Pursuing a 30-year old bailout is sending South Africa on a wild goose chase

South Africa’s Public Protector, Busisiwe Mkhwebane, has ignited a flaring grass fire with recommendations around a R1.2bn bailout paid to a local bank between 1986 and 1995. Known as the “Bankorp/Absa lifeboat”, the payment has been a bone of deep contention, with investigations and reports stretching back to the first presidents of South Africa’s democracy, Nelson Mandela and Thabo Mbeki.

The public protector’s recommendations on the bailout – set out in a report released this week – are provocative. The first is that there should be a new investigation by the country’s elite investigative team into the obligations of one of South Africa’s largest banks, Absa, to pay back the considerable sum. Absa was formed in 1991 following the amalgamation of eight banks, including Bankorp. Absa was later acquired by Barclays and currently trades as Barclays Africa. Essentially, this means calling on Barclays Africa to pay for the sins of one of its distant ancestors.

Even more provocatively, the Public Protector called for changes to the South African Reserve Bank’s remit. Her report says that Parliament should make changes to the country’s constitution to make this possible.

There are two quite complex issues here. Does Absa still owe the state (or the people) funds deriving from the “lifeboat” issued to Bankorp in the late apartheid era? And is the constitutional framework for the central bank appropriate?

The context for the report is an economy punch drunk from endless political infighting, where levels of trust between business and government are abysmal, and ratings are plummeting. Amid all the turmoil is the country’s Reserve Bank which remains one of the few core economic institutions still intact and uncaptured.

In these circumstances one cannot help ask the questions: why is the Public Protector reopening a case which has been thoroughly investigated, and why is it presuming the right to rewrite the constitutional mandate of the South African Reserve Bank?
 

The lifeboat saga

The issue has bounced in and out of the headlines over the past 30 years.

Two respected judges, Willem Heath and Dennis Davis found in two separate investigations – and for different reasons – that it was not practical or feasible to recover the funds. Heath delivered his report in 1999, Davis in 2000.

Both judges found the transaction illicit because it protected shareholders rather than depositors and because of its long duration. But they both came to the conclusion that there was no appropriate way for the lifeboat to be repaid.

Heath felt it was risky while Davis found that the beneficiaries, policy holders in one of South Africa’s biggest insurance companies Sanlam, could not effectively be tapped for the funds. Sanlam owned Bankorp at the time it got into trouble.

The bailout saved Bankorp from collapse. Absa then entered the fray and bought Bankorp presumably at fair value from Sanlam. This meant that, in the end, Sanlam policyholders were the beneficiaries of the lifeboat.

The complication is that Sanlam is today a very different kind of company, owned by shareholders and no longer by its policyholders.

The Public Protector found otherwise.
 

The Reserve Bank

How this matter relates to the proposed constitutional amendment is something the public protector would have to explain very slowly and carefully. The link isn’t obvious.

It is also not at all obvious that it is appropriate for the Public Protector to instruct Parliament to change the Constitution. It seems extremely peculiar and beyond the mandate of the office, although constitutional experts rather than economists would be better placed to comment definitively.

Nevertheless, the constitutional proposal of the Public Protector raises, or resurrects an interesting question: is the constitutional mandate of the South African Reserve Bank appropriate?

The most contentious change Mkhwebane proposes is that clause 224 (1) of the constitution be amended. This clause currently reads:

The primary object of the South African Reserve Bank is to protect the value of the currency in the interests of sustained and balanced growth.

The Public Protector says it should be replaced with:
 

The primary object of the South African Reserve Bank is to promote balanced and sustainable economic growth in the Republic, while ensuring that the socioeconomic well-being of the citizens are protected.

This change is inappropriate, not because it introduces the socioeconomic well-being of the citizens into the mandate, but because it removes any reference to the responsibility of the central bank in regard to the value of the currency.

In my 2005 book “Season of Hope” I also raised concerns about the absence in the constitutional mandate of the bank of a reference to the welfare of the people. After all, even the mandate of the US’s Federal Reserve Bank places the value of the currency and maximum employment as its twin responsibilities.

It could be argued that even without this clause, the South African Reserve Bank has occasionally acted as if it has a social mandate. This was particularly evident in the Gill Marcus era when as governor she kept interest rates lower than ostensibly justified by the inflation rate because of the dire state of the economy in the post-financial crisis period.

A welfare or employment element in its mandate could, at least in the abstract, bring a suitable balance to the responsibilities of the bank. But the Public Protector’s proposal to drop any reference to monetary stability would be extreme, utterly unconventional, and hopelessly foolish.
 

Now what?

As a bundle of proposals, the Public Protector’s findings have created a great stir.

It is very doubtful that Absa (now Barclays Africa) could be made to pay for Sanlam’s benefit and beyond even the realms of the post-truth era that monetary stability would be entirely removed from the constitution. It is hard to imagine that the Public Protector actually saw these proposals as viable.

The cynical among us might speculate that the ignition of such a grass fire is a wonderful way to deflect attention from pertinent state capture issues, and to implicitly support the radical economic transformation version of the “white monopoly capital” thesis that so much that is wrong with South Africa can be blamed on a few immoral capitalists.