Inside SA’s welfare-industrial complex

Eldrid Jordaan may be only 42, but his life is steeped in struggle politics. "I come from a family who were civil rights activists in the Cape. My father, Paul, was a secretary-general for a teachers’ union in the 1980s, so as a five-year-old, Friday night was considered debate night at my house. It’s how I grew up," he tells the FM.

This upbringing, linked to the ANC in the Western Cape, opened doors. At one point, Jordaan was a special adviser to former public enterprises minister Lynne Brown, and today he bills himself as a "digital communications adviseor" to several African governments

Jordaan is also a former adviser to the now-defunct cellphone platform Mxit. It was this experience, he says, that opened his eyes to how desperate people were for a platform on which to engage about things such as burst water pipes, power outages and service breakdowns.

This is why, in 2016, he says he started GovChat — a mysterious entity that rose to prominence during the Covid pandemic, when it scooped up the contract to build a technology platform for the delivery of the R350 social relief of distress (SRD) grant.

Intriguingly, GovChat built this platform for free, registering and processing the data of the 13-million South Africans who ultimately applied for the grant, for which 8.4-million qualified to get it.

This, Jordaan says, is his "contribution" to helping the government deal with Covid.

"Since we started, we haven’t taken a single cent from the SA government. We have only wanted to influence society positively," he says.

It’s a noble sentiment. But GovChat’s emergence as a pivotal player in the social grant machinery is the subject of a new report by nonprofit organisation Open Secrets, which raises awkward questions about the "red flags" in its appointment.

Foremost among these is the fact that the contract was awarded without a tender.

Astoundingly, this wasn’t revealed by the government. It emerged only because Open Secrets lodged an access to information request in September 2020, asking for all details of the contract. And the SA Social Security Agency (Sassa), to its credit, provided this two months later.

"The documents reveal that instead of following a formal procurement process, Sassa’s chief information officer Abraham Mahlangu phoned Jordaan on May 4 2020 to ask if GovChat could assist them in the rollout of the Covid SRD grant," says the Open Secrets report.

Jordaan loved the idea. In a letter that day, he confirmed that GovChat would do it — and it would do it for free.

Two days later, Sassa CEO Busisiwe Memela approved the deal.

Just five days later, GovChat launched the WhatsApp service. In its first run, 12-million people — 20% of the population — applied. That Covid grant was meant to come to an end in April, but after a chorus of protests, it was offered again in August, and 13-million potential beneficiaries put in applications.

"GovChat now appears to be Sassa’s partner of choice for its future digitalisation plans, and it has rolled out a trial application platform for disability grant recipients as well," says Open Secrets.

On this point, Jordaan tells the FM: "There wasn’t a tender, but there was no need for a tender because we are coming from the private sector to assist the SA government at this time. We donated our services."

Actually, he says, GovChat performed similar services for the department of health and the department of co-operative governance before the grant deal came up — and no tender was won in those cases either.

"There have been many other companies that have done partnership agreements with the government, like BCX and Telkom, and there were no tenders in those cases either," he says.

And, he says, this has provided a clear benefit: 13-million South Africans did not need to stand in a queue to apply for a grant.

While Open Secrets is clear that it hasn’t found any unlawful conduct on the part of GovChat, it says the process of appointing this company without tender "necessitates closer scrutiny".

Its report, which examines "who profits next from social grants", is being released this week. It asks, pertinently, what GovChat will do with the 13-million records it now has in its possession.

"Will a company like GovChat have access to the data of millions of basic income grant recipients? Is this the bonanza that GovChat and its investors are betting on?" it asks.

It’s a critical question because, when it comes to grants, SA has been burnt before. From 2012 to 2018, the JSE-listed Net1 made an estimated R1bn from a contract it unlawfully won from the government to administer grants.

And Net1 did this in a particularly unsavoury way: using the grant database, it flogged expensive microloans, funeral insurance and airtime to these recipients, deducting repayments from grants before they were paid over.

Tracey Davies, executive director of shareholder activist organisation Just Share, says that in SA, where millions of people are vulnerable to sophisticated commercial exploitation, private sector businesses that claim to deliver social goods should be subject to rigorous levels of transparency and accountability.

"This is even more important when billions of rands of public funds are thrown into the mix," she adds.

It’s a valid point. Shoddy transparency is the last thing one can afford, considering that big tech has been thrust into the forefront of the race to digitise platforms for everything in the wake of Covid — from grants to medical records.

As Jordaan says, "the grants programme is the largest social relief programme on the African continent".

But partly because of SA’s epic unemployment rate — 44%, including those who’ve given up looking for work — demand for grants is exploding (see graph)..

Two decades ago, fewer than 4-million beneficiaries received a grant of some kind; now, more than 18-million grants are given out. Proper disclosure around the machinery built to deliver this is the difference between an accountable democracy, and more woeful tales of plunder.

So who is GovChat, and what does it hope to get out of this?

Philanthropy, or not?

In its report, Open Secrets warns that GovChat may be making a "data play", based on the fact that the new digital system could "generate an extraordinary database of the personal information of around half of SA’s population".

This, it says, is the kind of "big data play that financial and technology firms dream of", which can then be on-sold to advertisers or politicians.

And while Jordaan created the platform for free, Open Secrets says there is a risk that anyone managing such a large chunk of data will want to "commercialise" it.

Jordaan, however, stresses to the FM that all the contracts it has signed with the government make it very clear that "we cannot sell the data".

While he is adamant that GovChat hasn’t made a profit from the Covid grant platform it built, he tells the FM that it is most definitely a "for-profit" company.

"The business model works in quite a few ways," he says. "One would be [selling] software as a service, where we’ve created the technology. And we enable governments to understand what is happening through visualisation capabilities and analytical tools and mapping, and those are paid-for services."

In the next few weeks, he says, there will be an announcement around the "commercialisation of GovChat". A number of governments around the world, he says, are interested in using the model for "citizen engagement", including Ghana, Nigeria and Zimbabwe.

Jordaan says SA’s Covid grant platform was built for free to "showcase" what GovChat could do — and it will use this model as a marketing tool in other countries.

Governments will be able to get a "freemium" model, then upgrade to a full information management system to help them interact with their citizens.

So will GovChat continue to put together free services for the government?

No, says Jordaan. "It is for the shareholders to decide how we take this forward but, no, it is definitely not going to continue to be free."

This, as it turns out, is a critical point: who are these shareholders?

While Jordaan’s personal motives may be more philanthropic, the fact is that GovChat has a powerful JSE-listed company behind it, run by several of the more hard-nosed executives you could hope to meet. And they’re not used to losing money.

In May 2019, Capital Appreciation (Capprec) bought 35% of GovChat for R1, in exchange for extending it a R20m line of credit. Capprec had listed on the JSE only four years earlier, with the support of Patrice Motsepe’s African Rainbow Capital.

Capprec has some of the sharpest corporate minds on its board.

It is chaired by Motty Sacks, who co-founded hospital group Netcare in 1996 and is widely considered to be corporate royalty. His son Brad Sacks, a former Bank of America MD, and Michael Pimstein, the former CEO of Macsteel, are joint CEOs.

Other heavy hitters on the board include former SABMiller supremo Meyer Kahn, the former head of Anglo American SA Kuseni Dlamini and ex-banking registrar Errol Kruger.

The thing is, Capprec is clearly expecting a return.

When it bought into GovChat, it sold the deal to shareholders like this: "The relationship with GovChat presents a number of potential commercial opportunities, which are consistent with the strategic objectives of Capital Appreciation."

And in its 2020 annual report, Capprec writes about the opportunity. "To monetise GovChat, [Capprec] has identified a variety of potential revenue opportunities, both locally and abroad, all of which will be explored."

It seems Capprec’s investors are also expecting a windfall: on the day the grant WhatsApp service went live, on May 8 2020, Capprec’s share price shot up 7.6%. Nor is the language Capprec uses to describe GovChat particularly soft and fluffy: it speaks of the "brutal efficiency" of "platform economics".

In an interview with the FM, Brad Sacks, now living in New York, says GovChat is clearly expected to produce a profit. "Our view is that it should be a commercial enterprise that is able to support itself," he says.

Asked why Capprec bought into GovChat in the first place, Sacks says it bought Jordaan’s vision, and believed this was a way of "giving back" to SA.

But there were also strong commercial opportunities.

"GovChat could evolve to a mechanism of grant distribution, and payments is very much in our DNA," he says. "We have a payments division, and we have a software division and the entire GovChat platform has been developed using the synthesis technologies of big data and analytics and artificial intelligence."

Clearly, Sacks sees value in bankrolling GovChat.

But intriguingly, a footnote in Capprec’s annual report reveals that GovChat "has pledged as a security for the loan from Capital Appreciation, all its rights, title and interest in and to all of GovChat’s intellectual property and specifically including all the software rights, trademark rights and technology source codes". In other words, if GovChat can’t repay the loan, Capprec gets all the data.

Jordaan dismisses this concern. "I’m not going to speak about security of shares, and all of those types of things. My goal, and why I started this institution, is about social impact," he says.

The UN and others have chosen to partner with GovChat because, Jordaan says, they believe in its mission, and they trust that the data is protected. As it is, all the data is hosted by Amazon Web Services and kept in the cloud — and GovChat is the largest user of the Amazon chatbot globally.

Sacks underscores this, saying no-one should fear what happens with their data.

"The way that GovChat has developed its relationship with other elements within government, there is a very clear understanding as to how the data is going to be used … the government [owns] that data."

GovChat’s "magic" he says, is that it can analyse the information and provide usable information, rather than just data points.

Avoiding the Net1 example

But another red flag is that some of the guiding hands behind Capprec were also part of Net1 which, under CEO Serge Belamant, had a history of not knowing where to draw the line.

Belamant was elbowed out in 2017.

Motty Sacks, for example, was a co-founder of Aplitec, which later became Net1. Prof Hanoch Neishlos was a co-founder of both Aplitec and Capprec, though he has since sold out of Capprec and emigrated to Australia.

Paul Whitburn, a portfolio manager of Rozendal Partners, which owns shares in Capprec, explains: "Neishlos, who was a professor of data analysis at Wits University, was a partner of Serge Belamant."

As Open Secrets points out: "A company having board members associated with the Net1 debacle should set the alarm bells ringing for most reasonable people — particularly the Sassa officials who appointed GovChat."

The concern here would be that Capprec could lean on GovChat to "commercialise" the data it has collected on grant recipients in a way that isn’t exactly kosher — in the same way that Net1 broke ethical boundaries by flogging overpriced products to its social grant database.

Brad Sacks, however, says it’s "ridiculous" to raise his father’s involvement in Net1, which dates back to long before that company began running into trouble.

"It’s no secret that my father was involved with the initial listing of Net1, and he was the chair of the company," he says.

"But it’s also common cause that he retired and separated himself [from it] in 2000 — long before they were involved in the electronic social grant distribution mechanism."

Sacks has a point. Yet because of how badly Net1 behaved with its social grants contract, scepticism continues to haunt any company, like GovChat, that lands up working in the welfare system.

Naeem Badat, a co-founder of Differential Capital, which takes a keen interest in environmental, social and governance investments, says it is important for anyone working in that system to avoid replicating the mistakes of Net1.

"The social grants contract was a big money-spinner for Net1, since they did a lot of lending to the grant recipients on their books — which was obviously unethical, if not illegal," he says.

Badat points out that Capprec contains a mish-mash of fintech businesses, which could benefit from using the grants data. "So the extent to which Capprec will be able to access any of the grant data, to use for its other businesses, should be closely watched," he says.

While GovChat might say it doesn’t want to make money from the grants platform, Badat says: "I always worry when someone says they don’t want to make money from something that has been created with a huge degree of effort — often, they’re looking to get compensated in some other way."

However, he says, any company genuinely helping the government alleviate poverty, in an economically fair and ethical way, deserves everyone’s full support.

But to assess whether this is the case, the government must be ultra-transparent about how the new grant platform works.

Sacks is clearly irritated by the comparison to Net1.

"That’s really unfair," he tells the FM. "Net1 and Capital Appreciation are materially different organisations with a completely different approach and ethos."

While he says Net1 did an excellent job in distributing the grants, the problem was what happened in the background.

"Where Net1 acted inappropriately is the advantage it took of the citizen, at the time they gave him the funds, and the usurious rate that they charged, and the preferences they took for themselves with respect to the loans," he says.

GovChat, he says, isn’t doing this.

Whitburn doesn’t believe that Capprec is in this game to manipulate the data and make a killing off social grants.

"GovChat was never going to be huge in Capprec’s lives, so I believe that by giving this platform away for free to the government, they’re proving what they can do. And fair play — you can’t be seen to be profiting from Covid," he says.

The platform is a nice sideline for Sacks’s company, he says, but it’s just that — a sideline.

‘Surveillance capitalism’

However, you only have to look at the cautionary tale of Cambridge Analytica, which has been heralded as the poster child for the "dark side of the big data economy", to see how it can all go wrong.

Immortalised in the documentary The Great Hack, Cambridge Analytica was an arm of a political consultancy whose owners had close ties to the UK’s Conservative Party and British military.

It bragged that it had up to 5,000 data points on every US voter — information it then sold to politicians (including Donald Trump, and those supporting the Brexit campaign for the UK to leave the EU) and companies on the basis that it could "change audience behaviour".

Cambridge Analytica’s undoing was that it had assembled its formidable whack of data through a backdoor breach of Facebook, which gave it individualised information on 87-million users of Facebook.

When the evidence of its manipulation emerged in March 2018, Cambridge Analytica had to file for bankruptcy. But Facebook was fined $5bn for allowing its data to be accessed like this.

When it comes to data, Facebook has displayed a moral compass that would make even the shameless ANC appear as if it were pointing true north. Two months ago, Mark Zuckerberg’s company was fined another $270m (R4bn) in Ireland for failing to disclose to WhatsApp users how it uses the data it gathers.

It’s an example of what Harvard Business School professor Shoshana Zuboff describes as "surveillance capitalism" — where private firms gather immense amounts of data on people, build up personality profiles, then sell these predictions to others.

Clearly, GovChat is not doing this. But the risk that Open Secrets flagged is that by collecting the information of 13-million grant applicants, this is data that could be manipulated not only by companies trying to sell products, but by politicians seeking votes.

Jordaan says GovChat would never sell individualised data.

What it is looking to sell is anonymised analytical reports around what is happening in a country.

"Let’s say there is a service delivery protest, because local government is not responding to citizens, or we are picking up that unemployment in a specific ward is getting out of control, then we’re able to report on that, but in an anonymised and in an aggregated manner," he says.

"We will never sell personal identifiable data to anyone."

But even this sort of data can surely be used by malign governments. What about a case like Zimbabwe, where Emmerson Mnangagwa’s thuggish regime has a history of abusing the state machinery to assault and jail critics and opposition parties?

In that case, data about possible protests can be used to choke democracy further.

Jordaan says GovChat has never sold any data to security forces.

"We will consider a government’s request around what they would like to use GovChat for. But this is to assist them to make their countries more responsive through our early warning capability — not to create intel around citizens," he says.

And, he adds, GovChat is deeply aware of the need to secure its platform so there are no breaches, as was the case with both Facebook and Cambridge Analytica.

For Jordaan, the opportunities of putting in place a proper digital platform to engage with an often unresponsive government far exceed the risks. This, he says, is one of the few ways to hold politicians accountable for their lack of delivery.

"Just last week, I needed to apply for a new passport. So I went to the department of home affairs at 4am, and when I got there, there were 100 people in the queue already. In the end, we were only served at about 11am. Those kind of things are unnecessary in the modern technological era," he says.

Anyone who has dealt with the mindless incompetence of applying for a driver’s licence, let alone a social grant, will agree.

But as Open Secrets warns, the "rapid digitalisation of the welfare state" presents a whole new category of risks. And the government has not yet shown it is ready to handle these. The Net1 cautionary tale shows that the potential for abuse isn’t just an ethereal concern either.

Read the full Open Secrets report Digital Profiteers: Who Profits next from social grants? You can also find out more about Digital Profiteers here.

Even though GovChat agreed to supply the government with grants technology at no charge, there are still red flags

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