The BRICS Bank: More Money for South Africa’s Municipalities?

Although BRICS is not based on a formal treaty of establishment, it hosts annual summits and parallel meetings, the outcomes of which are documented as Joint Declarations or Joint Statements, respectively. These Joint Declarations and Joint Statements provide some insight into the objectives of BRICS. From the initial Joint Statement of the BRIC Countries’ Leaders in Yekaterinburg, Russia in 2009, to the Johannesburg Declaration in 2018, each of these documents show that BRICS aims to foster cooperation in the areas of economic development and geopolitics. The founding idea of BRICS was to ‘advance the reform of international financial institutions [IFIs] to reflect changes in the global economy’ and to give emerging and developing economies ‘greater voice and representation in international financial institutions’ (Clause 3, BRICS Joint Statement, Yekaterinburg, 2009). As one of its primary aims, the BRICS group sought to create a financial institution that would be better suited to developing countries and emerging economies’ needs and circumstances, and supplement the existing IFIs. The group also identified numerous areas of cooperation such as climate change, energy, drug control, ending violent extremism, tax evasion and corruption.

The primary aim of reforming IFIs has led to the creation of the New Development Bank (NDB), to which BRICS countries are the founding members. The Agreement on the New Development Bank (Fortaleza, July 2015) with annexed Articles of Agreement, and the BRICS Contingent Reserve Arrangement (CRA) are the only two BRICS treaties so far. This highlights the particular interest of BRICS countries in reforming (and supplementing) the global finance system.

Municipalities have inadequate resources to meet infrastructure backlogs
Now that South Africa is part of the BRICS, there is an expectation that all spheres of government (national, provincial and local) will benefit from this partnership. However, there is no publicly available evidence to suggest that provincial and local governments are benefitting from South Africa’s BRICS membership especially in terms of BRICS financing from the NDB. The commentary in this article is limited to local government financing, in particular. While acknowledging the impact of corruption, resource wastage and poor financial management on local government’s ability to deliver, there is no doubt that most municipalities have insufficient resources to meet their needs. Municipalities are facing a huge backlog of infrastructure for major public services attributed mainly to the apartheid legacy and demographic changes. Municipalities’ own source revenue and intergovernmental grants are unlikely to eradicate this backlog anytime soon. Some municipalities have been able to access private sector financing, which is considerably more expensive. In the absence of significant public infrastructure financing, many large and small municipalities will not be able to fulfil their constitutional duty to achieve progressive realisation of human rights, in particular, the delivery of basic services, such as water and sanitation. Could borrowing from the BRICS bank for public infrastructure financing fill this existing resource gap?

NDB financing: An alternative for municipalities?

The New Development Bank Special Appropriation Act 20 of 2015 was passed to domesticate the Agreement on the New Development Bank (Fortaleza, July 15) (NDB Agreement). One of the functions of the NDB is to ‘utilize resources at its disposal to support infrastructure and sustainable development projects, public or private, in the BRICS and other emerging market economies and developing countries, through the provision of loans, guarantees, equity participation and other financial instruments’ (Article 3(i)  NDB Articles of Agreement annexed to the NDB Agreement). On 1 April 2019, the NDB and Eskom signed a loan agreement in terms of which the NDB allocated USD300 million to the Development Bank of South Africa (with a sovereign guarantee) for the benefit of Eskom - a state owned enterprise (SOE). The funds are intended to support a green energy project to be implemented from 2018 to 2033. The loan extended to Eskom demonstrates that SOEs are beginning to get value out of South Africa’s membership of the BRICS.  Can the same be said of South African municipalities?

Can municipalities access NDB funding under the current legislative framework?

a) South African legal framework

The Municipal Finance Management Act (MFMA) 56 of 2003 regulates municipal finances, including borrowing and investment. Section 45(1) MFMA allows municipalities to incur short-term debt provided the funds will be used to bridge cash flow problems, which are anticipated to be paid up within the same financial year, or for capital needs which are payable from allocations or long-term debt commitments. Section 46 of the MFMA also allows municipalities to undertake long-term debts for capital expenditure (more important for infrastructure financing) incurred in the furtherance of service delivery and socio-economic development as set out in section 152 Constitution, or for re-financing of long-term debt.

However, despite the power to incur short and long-term debt  section 163 (1) MFMA read with sections 17 and 47 of the MFMA prohibits municipalities from incurring liabilities or risks payable in foreign currency, except for (i) debts whose rand value is pre-determined, or fixed to avoid currency fluctuations, (ii) secured debt, by resolution of the municipal council, which is necessary for the provision of the minimum level of basic municipal services, and (iii) debt incurred in relation to procurement of goods or services where the rand value is pre-determined or fixed. Some challenges arise from this provision. First, it limits the size of the pie available to municipalities in international financial markets because most international financial institutions extend credit in foreign currency. Second, smaller and economically weaker municipalities such as rural municipalities often lack capacity to secure foreign debt although they probably have the greatest public infrastructure needs. Thirdly, many municipalities (excluding metros and secondary cities) will not be able to access credit by virtue of their financial state. Finally, municipalities may only incur external long-term debt with the approval of the National Treasury.

Further, section 51 of the MFMA precludes provincial and national governments from guaranteeing the debts of municipalities and municipal entities (as a general rule). This means that local governments would not be able to obtain government guarantees from provinces and national government. Although government guarantees are prohibited, it is unlikely that the national government would leave a large metro to fail due to financial difficulty, instead it is more likely that national government would intervene using other mechanisms such conditional grants (Liebig et al Municipal Borrowing for Infrastructure Service Delivery in South Africa: A Critical Review (2008), 56-67).

b) New Development Bank framework

This is where the NDB becomes particularly important as a source of finance for South African local governments. Article 24 NDB Articles of Agreement provides that the NDB can provide financing in the local currency of the country in which the project takes place. However, the NDB is not inclined to overstep national legislative frameworks in the granting of NDB loans. Instead, Article 21(ii) states that ‘the Bank shall not finance any undertaking in the territory of a member if that member objects to such financing’. This means that subnational governments cannot side-step the national government. Although they can apply directly to the NDB for loans, the national government has the power to veto the application. Further, according to the NDB General Strategy 2017-2021, the NDB defers to the domestic legal requirements of its members when implementing the Articles of Agreement of the NDB, such as granting loans to subnational governments. The Strategy provides that ‘national sovereignty is of paramount importance to the NDB in its interactions with member countries’ (NDB General Strategy 2017-2021, p11). Additionally, Article 21(i) NDB Articles of Agreement provides that the NDB operates according to ‘sound banking principles’, thus it may be difficult for poorly performing municipalities to access NDB financing.

c) Practical implications

The analysis of the South African and BRICS frameworks above could be perceived as suggesting that the NDB can enter into direct contractual relations with municipalities, provided it has the approval through the national treasury, however, this is yet to be seen in practice. First, it is argued that based on the domestic legal framework, municipalities might be able to conclude direct contracts with the NDB, subject to the conditions set out in the MFMA and Constitution (mainly). This approach is in line with the Policy Framework for Municipal Borrowing 2017 update which envisions independent metropolitan and secondary cities which are creditworthy, and directly compete on the financial market. The policy framework perceives municipalities’ access to private investment capital, as a key factor of efficient local government.

Secondly, the NDB can also extend funding through development banks, such as the Development Bank of Southern Africa (DBSA) and such funding can be further extended to local governments (as was the case with the Eskom loan).

Thirdly, since 1994, when government guarantees where scrapped for local governments, the local sphere has had to stand on its own feet, raise its own revenue, including debt, to supplement national transfers. However, in practice it appears that the national government finds creative ways to finance and guarantee certain projects by packaging them as ‘national’ projects. For example, the approval of the Durban Port US$200 million loan in 2018 shows that provincial and local governments could benefit indirectly from national projects, but not so much from their own initiatives.

Comment

The NDB present an opportunity for public infrastructure financing, which might be missed because of the restrictive domestic legal framework on municipal borrowing, and the poor financial state of many municipalities. If BRICS financing is available to local governments for public infrastructure projects, this can assist with social services backlogs and advance the achievement of basic human rights such as access to potable water and sanitation in urban townships and rural areas. However, it could also create international financial obligations for the national government if local governments fail to comply with loan conditions, and therefore it must be approached with caution. Further, South African municipalities are at different stages of economic development, and different categories of municipalities have access to different resources.

The MFMA prohibits borrowing in foreign currencies and borrowing from financial markets that do not peg the loan to an agreed rand value or amount. This prevents municipalities from incurring debt in foreign currencies, which would create risks for the national government if municipalities failed to repay their foreign debts.

On the bright side, the NDB enables municipalities to borrow in their local currency, thus it could enable South African municipalities to borrow from the NDB, provided they have the approval of National Treasury. However, the poor state of financial management in many municipalities might be a significant barrier to borrowing from the NDB because the Bank is a corporate entity, which operates for profit and would unlikely advance credit to municipalities with low creditworthiness. Thus, although the NDB is ‘available’ to municipalities in principle, it is likely that in practice only metros and some secondary cities would have a better chance of securing NDB loans, whereas other municipalities with poor financial performance, will most likely not be able to borrow from the NDB. It is yet to be seen whether in fact municipalities will be able to benefit from the NDB in practice.

by Dr. Michelle Rufaro Maziwisa, Post-Doctoral Researcher