Market failure or failed market? The role of development finance institutions |
What is the role of the Development Finance Institutions?
THE FINANCING that was extended by the Development Bank of Southern Africa (DBSA) to SAA has brought into focus the role of the Development Finance Institutions (DFI’s), particularly a national DFI such as the DBSA.
It has raised a number of economic and policy issues that were heretofore either avoided or skirted in the development policy space.
For the DBSA in particular the contradictions could not have been sharper, especially for the institution that has built its name as the financier of municipalities.
What is and what should be the role of DFIs? To be precise, was the facility extended to SAA consistently within DBSA’s mandate and role?
Conventional wisdom says that the DFI should be the lender of first, and not last, resort.
DFI’s should provide long-term rather than short-term funding. They should complement and not compete with commercial funding. They should measure their success in terms of wider societal economic returns attributable to the project or transaction rather than narrow financial returns that accrue to an institution or sponsor.
More importantly, they should intervene where there is clear market failure and not institutional failure. In development banking parlance, this is referred to as additionality.
The concept of additionality has become somewhat of a currency in DFI circles and it essentially means that it can only step in where it will not displace or crowd out the private sector, or where there is market failure.
By market failure it is meant where there is a reluctance and failure by the private sector to play into that market, either because the risk is seen or perceived to be unacceptable or the product or service is unproven or will take too long to realise a return.
DFI will then fill the void either as a long-term lender and sweeten the transaction to suit the appetite of the private sector. In all cases the objective is to enhance and supplement and not supplant the functioning of a financial market – the credit market in the SAA instance.
The key question is whether the lending by DBSA to SAA and for that matter to Eskom meets the additionality criteria. It is unclear if the so-called equity bridge to SAA, without knowing the specific structure of the transaction, crossed the additionality line, was there a market failure with regard to providing funding to the airlines in general and SAA in particular.
Is the reluctance to provide funding by the banks and other funders due to risks that are believed to be unacceptably high by the SAA? It seems that the latter appears to be the case.
Needless to say that SAA is in business rescue and in credit terms on the recovery phase.
DBSA has maintained that its intervention has been justified in the sense that if the funds were not forthcoming, the airline would have gone into liquidation and there would have been job losses. They also maintained that technically, the borrower is the government and, therefore, there is an implicit guarantee by the shareholder.
While all those argument are plausible, the question that still remains is why DBSA, whose mandate is generally understood to support and fund infrastructure for development impact.
Perhaps to add intrigue to the debate, would DBSA also consider a bailout for Maluti-a-Phofung municipality in Free State, which is under administration and is indebted to an almost similar quantum to, among others, Eskom?
Maluti-a-Phofung also has staff whose jobs have been imperilled as a result of dysfunctional administration. Maluti also has suppliers who have not been paid and are themselves, along with their employees, facing bleak financial prospects. The municipality also provides an essential infrastructure service as a regional service centre in the eastern part of Free State.
So the question that needs to be asked is what is the difference between SAA and Maluti-a-Phofung in the eyes of DBSA. To be financially correct, what will be the discount rate used in each project?
Perhaps the positive spin-off that came from the SAA financing saga is the Parliamentary interest it aroused. Parliament as a shareholder has to be credited for calling DBSA to account. This should be done regularly and as a matter of course.
South Africa has huge development challenges, which the government alone will not be able to deliver. The infrastructure gap is widening and the other social services such as water, electricity and roads are under severe strain due in large measure to insufficient investment in infrastructure, lack of proper maintenance and ineffective management.
Besides development targets enunciated in the NDP Vision 2030, as a country we have embraced Agenda 63, sustainable development goals (SDGs) and the Addis Ababa Action Agenda. These are continental and global commitments to improve the lives of the poor.
The SDGs are perhaps the most prominent, and as such attract a great deal of scrutiny. All these development needs point to the growing role of
DFIs. There is an expectation, and indeed an obligation, for both the national and multilateral DFIs to play a critical and prominent role in the achievement of SDGs by mobilising funding and other resources.
Indications are that we may be unable to achieve some of the SDG targets, precisely due to inadequate financial resources. It is for this reason that every cent needs to be accounted for when it comes to development.
What all this means is that as a country we need to have robust and credible accountability frameworks designed specifically to assess the impact of our development finance institution. Such a framework should not only assist our parliamentarians to ask the right questions, but should also allow us to account with confidence when it comes to our continental and global development commitments.
Special attention must be devoted to ensure that the DFIs remain on the straight and narrow when it comes to their developmental mandate.
Often, some of these DFIs do invest and lend in areas and sectors that are not consistent with their developmental mandate. This conduct is often driven by perverse incentives that often encourage complexity, volume and size of transactions rather than outcome and impact.
Some of the DFIs, when questioned and called to account, merely bamboozle the unsuspecting public with development speak peppered with meaningless jargon and untested economic models.
Jobs created, people connected and income generated must be exactly that and not merely implied.
As Dr Akinwumi Adesina, the president of the African Development Bank, rightly observed: “Nobody eats GDP.”