NEWSEADB headquarters in Kampala, Uganda. Dar High Court decision to attach EADB property sets off diplomatic and legal crisis for EAC Picture: File By JAINDI KISERO) Posted Sunday, December 4 2011 at 17:29 Dar High Court decision to attach EADB property sets off diplomatic and legal crisis for EAC February 13, 2012, will be a critical day for the East African Development Bank's operations in Tanzania. If John D. Lamba, the Tanzanian businessman currently engaged in a protracted court battle with EADB, is given the go-ahead to execute a $137 million court order against the bank, then the regional lender will be forced to shut down its operations in Tanzania altogether. Such a decision will deepen the diplomatic and legal crisis that East African Community states are facing over a Tanzanian High Court decision allowing Mr Lamba to send auctioneers to seize the assets of EADB last month. The core legal issue for member states is the decision by Tanzania's Court of Appeal to disregard a key component of the EAC Treaty that protects the assets of EADB from attachment. Tanzania thus finds itself in an awkward diplomatic situation as technocrats struggle to unravel the crisis. Thus, even though what is at stake is strictly a civil matter between Mr Lamba and the EADB, it was not surprising that the legal tussle was a top agenda item in last week's summit of the partner states of the East African Community in Bujumbura. The series of decisions made in this case over the past decade has also driven a wedge between the Tanzania court system and the established practice in the rest of EAC at a time when the region is expected to be moving to converged legal standards. This could impact Tanzania's country risk profile in the eyes of international investors. The Tanzanian government has in the past five years been accused of reneging on key foreign investor protection protocols by arbitrarily insisting on revising terms in deals entered in the mining, gas, aviation, telecommunications and utilities sectors. For EADB, the battle with Blueline, a transport business, has been a gruelling two decade-long affair that has shackled the ability of the bank to operate and participate in big syndication club deals with the likes of PTA Bank and AfDB, continental development banks. Fitch, the credit rating agency, has assigned EADB a lowly sub-investment grade rating of B- because of the legal tussle with Blueline. The bank cannot also draw on substantial credit lines extended by foreign governments like China, which provide a lifeline of cheap funds that it requires to remain competitive. Mr Lamba owns Blueline, the transport firm that sued EADB in 1997 after the bank put the business under receivership after he failed to pay $1.5 million of a three-year $2.3 million loan extended in 1990. Challenged As things stand, Mr Lamba has court orders to attach EADB's headquarter offices in Dar es Saam and the only reason he cannot execute it is because EADB has challenged the order. Four days after the building was supposed to have been officially opened by President Jakaya Kikwete in the presence of regional finance and trade ministers, Justice Augustine Shangwa on November 8 allowed Mr Lamba to send auctioneers to take over EADB's gleaming new headquarters in Dar es Salaam's central business district to enforce the $137 million judgment issued in May 2009. This is an amount that exceeds EADB's capital base. The High Court has already appointed Mustafa Nyumbamkali of Super Auction Mart as a court broker for the attachment of the property, whose value has not been determined. Tanzania has been a critical market for the bank. EADB has played a central role in the successes of major companies in Tanzania. Among the well-known institutions that have benefited from EADB funding are Precision Air, New Africa Hotel, Blue Bay Resort of Zanzibar, Zanzibar Sugar Mills, and Mufundi Paper Mills. Currently, the bank has a loan portfolio of $30 million in Tanzania. Early this year, the bank announced that it had received board approval to issue a bond in the Tanzanian market. The case between Mr Lamba and EADB has far reaching implications for Tanzania. It has left authorities in Dar es Salaam in an awkward position. On the one hand, the Kikwete government maintains that the dispute with Mr Lamba is a court matter, but on the other hand, it is having to deal with mounting diplomatic pressures from fellow members states who worry about Tanzania's respect for the diplomatic immunity and privileges granted to the East Africa Community institutions. Under the EADB charter, which was ratified by the United Republic of Tanzania, the bank enjoys immunity from attachment of its assets. The bank's privileged position was reinforced further when in August 1986, former Tanzania president Benjamin Mkapa assented to the Diplomatic and Consular Immunities and Privileges Act that came complete with a list of institutions enjoying diplomatic privileges - including EADB. That Act has provisions that unambiguously stipulate that the institutions listed in its schedules enjoy "immunity from suit and legal process." The institutions listed include the African Development Bank, the European Union, International Labour Organisation, the Eastern and Southern Management Institute and several UN agencies. Since EADB's projects and programmes are often in collaboration with other development finance institutions operating in Tanzania, these latter are aware that their immunity is as much at risk as EADB's. The African Development Bank and the PTA Bank are enjoined in the case as interested parties. Moreover, a number of European countries and international lending institutions are observers in the case as they have co-invested with EADB in a number of projects. Which is why it was not surprising that EADB's fate was among key agenda item during last week's meeting of the five members states of the East African Community in Bujumbura. In the initial stages of last week's discussions in Bujumbura, especially at the level of technical committees and ministerial councils - pundits were predicting a major diplomatic tussle pitting Tanzania against the other shareholders of the bank. Relief A sense of relief was palpable on the faces of delegates when President Jakaya Kikwete joined his peers in issuing a strongly worded communique that only fell short of criticising the manner in which Tanzania courts have handled the dispute between Mr Lamba and the bank. When part of the communiqué touching on the court tussle was read out, there was loud applause in the room. The five presidents directed ministers to uphold the EADB charter and to respect the "inviolability, assets, property, archives of the East African Community and its institutions." Against the backdrop of the case between Mr Lamba and the EADB and considering that the issue of immunity against legal suits is at the heart of the legal dispute between the parties, the statement - although clothed in diplomatic jargon - amounted to an indictment of the manner in which the High Court in Tanzania had handled the matter. The five presidents also directed the East African Development Bank to explore the possibility of escalating the case to a different level by referring it to the East African Court of Justice as if to imply that the Tanzanian court had mishandled the case. The Council of Ministers was directed to introduce a Bill at the East African Legislative Assembly level to give more protection to the assets and properties of the East African Community and its institutions. The five presidents also directed the Attorney Generals of the partner states to craft a special legal position on the way forward on the matter by December 31. Whichever way one looks at it, the fact that the partner states managed to get Tanzania to join in issuing such a strongly worded statement categorically upholding EADB's position on immunities and privileges was a major diplomatic coup for the 43-year-old bank. Dar es Salaam has all along been a strong supporter of the EADB. But an event happened early last month that raised eyebrows in diplomatic circles about Tanzania's support of the only institution that survived after the collapse of the defunct East African Community in 1977. On November 4, all finance and trade ministers of the EAC, their permanent secretaries, members of the bank's advisory panel and the diplomatic community had all gathered in Dar es Salaam to witness the opening of EADB's new headquarters. It was to come as a shocker when authorities in Dar informed the management of the bank at the eleventh hour that the headquarters opening ceremony would not take place. The dignitaries were forced to hurriedly make travel plans to leave Dar. Apparently, the authorities explained that President Kikwete, who was supposed to be the guest of honour, was tied up elsewhere. Pundits are unwilling to accept that it was a mere coincidence that hardly four days after the cancellation of the opening ceremony on November 8, Mr Lamba sent auctioneers to attach the headquarters building. The upshot is that between now and February 23, EADB is no position to operate. The Lamba case has been the proverbial millstone hanging around the bank's neck for a long time. Modelled around other regional development banks such as the Asian Development Bank, Africa Development Bank and the European Investment Bank, EADB's mandate is to support risky projects that commercial banks will not touch. Risks to business But the Lamba case poses significant risks for the bank. Although it continues to reflect a contingent liability of $69 million, the latest demand for payment by Mr Lamba of June 2, 2010 was in the amount of $115 million. The Lamba case has especially impacted negatively on the bank's ability to mobilise resources and hampered plans to grow its balance sheet. Even more significantly, the Lamba case has made it impossible for the bank to access capital markets. Ironically, it was the EADB that pioneered issues of corporate bonds in East Africa, having listed its first bond in 1996. EADB has since 2005 not participated in the bond markets of East Africa on account of the contingent liability associated with the Lamba case. Last year, ratings firm Fitch, gave the bank a rating of B-, mainly citing the contingent liability on account of the Lamba case. The ratings agency, while admitting that the bank had major problems with non-performing loans in 2007, noted that the bank has since gone through a portfolio clean-up and downsizing , the result of which was improved profitability.