it.

The failures of SAPO and Postbank

In October 2022, following a formal information request, Black Sash and Centre for Applied Legal Studies (CALS) uncovered that the South African Social Security Agency (SASSA) had ‘ceded’ its contract with the South African Post Office (SAPO) to Postbank. The documents showed there was a failure to inform grant beneficiaries about the decision even though the migration process took three months.

From the outset of Postbank’s takeover of the contract, chaos struck South Africa’s grants payments system. Many recipients were unable to access their grants from November 2022 and continued experiencing ongoing problems into 2023.

On 6 January 2023, Postbank issued a statement announcing that their payments system had experienced a technical “glitch”. Postbank also experienced technical “glitches” in its administering of the SRD grant, which left beneficiaries unable to receive payments.

The so-called “glitches” were exacerbated by Postbank’s transition from a biometric system to a PIN system. Postbank’s system was also the target of fraud and cybercrime attacks, and irregular expenditure at the institution accounted for a loss of R118-million in November 2022. But despite this track record of poor governance, government insists on turning Postbank into a fully-fledged state bank.

In an interview, #PaytheGrants Deputy Chairperson, Elizabeth Raiters, told Open Secrets that while Postbank has seemingly addressed some of these issues in recent months, many beneficiaries still have difficulties with SASSA:

“Postbank has really improved over the past few months, things have been running more smoothly with the grants system. The ongoing issues with grant payments, especially with the SRD grant, are mainly because of SASSA’s very long verification process which also gets people’s information wrong.”

Whether at Postbank or SASSA, there has been little accountability regarding these issues. Grant applicants and recipients are regularly left in the dark by SASSA and the DSD, and are forced to approach civil society groups like #PaytheGrants and Black Sash for assistance. There is still no clear explanation of why Postbank was selected by SASSA and SAPO to administer grant payments, given its reputation of being unable to manage the technical constraints and challenges of its internal systems.

Postbank’s failures have given rise to the suggestion that the grants payments system should be administered by actors in the private sector. In practice, many financial and non-financial companies have already identified social grants as an opportunity to profit, and have entered the social grants payment space in various ways.

The next instalment in this series will discuss several of these private companies, and show why handing over grants payments to private actors presents serious risks to grant recipients.

*Open Secrets sent questions on the administration of social grant payments to the Department of Social Development, SASSA and the Postbank. They have yet to reply.

This is the first article in a three-part series. Next: Who will profit?

The post Universal Basic Income Grant: who should run it? appeared first on Open Secrets.

Published in the Daily Maverick

By Abby May for Open Secrets

In the final part of this two-part series, we take a deeper look at the ways GovChat might undergo a commercial revival, who might benefit from ownership of its database, and the implications this may hold for the South African social grants system.

Read Part One here

In Part One we explained the deteriorating business partnership between fintech investment company Capital Appreciation (Capprec) and local tech company GovChat (Pty) Ltd. The failed negotiations between Capprec and GovChat led to Capprec’s successful application to have GovChat placed in business rescue.

Despite this, GovChat still provides the R350 SRD WhatsApp application portal to the South African Social Security Agency (Sassa), free. Despite GovChat having no sources of revenue, Capprec still believes it can become commercially viable.

On GovChat’s official website, the story of its beginnings goes like this: in April 2018, Eldrid Jordaan was out of luck and money after placing everything into creating GovChat as a digital tool to connect citizens with local government and services.

He was on the brink of deserting the GovChat project when a mysterious angel investor intervened. This mystery investor had been following the development of Jordaan’s project on social media and reached out to offer him R10-million in funding to continue GovChat.

This would be enough money to allow GovChat to sustain itself until it received further funding from Capprec, which would later become its primary investor. Though Jordaan has publicly stated that he “did not know this person from a bar of soap”, GovChat’s R10-million saving grace came from Dewald Dempers, former CEO of AfroCentric Investment Corporation Ltd.

Today, GovChat is in financial trouble again, but Eldrid Jordaan has resigned as CEO and no longer forms part of the company’s management. The company requires an estimated R70-million to repay its debts, and Capprec has expressed reluctance to fully rescue GovChat with further investment.

However, Capprec has agreed to “drip-feed” funds to GovChat to keep it going during the business rescue process. Capprec also sought out a prominent business rescue firm – Matuson & Associates – to handle GovChat’s affairs under business rescue. 

This firm has handled high-profile cases before, including the business rescue of Optimum Coal Holdings, the company that operates Optimum Coal Mine which provides coal to three of Eskom’s power plants.

Capprec’s financial commitment reinforces the firm’s belief in GovChat’s commercial viability. In its court papers applying to place GovChat under business rescue, Capprec makes it clear that it still views GovChat as possibly becoming profitable and generating revenue sufficient to cover its operating costs. 

However, GovChat is going to need another saving grace – this time far more than R10-million – for Capprec to salvage anything.

In May 2023, Lance Schapiro, the Matuson & Associates representative who was appointed GovChat’s business rescue practitioner (BRP), sent an update on GovChat’s business rescue proceedings to creditors. In it, he announced that GovChat’s office space had become redundant. 

On 21 June 2023, the sale of GovChat’s furniture and office equipment took place via an online auction. The proceeds of this auction would cover GovChat’s ongoing operating costs.

All the while, GovChat continues to provide a WhatsApp application portal for R350 SRD grant applications and appointments for assessments needed for the disability grant. 

As explained in Part One, Capprec may be reluctant to provide GovChat with more investment, but it also stands to gain GovChat’s intellectual property if GovChat is unable to pay back its debts. This would place Capprec in a primary position to capitalise on GovChat’s data and systems linked to its work for Sassa.

GovChat’s considerable reach to millions of South Africans adds to its appeal to Capprec. In past interviews, Capprec CEO Bradley Sacks hinted that GovChat may potentially get involved with the payment of social grants.

As Sassa and the Department of Social Development (DSD) continue to struggle to find a partner that can bring stability to the payments administration of grants, could GovChat’s revival lie in stepping into this arena? Who else may hold a stake in GovChat making a comeback? 

This part of the series explores these questions and what this may mean for South Africa’s future social grants space.

Who else holds a stake in the GovChat pie?

In early 2023, Eldrid Jordaan attempted to buy GovChat from Capprec. 

ITWeb reported that Jordaan and a company called K2018 offered Capprec R50-million to regain control over GovChat. The absence of media fanfare and non-acknowledgement of this offer by Capprec suggests it was declined.

In response to a set of written questions sent by Open Secrets to Matuson & Associates, Lance Schapiro confirmed that Eldrid Jordaan had resigned as a director of GovChat in February 2023 but remained an indirect shareholder through K2018. 

Company documents obtained by Open Secrets show that Jordaan is currently the only active director of K2018. The company does not appear to have a website and the documents reveal its address is located in the suburb of Belhar, Cape Town.

However, the court papers in Capprec’s business rescue submissions included an annexure of a 2019 Shareholders Agreement between Capprec, K2018 and GovChat. In the agreement, K2018 is also referred to as “Newco”. However, both entities share the exact company registration number, making it the same company. 

The document names Eldrid Jordaan, Goitse Konopi, Dewald Dempers, a company named Metcalfeorganism (Pty) Ltd, and the Haslam Family Trust as the shareholders of K2018 at the time the shareholders’ agreement was signed in May 2019. Company documents show that Metcalfeorganism’s directors are Barend Johannes Booysen and Carel Hoffman.

There is little public information about the Haslam Family Trust, but the name suggests it may be connected to GovChat’s former finance and commercial director, Tandi Haslam. 

It is unclear whether any of these parties were involved in K2018’s R50-million bid to regain control of GovChat. What is evident is that the bid indicates that Capprec is not the only other party that holds a key stake in GovChat’s commercial success.

Are social grants the key to GovChat’s commercial revival?

Where is the DSD and Sassa in all of this? In a written response, Lance Schapiro informed Open Secrets that “the relevant government departments are aware of the business rescue as well as the risks associated with it”.

He clarified that none of the service agreements GovChat secured prior to its business rescue generated any revenue. And yet, Capprec entered into a post-commencement finance agreement to ensure that GovChat would have the required operating costs needed while in business rescue, and that it can continue to pursue its ongoing legal battles with Meta. 

The continued investment suggests that Capprec still believes it can make a buck out of GovChat.

The question is how?

In its March 2023 update on GovChat’s business rescue proceedings, Matuson & Associates informed GovChat’s stakeholders that it had sent letters to both the Department of Cooperative Governance and Traditional Affairs (Cogta) and the DSD on GovChat’s present financial situation.

The update further states that “without an injection and/or financial contribution to operational funding, GovChat may find itself in a situation where it can longer afford to carry the cost of operating the platform without some financial contribution from the parties who are currently using it.”

Simply put, the services that came at no cost to Sassa and the DSD may soon no longer be free. Offering platform technology services to governments could prove to be a lucrative venture. In many ways, the contention of which tech company will be favoured to do so is at the core of the competition dispute between GovChat and Meta and WhatsApp.  

In its submissions to the competition tribunal against Meta’s off-boarding of GovChat from the WhatsApp platform, GovChat argued that Meta was abusing its dominance in the market of providing government messaging services in South Africa.

The question is which government contracts might GovChat be in the best position to monetise in relation to Capprec’s core businesses? Capprec has made it no secret that “payments is in their DNA”, and with GovChat already a key SRD grants application partner, this may place it in a good position for more contracts down the line. What is even more foreboding is the fact that, presently, South Africa’s social grants payments administration is going through another crisis.

From November 2022 to September 2023, reports of grant recipients not having been paid on time, or at all, consistently made the news. Postbank has regularly reported “technical glitches”, although these were often left undefined.

In a previous series, we detailed Postbank’s failure to pay social grants, its inadequate governance and controls, and raised questions on the lack of transparency by Sassa, SA Post Office and Postbank on the crisis of administering social grants payments. 

On 12 September 2023, all but one Postbank board member resigned following an investigation by KPMG that amplified concerns about payments of grants.

On 23 September 2023, the DSD and Sassa addressed Parliament’s Portfolio Committee on Social Development on the challenges facing Postbank. The presentation detailed how Postbank’s system failure resulted in grant recipients being unable to access their payments, and some having deductions from their bank accounts due to failed withdrawal attempts.

Though the issues were resolved and grant recipients were eventually able to receive their grants, the entire debacle emphasised Postbank’s inability to be Sassa’s partner to distribute grant payments.

As explained in Part One of this series, GovChat partnered with Sassa to provide the R350 SRD WhatsApp grant application portal through no formal procurement process. In our investigation, Open Secrets raised the concern that by providing its services to Sassa free, GovChat may be positioning itself to be the favoured partner for any future contracts that the state entity may offer.

With GovChat needing to generate revenue quickly to avoid liquidation, and Capprec having hinted at a future in grants’ payments distribution, could this be where Capprec sees GovChat’s commercial revival? It remains to be seen, and government is adamant that Postbank must be used. 

Whatever the outcome, protecting the constitutional rights of social grant recipients must come first.

The private sector must not be allowed to profit from social grants

Net1 and CPS’ unbridled access to the financial data of grant recipients was used without the informed consent of grant recipients to make millions of rand in profit for Net1’s subsidiary companies. 

Millions of social grant recipients across the country suffered unlawful deductions from their grants because of this profiteering.

In 2017, the Constitutional Court ruled that Sassa had a duty to protect the personal information of grant recipients and that their data must be used for no other purpose than for the payment of grants. Though the judgment concerned the CPS contract, it is one that must be upheld in all future contracts involving social grants.

As stated by the Black Sash: “Appropriate measures must be put in place in the current partnership between Sassa and the South African Post Office and any future partnership, so as to make sure that beneficiaries’ personal information is properly protected and to make sure that beneficiaries’ grants are not preyed upon by unscrupulous lenders who get access to beneficiaries’ personal information.”

In its current agreements with GovChat, it is unclear to what extent the personal information of social grant recipients has been properly protected by Sassa as dictated by the Protection of Personal Information Act, although GovChat told Open Secrets in 2021 that it only used anonymised data.

If GovChat is unable to repay its debts to Capprec, all of its intellectual property and rights – including its SRD WhatsApp application platform – will become Capprec’s. This will affect the millions of South Africans who use the GovChat platform and the millions of potential grant recipients whose information filters through its platform.

Conclusion

As GovChat remains in business rescue and is seeking financial backers to turn it around, Capprec still hopes that it can become profitable. Capprec also holds the potential trump card of GovChat’s intellectual property that it stands to inherit from GovChat.

The extent to which Eldrid Jordaan and his partners at K2018 will gain a stake in the commercial revival of GovChat remains to be seen. As Sassa and the DSD face a continuing crisis with the administration of social grant payments, any possible new partners must be scrutinised. 

The dire consequences that stemmed from Net1 and CPS’ unlawful deductions must never be repeated.

Capprec’s intent to turn GovChat into a commercial entity and its leadership’s hints about entering the world of grant payments should be a warning that the public must keep a close eye on the future of our social grants system

The post Capital Appreciation Ltd and GovChat: Follow the database — Part Two appeared first on Open Secrets.

The crumbling partnership between GovChat and Capital Appreciation Ltd – Part One

By Abby May for Open Secrets

Local technology company GovChat became a key partner of the South African Social Security Agency during the pandemic. Today, the company continues to provide a digital avenue to apply for certain grants, even though it is in business rescue and its executives resigned in 2022. This is Part One in a two-part series

Court records reveal that the relationship between GovChat and its financiers has soured, raising questions about who will get the keys to GovChat’s systems and data, and what this means for social grants.

The R350 Social Relief of Distress (SRD) grant was introduced during the worst parts of the global pandemic in response to the economic and social crisis. It saw the South African Social Security Agency (Sassa) scramble to ensure that millions of potentially new grant recipients would be able to apply for the grant while mitigating the risks of the pandemic.

Digital technologies were seen as the most viable solution to allow access to the SRD grant applications while enabling adherence to social distancing protocols.

In April 2020, Sassa awarded a R2.19-million contract to Prosense Technology to develop an email and website platform for SRD grant applications.

It also awarded Vodacom a R15-million contract to develop mobile communications during the pandemic for government, which included a USSD (unstructured supplementary service data, similar to SMS) SRD grant application platform for Sassa.

Most interestingly, Sassa contracted GovChat to create the WhatsApp SRD application portal, and GovChat agreed to do it free. GovChat was a start-up company primarily known for creating a civic engagement platform (also called GovChat) with the Department of Cooperative Governance and Traditional Affairs.

How is it that, unlike its competitors, GovChat was able to provide its digitalisation services free? And what are the long-term implications of a service provider offering free services to Sassa?

Open Secrets’ 2021 investigation, Digital Profiteers: Who Profits Next From Social Grants?, argued that access to the personal data of millions of grant applicants was likely a key motivation for GovChat’s financial backers. The investigation revealed that, though GovChat agreed to provide its services free, its primary investor – financial technology company Capital Appreciation Limited (Capprec) – expected GovChat to become commercially viable and make a return on its investment.

In its investigation, Open Secrets raised concerns about GovChat providing its services entirely free to Sassa and that it gained the contract without any formal procurement process. 

However, in an interview with the Financial Mail, GovChat’s CEO and founder Eldrid Jordaan defended the company regarding this, stating that “there wasn’t a tender, but there was no need for tender because we are coming from the private sector to assist the SA government at this time [Covid-19 pandemic]. We donated our services.”

A year after the Open Secrets investigation, Capprec announced it would impair its loan of R56.35-million to GovChat. This meant that Capprec was publicly stating it did not expect GovChat to be able to fully repay the loan.

Capprec’s loan was secured by shares in GovChat (a 35% stake) as well as GovChat’s intellectual property, including software rights, trademark rights, and technology source codes. This means that if GovChat fails to pay back the loan, Capprec may gain control of all the data and intellectual property it holds.

Three days following the announcement of the loan impairment, Jordaan released a statement announcing his resignation as CEO, as well as that of GovChat’s chief data officer, Goitse Konopi. 

In one week, GovChat saw its founder step away from the operations of the business and its sole funder take protective measures against its investment within the company. The implications of these changes for GovChat’s partnership with Sassa and the social grant recipient’s data it has access to remain unclear.

Let’s not forget the harmful consequences of Net1’s subsidiary, Cash Paymaster Services (CPS) unlawful contract with Sassa. Net1 and CPS were able to sell illicit financial products to social grant recipients, in part because they had access to the entire financial history of a grant recipient through the smart card technology they used for grant payments.

With Capprec having expressed the possibility of GovChat evolving into a grant payments distributor, the lessons learnt from the Net1 and CPS case are more important than ever. 

The SRD grant has since been extended to March 2024, and GovChat’s portal is used to apply for other grants. This means more potential applicants’ data will be filtered through the GovChat portal. The question is: will Capprec soon own the entire operation and the data of grant recipients?

GovChat and Capprec – a friendship on the rocks

On 13 December 2022, “private and confidential” talks between GovChat and Capprec to ensure the long-term viability of the GovChat business model broke down. 

Net1 founder, Michael “Motty” Sacks, who at the time served as a non-executive director at GovChat and Capprec, had attempted to broker an agreement between GovChat – represented by its only other director, Eldrid Jordaan – and Capprec. 

The following day, Capprec applied to the Western Cape High Court to have GovChat placed under business rescue.

In his founding affidavit, Capprec’s chief financial officer, Alan Salomon, makes it clear that unless a potential financier emerges through GovChat’s business rescue, Capprec is unwilling or unable to continue to provide the funds GovChat requires to remain functional.

However, Salomon has also said that Capprec intends to continue to “drip-feed” fund GovChat as it still sees long-term value in the civic engagement platform’s operations. Moreover, recent media reports suggest that GovChat’s partnership with Sassa is expanding beyond its free service provision of the SRD WhatsApp grant application portal. This is despite the ambiguous state of GovChat’s operations.

The court papers further reveal that GovChat, aside from the funding it received from Capprec, has had no source of revenue since 2019. 

The papers acknowledge that if GovChat were to undergo liquidation, it would result in harmful consequences to the millions of South Africans who use the GovChat platform. The court papers suggest that the failed brokering between the two parties is the culmination of what appears to have been a disagreement between GovChat’s founder and Capprec on how GovChat would operate as a business.

On page 16 of the founding affidavit, it states: “Despite the first respondent’s non-executive director Michael Ivan Sacks’ best endeavours to broker an agreement between the applicant and the first respondent (essentially represented by the first respondent’s only other director, namely Eldrid Jordaan), in order to ensure the long-term sustainability of the first respondent, those private and confidential discussions broke down on 13 December 2022.”

On 22 December 2022, the high court ordered that GovChat be placed under business rescue. A Johannesburg-based consulting firm called Matuson & Associates was appointed to handle the business rescue; it had been approached by Capprec in advance with a request to play this role.

It was always about the money

In an interview with Open Secrets’ investigators in 2021, Eldrid Jordaan insisted that monetisation was not a priority for GovChat. Despite these claims, GovChat’s commercial potential was what sparked Capprec’s interest in investing.

This is made clear in Capprec’s 2020 annual report which states that “to monetise GovChat… the Group has identified a variety of potential revenue opportunities, both locally and abroad, all of which will be explored”.

Additionally, in an interview with the Financial Mail, Capprec CEO Bradley Sacks stated that: “GovChat could evolve to a mechanism of grant distribution, and payments are very much in our [Capprec’s] DNA.”

This suggests that Capprec’s leadership sees social grant payments as a possible avenue for GovChat to generate revenue.

But these revenue opportunities never materialised. By the end of 2022, Capprec announced that it would be impairing its loan to GovChat due to a lack of revenue generation and protracted time of securing contracts with clients. 

The business rescue papers reveal that GovChat requires more than R70-million to repay its debts.

GovChat’s financial woes are intimately intertwined with its competition dispute with Meta (formerly known as Facebook) and WhatsApp South Africa. In late 2020, the global tech giant attempted to force GovChat off its WhatsApp business portal, causing the small technology company to pursue litigation through the Competition Commission.

On 21 January 2021, the Competition Tribunal granted in favour of GovChat’s application and ordered interim relief.  Capprec’s court submissions reveal that GovChat’s legal costs in this matter have now reached approximately R10-million.

The order prohibited Meta and WhatsApp from undermining GovChat’s relations with its clients. But it also prohibited GovChat from onboarding any new clients to its WhatsApp platform.

The interim order lapsed on 11 March 2022, the same day the commission referred Meta and WhatsApp to the Competition Tribunal for abuse of dominance based on its conduct in relation to GovChat. If the commission is successful at the Tribunal, it may result in a pay-off for Capprec.

In its 2022 financial commentary, Capprec said this may be a means of recouping the value of its loan to GovChat: “GovChat believes the Competition Commission will prevail and that GovChat will ultimately be awarded substantial monetary damages because of Meta’s actions. This award is expected to far exceed the value of the group’s loan exposure to GovChat and will likely be more than sufficient to ensure the loan’s repayment over the long term.”

However, with the matter still unresolved, it is unclear whether the prohibitions of the interim order are still in place and if so, GovChat cannot onboard new clients. This, along with the high litigation costs, may mean the company won’t be generating income any time soon.

But why would GovChat rely on the award from its Competition Commission case to cover its debt to Capprec?

A possible answer can be found in Capprec’s interim financial results booklets which state that “as a startup with limited resources, GovChat’s challenges have been made more difficult, as other GovChat shareholders have, to date, been unable to contribute their share towards the capital needed to fund its operations”.

Who are the other shareholders? Could it be that Eldrid Jordaan was unable to pay back the initial loan and therefore was asked to step down as CEO?

In Part Two of this series, we will dig deeper into what the answers to some of these questions may be.

A February 2023 report by ITWeb, broke the news that Jordaan, along with a company called K2018, had made a R50-million public offer to Capprec and its creditors to gain control of GovChat.

At present, this article was the only media report on the potential bid and we are unaware if Capprec is considering it, though the time elapsed suggests that it could have potentially been declined. The identity of K2018 also remains unclear.

Conclusion

The funding Eldrid Jordaan secured from Capprec ensured that a return on investment needed to be secured. Whatever the GovChat founder’s vision might have been, especially regarding monetisation, his primary investor made it well known that GovChat needed to become commercially viable.

The business rescue proceedings reveal that this tension ultimately led to the break-up of the relationship and the departure of Jordaan.

With no resolution, the survival of GovChat, its role in the social grants space, and the ownership of its intellectual property and data remain uncertain.

As we discuss in Part Two of this series, the search for an effective way to pay social grants remains highly contested. This makes it all the more important for this story to remain in the public eye.

The post The crumbling partnership between GovChat and Capital Appreciation Ltd – Part One appeared first on Open Secrets.

Court Order and Section 131 Application

Annextures

The post Govchat CAPPREC Business Rescue Court Documents appeared first on Open Secrets.

By Erin Torkelson, Abby May and Michael Marchant

The most cynical corporations seek to rip off the poor. Few have been as effective as Net1 and Cash Payment Services (CPS). While they have rebranded, they have not paid back their illicit profits owed to millions of South Africans

Between 2012 and 2018, South Africa’s social grant payment system, designed by Net1 subsidiary Cash Paymaster Services (CPS), showed how social welfare can be used by private actors for profiteering through the sale of financial products. Despite court orders that the contract was unlawful, and that CPS must pay back any profits made from it, this has not happened. Further, newly rebranded Net1 – now Lesaka – continues to profit from selling financial products to social grants recipients. Its privileged access to this market can be traced back to the original unlawful contract between SASSA and CPS.

More than 30 per cent of people in South Africa rely on a social grant to survive and in some instances to support their families. Since the introduction of the R350 per month social relief of distress grant (SRD) in response to the social and economic crises brought on by the Covid-19 pandemic, this has increased to nearly 50 per cent. South Africa’s social welfare system, though inadequate, is thus of paramount importance to supporting millions of people.

Despite its importance, South Africa’s social welfare system is once again facing an administration crisis. Since the beginning of November 2022, thousands of social grant recipients have either been unable to receive their grants or have had grant payments delayed due to technical ‘glitches’ in the system. These issues followed the Postbank taking on the job of administering grant payments after the South African Post Office – now in provisional liquidation – could no longer do the job. The Postbank, which should be administering these grant payments, is ill-equipped to take on the job; Open Secrets and Black Sash have written elsewhere about Postbank’s awful track record of mismanagement, fraud, and corruption. Regardless of the risks, SASSA remains committed to the Postbank taking on the contract, and grant recipients have borne the costs.

This is the last in a long line of decisions by SASSA that have been disastrous for grant recipients. The sheer number of grant recipients has made the social welfare system an attractive target for profiteers in the private sector. Together with mismanagement by SASSA, this has made millions of people vulnerable to predatory financial practices. The Chair of the Digital Frontiers Institute, David Porteous, warned in 2006, that “The regular cash flow of grant recipients may also make them an attractive target for lenders who may use irresponsible marketing techniques to lead to unsustainable indebtedness.” This continues to be a real risk in South Africa.

SASSA’s unlawful CPS contract

CPS has a long history with South Africa’s social development administration, dating back to paying grants in rural provinces in the 1980s, when it was owned by First National Bank.  It continued to do this after being purchased by Net1 in the 1990s. As a result, when SASSA announced that it wanted to consolidate grant payments under one company, CPS emerged as the clear favourite because of its experience paying in relatively remote areas.

SASSA contracted CPS, in 2012, to distribute grants nationwide. At the time, this was the second largest government contract ever issued, after the infamously corrupt Arms Deal in 1999. The contract empowered CPS to embark on a massive enrolment drive, collecting the personal information of around 17 million beneficiaries and opening bank accounts for 10 million recipients. This would prove essential to allowing other Net1 subsidiaries to profit from the sale of financial products to grant recipients.

Despite the size of the contract in terms of value and public importance, it was declared unlawful by the Constitutional Court in 2013 after it was challenged by ABSA subsidiary AllPay. The process was deemed unlawful because SASSA changed the wording in the request for proposals at the very last minute, resulting in CPS being the only company that could win the contract. Originally, the requirement for biometric verification was only “preferred”, but this was changed to being “mandatory” at the last minute.

AllPay and CPS both had the capacity to verify recipient biometrics during enrolment, but SASSA now specified that they wanted a service provider to be able to do biometric “proof of life” checks every month. CPS claimed to have the capacity to verify grantees via fingerprint or voice biometrics each month, though the latter never worked and was stopped. The Constitutional Court ruled that this last-minute change reduced the number of viable bids to one and precluded a proper comparison of costs.

Despite these contractual irregularities, the Constitutional Court recognised that grant recipients had to be paid and that an order jeopardising this would not be just. As a result, it allowed CPS to continue acting in terms of the contract to ensure grant recipients were paid. Private companies like CPS securing contracts with state institutions that cannot afford for the terms of the agreement to not be effectively executed is critical in understanding how Net1 and CPS continued to unabashedly profiteer from an unlawful contract. It is a systemic oversight in both procurement and regulatory frameworks that must be scrutinised. 

CPS and Net1 opportunistically exploited the absolute necessity of social grants being paid. Over the next years, the Net1 group of companies would make a mint from their access to and control of the grants payment system, at great cost to many beneficiaries.

Net1 subsidiaries flog financial products to grant recipients

From the very start of the contract, SASSA knew CPS’s business model included making additional profits by selling financial products and services to grantees. These products included loans (Moneyline), funeral insurance (Smartlife), airtime and electricity (uManje Mobile), and payments (EasyPay). All these companies were subsidiaries of Net1.

This proved so profitable because Net1 and its subsidiaries had unrestricted access to South African grant recipients, both in person and via their electronic data. CPS was allowed to build a system for grant recipients, separate from the National Payment System (NPS), which is the South African banking standard. Governed by the Reserve Bank, the NPS is the clearinghouse for all payments and settlements between banks. Net1 created a parallel banking system, which could be linked to the NPS but was not directly part of the NPS, giving it significant control over the bank accounts of grant recipients beyond official oversight.

Net1 could thus make grant payments, sell financial products, and extract repayments for those products without bearing any risk. Grant recipients could not default on their debts, because Net1 controlled the entire financial flow from the National Treasury into individual bank accounts and could debit those accounts early and automatically. A Financial Mail feature article written by Black Sash, chronicled the stories of three grant recipients who experienced these unsolicited deductions without their consent.

Maolaotse Grace Bonokwane, needed to fight for a refund upon discovering deductions from her bank account for airtime purchases affiliated with a number belonging to neither herself nor anyone in her family. Pension grant recipient Sipho Bani had deductions off his account for a loan he never received due to inadequate information capturing, and many more grant recipients had deductions made on their grant payments for a 1Life funeral policy they never took out.

Net1 made more money on these “financial inclusion” products than from grant distribution between 2015 and 2017. It is difficult to estimate the exact cost to grantees of Net1’s control of the data. However, Black Sash conducted quarterly surveys with grant recipients at pay points. Between October and November 2016, 25.5 per cent of recipients surveyed nationally said that money was deducted from their grants without consent. In some “hot spots”, like Khayelitsha, around 50 per cent of recipients said that they experienced deductions without consent.

 

New investigative report! The Secretary- How Middlemen and Corporations Armed the Rwandan Genocide

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This process was so profitable that companies like Moneyline did not market their loans to low-income consumers in general but to social grant recipients specifically. Investigative journalist Craig McKune, then at amaBhungane, demonstrated how Net1’s financial statements were very explicit about how it targeted grant recipients. In fact, Net1 had two microlending businesses: one that was accessible to anyone and another that was only for grantees (Moneyline). The former business was unprofitable because of the high default rate on loans, but the latter was very profitable because grant recipients were prevented from defaulting on loans.

As Net1 put it, “[W]e consider [social grant-based] lending [to be] less risky than traditional microfinance loans because the grants are distributed to these lenders by us”.  Social grantees could not default because Net1 had monopoly control over the entire grant payment process. CPS ensured that any debits owed to Net1 subsidiaries were paid early and automatically before grantees received their money.

As a result, Net1 bore none of the risk of a typical microfinance business when lending to grant recipients. In addition, the South African government guaranteed grants. There was no risk at all that the debts would go unpaid. Yet even though the risk of non-payment was nearly zero, interest rates on social grant-based credit were significant. Net1’s CEO Serge Belamant often said that his products were the cheapest available, partly because Moneyline’s official interest rates were 0 per cent per month. But the costs of credit were hidden in service fees that could be as high as 5.33 per cent per month (on a six-month loan of R1,000). This was within the law and the limits set by the National Credit Regulator, but it amounted to an effective interest rate of a staggering 32 per cent on such a loan.

In this way the company was not only profiting from an unlawful contract but doing so through unscrupulous conduct that risked the sustained livelihood of grant recipients. CPS has always denied that there was anything wrong with this, arguing that it was simply applying an early debit order, like most banks do. However, that does not take into account that CPS was in charge of both the payment of the grant and the deduction. It was not at arm’s length from participants in the transaction. It demands the question: at what point will the extensive profiteering off vulnerable communities be seen as unjust?

 Net1 pivots to EasyPay and plays the long game

Throughout CPS’s contract with SASSA, Net1 and CPS were looking ahead. They created another product exclusively geared toward grantees: the EasyPay account, which would ensure that CPS had continued access to grantees’ bank accounts if and when the contract with SASSA ended. The EasyPay account ultimately gave Net1 more control over grantee banking beyond SASSA’s purview.

Net1 aggressively marketed EasyPay to grant recipients. Black Sash paralegals found that some people were told that the EasyPay card was the “new SASSA card”; others were told that credit was “not allowed on the old SASSA card”; and still others that EasyPay is the cheapest, safest bank account “for life”. Over 2 million grantees opened EasyPay accounts without filing the necessary declaration with SASSA to have their grant paid into a new bank account. Through the CPS contract, grantees could “consent” to new product offerings with their fingerprints. Upon giving “consent”, they were moved out of the CPS banking environment, which had some oversight by SASSA, into a private arrangement with EasyPay.

Net1 were right to plan for a period with a contract with SASSA. As Black Sash, investigative journalists and academics exposed the unlawful contract and dubious deductions, political sentiment turned against Net1. Then Minister of Social Development, Bathabile Dlamini, attempted to amend the Social Assistance Act to stop debit orders on the CPS/Grindrod bank account. Dlamini had been an early champion of CPS and Net1. The Constitutional Court declared her conduct “reckless and grossly negligent”, and Dlamini was convicted of perjury in March 2022 for lying to an inquiry about the social grants crisis.

Yet the strategy of pivoting to EasyPay has worked. In May 2022, Net1 changed its name to Lesaka in an effort to avoid the negative image Net1 had after its conduct in relation to the SASSA contract. Lesaka means “kraal” in Setswana and Sesotho, and Lesaka says that it has chosen this name because it is committed to communities and seeks to drive “financial inclusion”. This was the same promise that CPS and Net1 made a decade ago, and the evidence from communities is that little has changed in the business model.

In 2022, the cost-of-living crisis brought about by the Covid-19 pandemic, rocketing fuel and food prices, and chronic unemployment, have left millions of South Africans desperate to access cash and looking for loans wherever they can find them. Reporting by GroundUp in June 2022 revealed that hundreds of thousands of social grants recipients with EasyPay cards queue for grants and then take out loans against these grants from MoneyLine on the same day. In Lesaka’s reporting to its US shareholders (it is listed in the US as well as South Africa), it says that its strategy is to grow the number of EasyPay customers so that it can “cross-sell” financial products such as insurance policies. Sound familiar?

As GroundUp concludes, the success of this business model is down to the “preferential access to this vast market was handed to them “on a plate” when CPS was given the SASSA contract in 2012”.

CPS yet to pay back the money

As mentioned, South African courts have never settled the issue of the automatic deductions discussed previously. However, four years after the Constitutional Court declared the CPS contract unlawful, in 2017, the Court made a new order directing CPS to pay back the profits it made in terms of the unlawful contract. SASSA claims that this is over R500 million. This was a significant victory that entrenched the principle that companies should not profit from unlawful contracts.

Yet despite the order, CPS has engaged in a drawn-out fight against repayment. When it first filed its audited financial records with the court in terms of the court order, the records were contested by numerous parties, including Treasury and the accountants hired by SASSA. A report by RAiN Chartered Accountants concluded that CPS had overstated numerous expenses, and that it may have been understated its profits by as much as R843 million. RAiN also expressed concerns that more information was needed to determine if CPS had engaged in unlawful profit shifting. Civil Society organisation Freedom Under Law approached the Constitutional court in 2021 alleging that CPS was under-declaring the profits made in terms of the contract by R800 million.

As a result of these concerns, in April 2021, the Court again ordered CPS to completely open its records to an independent auditor to determine the profits it must pay back. CPS has been in liquidation since 2020, and its provisional liquidators asked the court to delay enforcing this order. Their application was again denied by the Constitutional Court in February 2022. It is now more than a decade since CPS was first unlawfully awarded the contract by SASSA, and six years since it was directed to repay its profits.

Net1 and CPS blaze a trail

The conduct of Net1 and its subsidiaries in relation to social grant beneficiaries is a stark warning about how private actors can profiteer from the social welfare system in South Africa. In 2021, Open Secrets investigated new companies moving into the social grants system and partnering with SASSA to build digital systems for social grant applications. The Open Secrets report, Digital Profiteers: Who Profits Next from Social Grants? exposed the role of GovChat, a small South African technology firm part owned by listed tech company Capital Appreciation, in seeking to profit from its role in the grants system.

GovChat has so far offered its digital services to SASSA for free. However, Capital Appreciation is on record saying that it is constantly looking at ways to monetise GovChat’s work on social grants. In a radio interview in 2021, Capital Appreciation CEO Bradly Sacks stated that while GovChat does intend to make money and charge for its services, the SRD grant process was done out of true altruism.  But perhaps the offerings of free services are a way to get a foot in the door. At the moment, GovChat helps SASSA with grant applications, but Capital Appreciation is eyeing what CPS and Net1 used to control: the payments system. In response to the Financial Mail’s questions to them about the Open Secrets publication, Sacks said that while the investment was about “giving back” to the country, he also admitted that there were commercial opportunities for Capital Appreciation. In particular; he added “GovChat could evolve to a mechanism of grant distribution, and payments is very much in our DNA”.

It may well be that SASSA is already considering this due to the state’s inability to create a functioning payments system. In June 2022, a massive technical outage at the Postbank meant that the majority of people owed the R350 SRD grant were unable to collect it. Similar issues were experienced again between November 2022 and January 2023. In this context, SASSA may well look to turn to another private service provider to manage the grants payment system.

While it may seem a necessary or even attractive step to engage the private sector in grant delivery, the story of Net1 and CPS revealed that SASSA fundamentally failed to protect grant beneficiaries from private companies seeking ever greater profit margins. The unsuccessful efforts to ensure repayment of these profits from CPS should be a damning indictment against all involved. The reason for such penalties is to ensure that reparations are made and to create a disincentive for their repetition. Now we have neither.

A key lesson from CPS and Net1 debacle is that SASSA placed grant recipients in a financially exploited position with a private company that monopolised the grant system to serve its benefit. Such welfare profiteering cannot be repeated.

Unaccountable, we have not forgotten.

The post Unaccountable 00038| Net 1 and CPS- Welfare Profiteers appeared first on Open Secrets.

By Open Secrets and Black Sash

Published in the Daily Maverick

With a reputation of being incapable of managing the technical constraints of its internal systems, it must be questioned why the South African Social Security Agency and the South African Post Office would make Postbank the preferred partner to take over the administration of social grant payments.

Postbank’s technical ‘glitches’ are nothing new

Postbank officially took over the social grants payment system from Sapo on 31 October 2022 and its system immediately experienced technical failures that disrupted grant payments.

In December 2022, Postbank announced that ATM use for the Postbank/Sassa gold card had been suspended for December and that beneficiaries using these cards should collect their grants at retail stores. The reason given was the uncovering of attacks on the Postbank system by criminal elements “determined to commit systematic ATM card fraud-related crimes on Postbank payments” which required further investigation. Many retail stores ran out of cash, leaving beneficiaries unpaid.

PostBank had an emergency meeting with Sassa in December 2022 in an effort to resolve the issues, but the Postbank CEO was noticeably absent from the meeting, since he was on leave in a time of a crisis.

Postbank explained the suspension of ATM use as risk mitigation against fraud. Despite Postbank’s undertaking to inform stakeholders upfront of any action taken, Postbank was noticeably quiet in the media regarding the challenges with grant payments which continued in January 2023.

Despite the promise that these issues would be resolved in December, Postbank faced similar problems in January 2023, with recipients not being able to access their grants. All of this indicates that Postbank was ill-prepared to take on the responsibility of managing social grant payments. Yet, such issues have been persistent throughout the state entity’s existence.

In November 2022, the Mail & Guardian reported that Postbank’s irregular expenditure had risen by R118-million and that it had not reached its 2021-22 target of acquiring a commercial banking licence. Senior manager at the Auditor-General of South Africa, Joyce Nkonyane, told Parliament’s Portfolio Committee on Communication that the inappropriate spending came from various contracts.

The article reported that one of the major irregularities was that Postbank failed to safeguard the issuing of bank cards for its client, Sassa, which resulted in the loss of R68.8-million in cards that were not accounted for. These Postbank cards were meant for Sassa grant recipients who used Postbank accounts for their grant payments.

Additionally, Postbank’s failure to protect its internal systems and manage the cards led to stolen Sassa cards being used to commit fraud amounting to R13.6-million.

Moreover, in March 2022, Postbank confirmed that a cybercrime attack had resulted in a financial loss of about R90-million, though it claimed no customers had been affected by the loss.

AmaBhungane reported that “between 16 and 28 October last year (2021) individuals presumed to be either employed by Postbank or by a Postbank contractor stole at least R89,459,330 in physical cash through Sassa accounts. The brazen fraud involved illicitly crediting grant beneficiary accounts with large sums and then emptying these accounts out at ATMs.”

It was not the first time Postbank had suffered a cybercrime attack. In 2012, a hacker stole R42-million from the state entity when an employee’s computer was used to transfer money from the bank’s main server.

There have also been technical glitches within the Postbank system leaving recipients of the R350 Social Relief of Distress grant unable to get their grants. This problem was eventually resolved, but it highlighted concerns about Postbank’s ability to maintain adequate protections in its internal digital systems.

There has been little accountability for any of these issues, with the Auditor-General telling Parliament that it had noted a clear “failure of having enough consequence management efforts and no internal process established to deal with consequence management”.

What next to protect grant recipients?

With a reputation of being incapable of managing the technical constraints of its internal systems, it must be questioned why Sassa and Sapo would deem Postbank the preferred partner to take over the administration of social grant payments.

It has become evident over the past three months that Postbank may not be suitable to maintain the critical responsibility of making grant payments. It certainly raises even greater concern about the secretive nature of and lack of public engagement on the decision.

If Postbank is to remain Sassa’s preferred partner, then questions need to be raised as to how and when Postbank will address its internal control failures and fraud problem. Sassa, Sapo and Postbank must also be more transparent on the details and implications of Sapo ceding its responsibilities to Postbank. The public needs urgent answers to the following:

• What informed the decision to cede Sassa’s contract with Sapo to Postbank?
• Why was no notice of the proposed cession given to the public, particularly social grant beneficiaries?
• Why were beneficiaries not kept updated about the reasons for the delays in payments and how Postbank planned to address the issues?
• Given the experiences of grant beneficiaries over the past three months, is Sassa and the minister of social development satisfied that Postbank is able to fulfil the functions required of it in terms of this agreement?
• What measures have Sassa and the Postbank taken to protect grant beneficiaries from the effects of Postbank’s lack of expertise and capacity to fulfil the obligations to administer and pay the grants?; and
• What oversight mechanisms are currently in place between the Department of Social Development, Sassa and Postbank to ensure the efficient payment of social grants?

The post Social grant payments are a mess – and the public needs answers from Sassa, Sapo and Postbank appeared first on Open Secrets.

Open Secrets’ Head of Investigations, Michael Marchant speaks to Sakina Kamwendo about the nearly R50 billion in Unpaid Pensions that belong to almost 5 million people in Southern Africa and the ways in which this deepening injustice can be addressed.

The post WATCH| Five million people owed R47 billion in unpaid funds appeared first on Open Secrets.