Gijima took a knock of a year-and-a-half’s net profit after its settlement agreement with the Department of Home Affairs, as it could not afford the damage that would be caused if it sued its biggest client.
ITWeb reports the listed outsourcing company on Monday said a spat between it and the Department of Home Affairs (DHA) had been resolved after almost a year of negotiations. Last April, the department canned the ‘Who Am I Online’ contract, arguing that the deal was invalid. Gijima was awarded the contract to overhaul the department’s systems and improve security in 2007, and the contract was signed the following year. The project aims to replace outdated and obsolete legacy systems, as well as improve security.
CFO Carlos Ferreira says the large amount of business the company receives from government was one of the deciding factors in settling with the department. “We don’t think it’s healthy to be in litigation with any client, big or small, and especially not with government.” Government contracts accounted for almost half of Gijima’s revenue at the end of last year. However, this percentage has dropped to 36% as the company did not earn any revenue from the deal during the first half of the year.
Gijima usually earns R500 million from ‘Who Am I’ in a full-year period. So far, the company has earned R1.23 billion from the deal, but the debt write off takes this down to under R1 billion. The canned deal led revenue 15.6% lower in the six months to December, as it dropped to R1.2 billion. Last year’s R85 million net profit was wiped out as the company reported a R270 million loss.
Ferreira says going to court to have the original contract upheld would have taken at least five years, and placed pressure on top management, whose focus would not be on growing the company.
CE Jonas Bogoshi defended the company’s decision to settle the argument. He says while it led to a short-term knock, it will benefit Gijima in the longer term. He says the decision was taken despite the fact that Gijima felt it had a strong legal case because it was “pragmatic”. Bogoshi says the dispute has not affected Gijima’s ability to win contracts, as it continued to secure tenders. Gijima has a pipeline of deals worth R600 million from both the public and private sectors.
However, Bogoshi admits the dispute has damaged Gijima’s reputation. “It’s a perception, and we have to manage that.” He says management is taking steps to mitigate this, and future government contracts will be tightly worded to prevent a repeat incident.
Settling with the department has hit the company’s profitability. It incurred R375 million in costs, of which R263 million related to Home Affairs debt that was written off. In addition, the company has written off another R80 million in future discounts it has promised the department, and another R30 million in expenses related to the settlement. Ferreira explains this amounts to about a year-and-a-half of net profit. Gijima took the entire cost hit in the six months to December, which resulted in a net loss of R271.8 million compared with a R85.8 million profit a year ago.
Gijima expects to complete the project in the next year-and-a-half once a new contract has been signed. Ferreira says the company will make a profit, but not at the level it would have without the additional costs.
ITWeb seperately reported Gijima has suspended its dividend payout for the time being. It says the results are “disappointing” and largely reflect the impact of the dispute with Home Affairs and its subsequent settlement. “We believe the settlement with the Department of Home Affairs was the best solution possible for both parties, as it is important for our relationships with government and our clients.”
The DHA, is, meanwhile, not holding anyone accountable for the fiasco. At a press briefing Monday minister Nkosazana Dlamini-Zuma said the tender was originally awarded to Gijima at R2.1 billion. However, director-general (DG) Mkuseli Apleni said the contract was signed for R4.5 billion, although this amount had not been approved by National Treasury. “So there is, therefore, a gap of what is given by National Treasury and what is signed for on the contract.”
The DG explained that this is what led to the need for onerous financial leases from HP and IBM. However, he said the contracts were viewed as invalid on two fronts. Firstly, Gijima got the financing from HP and IBM when the Public Finance Management Act (PFMA) says it is only the minister of finance that can give approval for any government department to borrow funds. “Therefore, when these contracts were signed, they had not received this express approval from the minister of finance,” said Apleni.
The department also argued that the extra costs had not been tendered for. “Section 215 of the Constitution is clear that anything must be acquired in a transparent and equitable manner. Therefore, the growth of the contract, between R2.1 billion and R4.5 billion, was not tendered for.”
Meanwhile, forensic audits by the auditor-general and academic Harvey Wainer are ongoing and action will be taken once these have been completed. However, the opposition Democratic Alliance says reports on both these processes were given to the department in 2009, but never made public.
Home affairs spokesperson Ronnie Mamoepa says it is most likely that former DG Mavuso Msimang would have signed the contract for R4.5 billion.
Reasons given to the department for the cost escalations were changes in the financial sector due to interest rate increases, inflation, the exchange rate and other processes, which were not on the original scope. “But this still does not mean you can do it at the contract level. Processes must still be followed,” said Apleni. “This is why we were saying that you cannot take a contract that jumps from R2.1 billion to R4.5 billion, irrespective of how justifiable the reasons.”
The contract between Gijima and the DHA will continue as part of the resolution, but there will also be collaboration with the Department of Finance [sic] and South African Revenue Services (SARS).
Dlamini-Zuma said there is no strict timeframe for the completion of the project, but a period of roughly two years is being looked at.
The system will now cost the department R2.489 billion in total. Although the initial tender was for R2.1 billion, Apleni said considering the contract was signed for R4.5 billion, the state has saved R2 billion. The financial leases, which amounted to R945 million, would have accumulated interest of R440 million over the period of five years and so the department decided to settle the amount to avoid this. The DHA says overall it will save approximately R234 million by settling the leases early. “IBM and HP have agreed to such early settlement, thereby forgoing a portion of the amounts due to them.”
It adds that Gijima has agreed to contribute a sum of R375 million, comprising the writing down of invoices and the future rendering of support and maintenance services. “The settlement opens the way for urgent resumption of the project.” Once the leases have been paid off, the department anticipates spending around R1.3 billion more to complete the project.
“The vast bulk of this funding will be paid to subcontractors working with Gijima to deliver on the outstanding components.”
The DHA already paid Gijima R391 million, the early settlement of leases will cost R815 million and, along with the expected completion cost of the project at R1.283 billion, a total of R2.489 billion is reached.
“A key factor, which allowed for completion of the project close to the original tender amount, is the use of existing IT infrastructure.” The DHA adds that the project will also build on several systems used by SARS, ITWeb reported.