Development Bank of Southern Africa (DBSA) Annual Report 2009/10 briefing

NCOP Finance

30 May 2011
Chairperson: Mr C de Beer (ANC – Northern Cape)
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Meeting Summary

The Development Bank of Southern Africa (DBSA) gave a short briefing to the Committee on its 2009/10 Annual Report. It was noted that although in the past, DBSA had focussed on the global financial crisis and the demands of the new government, but it was now necessary to re-engineer the organisation and to launch a new strategy. The results in the 2009/10 Annual Report must be seen within this context. It was reported that the number of municipalities running Siyenza Manje projects had risen from 172 in 2008/9 to 199 in 2009/10. R15.7 billion had been unlocked in the Municipal Infrastructure Grants (MIG) and MIG expenditure had been R8.9 billion. Half of the students at the Vulindlela Training Academy were linked to Siyenza Manje projects. It was further noted that Southern African Development Community (SADC) training had increased by 400%. The loan book was R33 billion, with 50% being municipalities and 15% public utilities. Debt was down from 5.4% to 4.99% and assets had increased by 12%. Profit was R963 million and sustainable earnings were R823 million. Members raised questions on the reasons why there was no mention of the Department of Public Works in facilitating infrastructure projects, and asked for clarity on the numbers of young professionals and how the DBSA assisted them in placement. Members asked about the underspending, enquiring whether this was because of lack of capacity at DBSA or problems in the municipalities. They wanted to know how many municipalities had been turned around, with the DBSA’s intervention, to the point where they no longer needed assistance. They also enquired about the criteria for lending, the interest rates, what the DBSA did for poor communities, and how much debt had been written off.

DBSA’s then presented its corporate plan, setting out that when transforming itself, it was envisaged that two new instruments would be used to manage the developmental risk. The Development Fund would be the implementing agent, and the Development Planning Programme would play an advocacy role. The Development Fund would focus on capacity development, rural development and community development. Most of the DBSA’s focus was on funding and financing internationally. However, given capacity constraints at all levels, the DBSA in South Africa found itself having to intervene across most of the value chain, right from initial policy level, up to the final stages of operations and maintenance. There was a need for coherent national institutional development. DBSA deployed people to deliver, and the building up of institutional capacity emerged as an offshoot. There was a need to balance catching up on backlogs while also developing capacity. DBSA decided to focus on the sectors of energy, water and sanitation, transport, education, and human settlement. Some examples of delivery models were given, and it was noted that it had agreements with other departments. These projects ran alongside the Siyenza Manje building of capacity. Members asked where work had been done, commenting that its work was not always obvious. Members asked about the interest rates and terms, and what cost implications there were in unlocking the MIGs. They noted that the DBSA was involved
in 18 countries internationally, and enquired whether government was getting value for money, how these projects were monitored abroad and who was responsible for doing the monitoring. They also enquired about the cost implications of the restructuring. They also wanted to know about the work being done with the South African Institute of Civil Engineers, and stressed again the need to capacitate municipalities. A further meeting involving the DBSA and other government stakeholders would be continued on the following day.

Meeting report

Development Bank of Southern Africa Annual Report 2009/10 Briefing
Mr Paul Baloyi, Chief Executive Officer, Development Bank of Southern Africa, briefed the Committee on its 2009/10 Annual Report. It was noted that the Development Bank (DBSA) was now being redefined, following a challenge by the Minister. In the past, the DBSA had been focusing on the global financial crisis and the demands of the new government. However, it had then become apparent that it must re-engineer the organisation, and a new strategy was being launched. The results of the DBSA had to be seen within this context.

Mr Adam Tadesse, Group Executive, DBSA, outlined the DBSA’ five major goals and the initiatives linked to those goals. DBSA deployed people to municipalities, under the Siyenza Manje project, and he he summarised the types of project supported. A number of graphs were presented (see attached document for further details).

Dr Paul Kibuuka, Managing Director, DBSA, said the number of municipalities that were running Siyenza Manje projects had risen from 172 in 2008/9 to 199 in 2009/10. The amount of MIG funds unlocked through this totalled R15.7 billion and Municipal Infrastructure Grant (MIG) expenditure had been R8.9 billion. He said that about half of the Siyenza Manje municipalities benefied from the training programmes at Vulindlela Training Academy. In the Southern African Development Community, the training had increased by 400%.

Mr Pieter Del la Rey, Chief Financial Officer- DBSA, said the loan book was R33 billion, with 50% relating to municipalities and 15% to public utilities. Debt was down from 5.4% to 4.99% and assets had increased by 12%. The profit that the DBSA had shown was R963 million and the sustainable earnings figure was R823 million.

Mr Tadesse said that a Markinor survey by an independent contractor had shown that DBSA had a “favourable” rating. 79.5% of the staff had attended training interventions.

Discussion
The Chairperson said that the DBSA’s annual report had said that it intended to focus on facilitating health sector infrastructure this year. However, nowhere was there mention of the Department of Public Works (DPW) as a role player. He noted that the Bank must put the challenges and key issues in perspective and outline the future.

Mr B Mashile (ANC - Mpumalanga) wanted to know if the decline in the number of young professionals related to a decline in young professionals in the industry, or the municipality.

Mr Baloyi said DBSA was taking young professionals who had just qualified and would then place them with a qualified engineer in a structured programme so that the graduates could gain professional certification. If they did gain their certification, some would be placed in the municipalities. This had been the intention of the programme, and accounted for the decline in the numbers for young professionals.

Mr Mashile questioned why R
6.8 billion had not been spent, asking if this was because of a lack of capacity in DBSA, or because of the state of municipal systems.

Mr Baloyi confirmed that there were still problems with local government.
The performance of municipalities was affected by the vacancies. The Bank assisted in the unlocking of MIG funds and then helped the municipalities to spend it.

Mr Mashile wanted to know if the Bank would lend money to poor communities, and, if so, what the criteria were. He also asked how many municipalities it had helped to turn around, which could now continue without the assistance of the Bank.

Mr Baloyi said that poor municipalities were a reality, particularly where the municipality did not have a strong
rates and tax base. DBSA would check on this, and would then assist them. Poor municipalities were given a discount on the DBSA’s loan rate.

The Chairperson noted that money had been released for infrastructure, but asked the DBSA to give names and places where work had been completed or where it was still busy completing projects. He commented that he could not see the results of the DBSA interventions.

Mr Baloyi said the context in which the banks assisted municipalities was only to do what was asked of them. It could not take over the municipalities, only do targeted interventions. A comprehensive report on Siyenza Manje had been commissioned by an independent contractor

Mr B Mnguni (ANC – Free State) asked what the core business of the Bank was. He also enquired about the implications of the envisaged restructuring.

Mr Mnguni also wanted to know how much of the public sector debt had been written off.

Mr Baloyi noted that an amount of R1 billion had been written off. One of the matters in which the DBSA assisted the municipalities was in the collection of rates and taxes. He noted that the system for municipalities’ write off was different to that of the private sector; the DBSA would pursue matters in the private sector but tended to be more lenient on defaulting municipalities, and may even grant them more funding.

Mr Mashile wanted to know how many municipalities could now do without further assistance from the bank in any area in which it had previously intervened, such as a finance or technical area. He commented that the main problem seemed to be that technicians who had graduated from Technikons were called professionals.

The Chairperson said that when one looked at the amount of money put in by DBSA, and compared this to the audit reports on municipalities, there appeared to be a mismatch.

Mr Baloyi said all deployments had been monitored. DBSA would follow up any specific incidents brought to its attention. All monies were fully audited and accounted for.

Mr Mnguni asked what the DBSA’s interest rate for loans was. He also asked about the turnaround time for loan applications, and asked what DBSA was doing to try to ease the process and remove too much “red tape”.

Mr Mnguni asked if there was a cost associated with the unlocking of the MIG.

Mr Baloyi said the intervention of DBSA was intended to help with specifics like unlocking MIG funds. The skills development programme was incidental to this assistance.

Mr Kibuuka added that 20% of Siyenza Manje graduates had been absorbed by municipalities. DBSA had started with a plan where it had identified what was needed. It had found high vacancy rates, meaning that there was no transfer of skills when skilled people left. For this reason, it had started the young professionals’ programme, where recent graduates went through a structured programme, to get certification from professional bodies. He said that any unlocked MIG funds used for procurement were under the auspices of the municipalities, not the young professionals.

Mr Baloyi wanted to make it clear that DBSA borrowed money from the market, and did not receive it from the government. Between 70% and 80% was borrowed from the domestic market. Poor municipalities found it difficult to borrow money on the open market because of their inability to repay. Sometimes the DBSA subsidised the non-recovery of the interest, and then only recovered the principal debt. Government paid 70 cents in every R1 of costs, while DBSA covered the other 30 cents. He said that DBSA not only assisted with the unlocking of funds at local government level, because it also assisted at other levels. DBSA, by discovering the blockages in the system, had truncated the process and the turnaround time was now much quicker.

Mr Kibuuka said projects differed in complexity and could take between six and 24 months. This also accounted for the discrepancy between the amount of MIG funds unlocked and the amount of funds spent.

The Chairperson noted that DBSA was involved in 18 countries internationally. He wondered if government was getting value for money through its involvement. He also wanted to know who was doing oversight of the international work, and how this happened happen in foreign countries.

Mr Baloyi said that the extensive work outside the country mirrored what was happening internally, and that the funds for this were accessed from foreign sources.

Mr Tadesse noted that he managed the international activities. Most of the activities were in the form of investment. A governance framework determined its participation. Examples were the Lesotho Highlands Water Project, and assistance with roads and hospitals in neighbouring countries. DBSA had been honoured with an award, being recognised as the best development bank in Africa.

Mr Baloyi said the assistance was given in the context that South Africa would develop faster and better if its neighbours were also developing.

DBSA Corporate Plan: Briefing
Mr Baloyi then outlined the DBSA’s corporate plan. He said that two new instruments were envisaged for the transformation and management of developmental risk. The Development Fund would be the implementer, and the Development Planning Programme would play an advocacy role. The Development Fund would focus on capacity development, rural development and community development. This had emerged as most of the bank’s focus was on funding and financing initially. In South Africa, there were capacity constraints.  DBSA had to intervene across most of the value chain, from the initial policy or sector level, through appraisal, financing, planning and procurement, as well as construction, management and maintenance, to final operations and maintenance. The challenge was to create coherent national institutional development. DBSA had deployed people to deliver, whilst the building up of institutional capacity came about incidentally.  The conundrum lay in how to catch up with the service delivery backlog, whilst building capacity. DBSA would focus on key sectors, as it could not do all at the same time. These would be energy, water and sanitation, transport, education, and human settlement.

Mr Baloyi gave an illustrative example of a delivery model. DBSA was signing specific mandates with the Department of Health to build not just one, but five hospitals across the country. This demonstrated the scale of what it was trying to implement. This was a large and ambitious challenge. DBSA had agreements in place with the departments dealing with water, energy, health and sanitation. Coincidental to this, it was also helping with capacity through the Siyenza Manje projects. These were not sufficient on their own.

The Chairperson said that complaints about capacity ran as a common thread in every report submitted to the Committee. He would dearly like to hear, for a change, that departments had recruited 100 engineers.

Mr Mashile said that the South African Institute of Civil Engineers (SAICE) had a good planning scorecard. The lack of capacity at municipal level would undermine DBSA’s efforts. He urged that it was vital that it must capacitate municipalities, if it was not doing so already.

Mr Baloyi said DBSA had a good record on skills training, with 11 000 interventions, but that the skills training was a by-product. He confirmed that DBSA worked with SAICE, and drew professional engineers from its ranks. He said the capacity building mandate was a huge and important one. In answer to the question whether the DBSA was doing enough, he said that it was not, but that the DBSA had never hoped nor intended to solve all the problems of all the municipalities. It was doing targeting interventions. However, the new plans on which DBSA was working would hopefully achieve more. Whether the task of capacitating municipalities should rest with one institution was still under discussion. He said the DBSA’s costs were the best in the sector. Its involvement in Operation Clean Audit was an extra component, which had been added outside of the original interaction with municipalities.

Mr Mnguni asked if there were cost implications to the organisational reshuffle. He noted also that most municipalities had adverse audit opinions. He asked where DBSA fitted in to the audit process.

Mr Kibuuka said two targets had been set. The first was that municipalities should be delivering clean audits by 2014. Secondly, there should be more than a 65% improvement in audit issues.

Mr Baloyi confirmed that DBSA had no authority to direct municipalities. It could only try to influence them. He said the main weakness in service delivery was that government departments were not working coherently enough to streamline the process. There was a lack of integration of organisations.

The Chairperson noted that the Committee and DBSA would meet on the following day, together with a number of other role players in government

The meeting was adjourned.


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