Allan Gray admits it could have conducted better oversight of the business
The World Bank’s private sector arm, the International Finance Corporation (IFC), insists it made the right call when it decided to buy a stake in the controversial Net1 UEPS Technologies — the parent company of Cash Paymaster Services (CPS), which disburses South Africa’s social grants.
Speaking to the Mail & Guardian exclusively, the IFC said it conducted thorough due diligence when it bought its Net1 shares and did not go into the investment blind. The second-largest shareholder, asset manager Allan Gray, has, however, acknowledged mistakes, saying it could have conducted better oversight.
The two largest investors in Net1 — the IFC and Allan Gray — have come under intense scrutiny following the last-minute scramble to extend the contract between CPS and the South African Social Security Agency (Sassa) for the payment of social grants to 17-million beneficiaries.
The contract was found to be unlawful and invalid by the Constitutional Court and has been mired in allegations of unethical conduct since the beginning, although no court has made such a finding.
There is also a pending high court judgment, which will determine whether Net1 can lawfully make deductions from grant payments for microloans, airtime and other financial services. Respondents in the case, including human rights organisation Black Sash, claim the loans and other services are marketed to grant recipients in an unscrupulous and irresponsible manner.
With an 18% shareholding in Net1 acquired in April last year, the IFC works with the private sector in developing countries and, like the World Bank, its core mission is to fight poverty.
In an interview with the M&G, the IFC’s Andi Dervishi said the organisation’s due diligence took into account all the publicly raised concerns about Net1 and still made a decision to work with the company.
Dervishi said Net1 provides critical services to a constituency at the core of IFC’s mission. “It is providing a very necessary service to a population group we are very interested in,” said Dervishi, noting the service provided could potentially be expanded on and rolled out to the rest of the sub-Saharan region.
“We have a long history of being a prudent investor. We are very sensitive to these kinds of issues, more so, possibly, than anyone in the world,” he said. “We don’t care for oversized returns if they come at the cost of our principles.”
Dervishi said IFC has also examined Net1’s lending practices and found it was offering the cheapest and most transparent short-term loans for that customer segment.
“They don’t charge interest, instead they charge a fee, and we have found that this is the most transparent way of charging for loans; it’s the easiest way for consumers to understand true cost and budget accordingly.”
The average loan size was R800 for an average term of five months and the average monthly service fees amounted to R54 a month — an added cost of 34% on the original loan amount — the IFC found at the time of its due diligence.
But asset management company Sygnia’s chief executive, Magda Wierzycka, said the added cost was very expensive financing to very poor people. It amounted to an effective interest rate of 164% a year, she said.
The second-largest investor in Net1, Allan Gray, with a 15.6% stake, has built its brand on high standards of ethics and integrity. But it has admitted that better due diligence could have been done.
“We have previously met them on numerous occasions, with members of the board,” said Allan Gray chief investment officer Andrew Lapping. “For sure we knew they were in the business of microlending and selling insurance policies. They insisted to us and assured us they are the cheapest by a country mile and they supply products in a responsible manner — they won’t take more than a certain percentage [of the grant amount].”
Lapping said Net1’s disclosure had been “very poor”. Asked whether Allan Gray could have independently checked how much lenders were paying in interest, Lapping said the firm was now randomly sampling grant recipients. “We should have checked it before,” he said.
Lapping also acknowledged Allan Gray knew that Net1’s broad-based black economic empowerment partnership was problematic: “It hasn’t just cropped up. We had been concerned about it from the beginning.”
But even with no resolution of this concern, Allan Gray invested anyway.
This was one of the grounds on which the Constitutional Court found CPS’s tender was unlawful.
Elroy Paulus of the Black Sash said that, as a dual-listed company, it was unfortunate that shareholders may have made decisions based solely on briefings by Net1.
“Now that the court matter is public record and they can read and see lived experiences of South Africans — including our affidavit citing tens of thousands in illegal deductions — these investors, including the World Bank, have the opportunity to know. And now that they know we ask that they act according to their conscience,” he said.
Even though the IFC insists its process was thorough, it has requested Net1 to hire consultants to assess their practices as a responsible lender.
The IFC conceded it has been concerned about the tone of some of the company’s public comments, including comments that added to uncertainty about whether the grants would be paid come April 1. The organisation has encouraged Net1 to communicate more effectively in public.
Lapping told the M&G Allan Gray had written to Net1 two weeks ago. “They have told us they don’t do these things [that have been reported]. They must provide us with proof that this is not the case.” After they received no response, Lapping said the firm sent another letter taking a harder line in which “we pointed out the duty of care they must take with people who may not be financially savvy”, Lapping said.
Allan Gray is taking legal advice on its options. One may be to remove Net1’s current management team, which would typically require at least 50% of the vote. However, because Net1’s primary listing is in the United States, the process may be more complex.
Lapping couldn’t say whether the other shareholders could be lobbied to join Allan Gray to make changes at Net1. “The rest of the shareholders are faceless US investors. Their view many be diametrically opposed to ours. We are just a small minority.”
He dismissed the idea of divesting from Net1, suggesting it was in the interest of the company, its clients and the country that it rather seek to influence its business operations.
“This experience has for sure led us to improve our process and hopefully improve generally.
“We take this extremely seriously,” he said.