Government will ask the constitutional court to allow it to extend a welfare distribution contract with Net1 UEPS Technologies’ Cash Paymaster Services (CPS) unit, which the nation’s top court had ruled invalid, to ensure that 17,2m people continue being paid.
The payments, which amount to R140bn/year, are a signature policy of the ruling ANC, which says the grants are an important measure to reduce inequality in the nation almost 23 years after the end of white-minority rule. In previous election campaigns its officials have told rallies that if another party came to power the payments may end.
While Net1’s contract expires at the end of March, the South African Social Security Agency (Sassa) hasn’t appointed a replacement or made arrangements to take over the payments itself.
Although six options, including using other banks, were considered, granting Johannesburg-based Net1 a one-year extension was considered the only viable one, Sassa executive manager Raphaahle Ramokgopa told lawmakers in Cape Town on Wednesday. The agency is effectively asking the nation’s highest court to overturn its own ruling. Net1 shares surged.
“The only thing that would make us survive is to go to court and ask for the suspension of the invalidity” of Net1’s contract, she said. Any other option “will not enable Sassa to pay on 1 April 2017.”
If the court refuses to allow the extension support for the ANC may be damaged.
Welfare grants are “possibly one of the most important instruments available to the ANC and to the government in order to mobilize support”, Dirk Kotze, a politics professor at the University of South Africa, said in an interview from Pretoria.
“If there were interruptions for a month or so, the ANC would be regarded as the one who should take responsibility for it. A huge percentage of the South African population would be affected.”
ANC legislators welcomed the approach taken by Sassa, saying it would ensure welfare payments will continue in April. Opposition parties criticised Sassa for not having an alternate plan should the court refuse to sanction the extension of Net1’s contract and alleged that it had been politically pressured to retain the company’s services.
“The constitutional court may have no option but to condone the extension of Net1’s existing illegal contract to ensure the payment of welfare grants isn’t interrupted,” said Lindy Wilson, the Democratic Alliance’s shadow deputy minister for social development. “They have done nothing for two years to force this emergency.”
Thokozani Magwaza, the welfare agency’s CEO, denied that the agency had tried to circumvent the court order, saying its attempts to issue a new tender were upended when two potential bidders withdrew and none of the others met the technical specifications.
“It’s not like we have been sitting on our laurels,” he said. “The fact remains that a decision needs to be taken. Come 1 April we need to pay. We have not had any political pressure on the issue of CPS,” he said after allegations of interference were made by opposition parties.
Ramokgopa said Sassa will use the extension of Net1’s contract to give it time to issue a closed tender to 27 banks to take over the payments for welfare recipients that have accounts and appoint a new company to distribute cash to those that don’t. The agency ultimately aims to take over the entire payments system itself. The tender will be issued by the end of March and banks will be required to express their interest in May with contracting expected in June.
Sassa want the banks to offer accounts designed to protect welfare recipients, often poor rural citizens with little understanding of how financial systems work, from companies that offer services such as funeral insurance for children and mobile phone airtime and then make deductions directly from state payments.
The constitutional court ruled the Net1 contract invalid in 2013 because of the way it was awarded a year earlier.
Net1’s CEO, Serge Belamant, said on Tuesday his company is willing to keep providing the service and would also consider selling the unit that handles the payment to the South African government. Belamant wasn’t immediately available to comment on Wednesday.
Net1 has been in legal battles with the government over the right to allow deductions and it part owns some companies that offer the services.
“Up to now, CPS have been doing a good job with regard to the payments of grants,” which must be separated from the issue of the deductions, Magwaza said. “I have got to divorce the two things. CPS is not deducting per se, Net1 is one that is doing the deductions. It’s unfortunate they are in the same stable.”
Net1 shares rose as much as 11% to US$12,74 in New York and traded at $12,63 as of 12.25pm local time.
“It’s a great result for South Africa,” Belamant said in an interview on Wednesday. “This is probably the best system in the world. The question is, are we going to end up with another dozen lawsuits? But you’ve got to take the good with the bad. ”
Net1’s CPS unit has exploited its position and could now benefit further from an extension, said Bonita Meyersfeld, head of the Centre for Applied Legal Studies at the University of the Witwatersrand in Johannesburg.
“They are capriciously targeting beneficiaries who are not necessarily literate,” she said in an interview. Now “they have the upper hand that makes their negotiating very strong. They are in a very strong negotiating position. I am nervous about what the cost of this would be.” — (c) 2017 Bloomberg LP