DBSA fails to justify the undermining of its investment mandate

SA Airways (SAA) has been thrown multiple lifelines over the past decade. Among others, the Development Bank of Southern Africa (DBSA) also stepped in. The bailout it provided was extremely irresponsible and, as Business Day editor-at-large Carol Paton pointed out, went against the bank's investment mandate ("Pravin Gordhan’s breathtaking manipulation of the Treasury over SAA”, June 21).

What is interesting is that soon after Paton's article was published, DBSA chief economist Zeph Nhleko penned an op-ed in Business Day wherein he defended the bank’s investment mandate by stating that the bank "funds large movable assets because they fall within its mandate" 
(“DBSA mandate is economic prosperity for the Southern African region”, July 8).

Nhleko might not have mentioned Paton, her article or even SAA anywhere in his piece, but from the content and tone of it one can infer with reasonable certainty that he was responding to Paton's criticism.

The DBSA was reconstituted in 1997 through the Development Bank of Southern Africa Act, under the new democratic dispensation in SA. Section 3 of the DBSA Act stipulates that the bank's main object "shall be the promotion of economic development and growth, human resources development, institutional capacity building, and the support of development projects and programmes in the region..." It then lists various mechanisms through which to achieve this objective, including but not limited to, mobilising financial and other resources from both private and public sectors, on both a national and international scale.

Section 4 of the Act lays out the various powers that have been conferred upon the DBSA. What is of relevance here is subsection (b), which states that the DBSA shall have the power "to lend or advance money to any person or private or public body engaged in or proposing to engage in development projects and programmes in the region…". Subsection (b) goes further by stipulating that the DBSA shall also have the power to acquire an interest in it (the development project/programme in question) or to provide capital for it or even underwrite or otherwise assist in the acquisition of capital for it.

The issue at play here is what qualifies as "economic development". Even though the phrase is used five times throughout the 1997 Act, and four times throughout the DBSA Amendment Act of 2014, both of the Acts fail to define precisely what is meant by economic development. One would think such a definition would be too important to omit, seeing as the whole purpose of the DBSA is "economic development". Alas, the legislature failed to recognise and acknowledge the importance of definition.

The Act also does not set out clear criteria according to which possible projects must be evaluated, to determine whether they are consonant with the objective of economic development. It seems as if the Act itself leaves a lot of room for discretionary powers without any objective criteria to determine how said discretionary powers must be exercised — such vagueness is anathema to the rule of law.

As Nhleko is relying on the ambiguity surrounding the definition of economic development to try to justify DBSA's spurious investment decisions, this omission seems to be serving the bank well. Such ambiguity gives the DBSA wide discretion when it comes to deciding what projects constitute economic development.

This is not the first time bank officials have attempted to use this ambiguity to justify them going against their investment mandate. Zodwa Mbele, group executive for transacting, stated in an interview with Radio 702 that the reason funding was extended to SAA is that the DBSA's mandate obliges it to "look into economic development..."

DBSA chief investment officer and acting CEO at the time Paul Currie told parliament's select committee on finance on Feb. 14 last year that had the DBSA not stepped in, the business rescue process would have collapsed, thus forcing the airline into possible liquidation, which would have "destabilised" the transport sector. This, it would seem, is Currie surreptitiously taking advantage of the ambiguity surrounding the meaning of the phrase "economic development" to justify, ex post facto, the loan to SAA.

Currie denied that the DBSA extended the loan to SAA because of political pressure, something that is hard to believe given the poisonous political environment in SA, which is marred by corruption, a lack of accountability and state involvement at every opportunity.

Currie further specified that the monies lent to SAA were raised on financial markets, with the repayment thereof guaranteed by  government. Mbele also confirmed the debt guarantee agreement undertaken with the government. However, she was a tad more direct, saying they "are not lending with the hope of getting repaid by SAA..."

Mbele went further, stating that "...the repayment will come from government…". In other words, the taxpayers will foot the bill. This is sadly ironic seeing as the DBSA states on its website that its mission is, among other things, to "promote [the] sustainable use of scarce resource[s]". Its official "development position" also states that its goal is to realise a "prosperous, integrated and resource efficient continent".

Also, since when can an investment mandate allow for investments that do not produce a positive return? Surely it cannot be argued that requiring taxpayers to assist the bank in recovering its investment capital is congruent with the bank's investment mandate?

Nhleko himself says "economic development is simply the upliftment of the standard of living of citizens." Based on the actions highlighted here, is the DBSA's focus on the "upliftment of the standard of living" of only the politically connected? Considering the extensive opportunity costs of the billions thrown at SAA, it can hardly be argued that Nhleko's defense of the bank passes muster.  It is a spurious argument that relies on legal ambiguity that is being used to generate plausible — yet nevertheless questionable — deniability for the bank and its executives when faced with criticisms of their decisions. After all, even Nhleko's own conceptualisation of economic development undermines his argument to a large extent.

This article was first published on BusinessDay on 16 July 2021.

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