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.
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.