Development Bank of Southern Africa Amendment Bill: briefing by National Treasury

Meeting report

Briefing by National Treasury on Development Bank of Southern Africa Amendment Bill
Mr Lefentse Radikeledi, Director: Asset and Liability Management, National Treasury, said the Amendment Bill was to allow for the restructuring of the Development Bank of SA (DBSA), at the request of the Minister. This would assist DBSA with its deteriorating financial position, would allow the DBSA to expand its assistance to government programmes and to expand its mandate to include the African continent.   The Minister had currently signed a mandate statement allowing DBSA to expand its operations into Africa.

DBSA’s last capital injection of R200m was at its inception, and its capital now stood at R15b.  It wanted to extend its mandate to include going beyond South Africa and the SADC countries. In South Africa, the money would be used on municipal, state-owned enterprises (SOE) and private public partnership (PPP) projects, to provide for the likes of water supply and electrification, while in Africa the focus would be on energy, transport, water and information and communication technology (ICT). The ratio of expenditure between South Africa and Africa would be 67:33.

The DBSA assisted municipalities with pre- and post-project planning, and provided loans and grants for these projects. The grants component, however, was eroding DBSA’s finances and DBSA had started to lose money. In the new restructured format, the DBSA would reduce its grant giving function and work on a cost recovery basis for the money it spent on planning and running projects on behalf of the smaller municipalities.

DBSA planned to disburse R55.2b, of which R16.8b would be to municipalities, with the metro municipalities receiving R11b.  R16.7b was expected to be disbursed outside of SA.

Adv Empie van Schoor, Chief Director of Legislation at the Treasury, said the main objects of the Bill were to allow DBSA to operate beyond SADC countries, to increase the authorised share capital, and to amend the Minister’s regulatory powers.

Advertisements for public comments had been placed in December 2013 and January 2014.  One response had been received from the SA Development Partnership Association (SADPA) questioning whether the DBSA was not a duplication of SADPA’s work. This was not related to the amendment bill.

The bill contained new definitions for the terms ‘authorised share capital’, ‘callable capital’, ‘issued share capital’ and ‘the Companies Act,’ and changes to the definition of ‘region’. The countries in Africa in which DBSA would operate, would be determined by the Minister. The Minister had already changed the regulations to allow it to operate in Africa. The aim was to allow DBSA to participate in infrastructural and strategic projects. Government was the sole shareholder presently, but this could possibly change in the future.

Discussion
Dr D George (DA) asked where the DBSA was getting the money from to increase the authorised share capital. He was uncomfortable with the Minister’s increased regulatory authority.  Why had mention been made of limiting the Minister’s regulatory powers?
Mr D van Rooyen (ANC) asked what the interest rate charged to borrowers was, in comparison to commercial lenders.
Ms P Kekana (ANC) questioned the timing of the call for public comment in the December/January period.
The Chairperson asked how the DBSA mandate could be expanded, given its deteriorating financial state. Was it true that the DBSA interest rates were higher, and was this because of the losses it had incurred in supporting municipalities?  What criteria would be used regarding the Minister’s power to choose the countries DBSA would be involved in? How were the DBSA‘s estimated expenditure figures (in slide 16) arrived at?  Who were the other potential shareholders?
Dr M Khoza (ANC) asked what relationship DBSA had with the BRICS nations in terms of banking. Where was oversight located -- with the Minister, or the Standing Committee on Finance?  If government’s shareholding were diluted through the increase of authorised share capital and extra shareholders, was there not the risk that the DBSA would become like a commercial bank, rather than focussing on public projects?

Mr Radikeledi replied that DBSA wanted to expand its lending and they estimated that there was a R50b gap. DBSA had requested R10b, but had agreed to a R7.9b increase in capital. The capital was mainly borrowings leveraged 2.5 times.  DBSA had its own prudential limits.
The countries in Africa were determined by the political, economic and commercial risk of DBSA getting its money back. DBSA spent on social infrastructure projects in conjunction with the funder, which was normally the government of the country, so there was low risk.  Historically, the risk for DBSA was very small in Africa.  If these projects were left to BRICS, they would not be interested -- they were not interested in regional integration, but rather in making a profit.
DBSA’s growth since inception had been based mainly on borrowing at commercial rates. To be competitive, the government had given guarantees which had resulted in the reduction of the interest rate DBSA was charged, but a guarantee fee was still payable by DBSA to the government. The question of how government could subsidise interest rates for municipalities was still an issue.
Mr Ben Mokheseng, Senior Policy and Financial Analyst, National Treasury, said the increase in the authorised share capital was in callable capital, so that DBSA would not have to return to government to strengthen its capital base and so that DBSA could negotiate better terms for its borrowings.  Currently, the authorised share capital was R5b, and the callable share capital was R4.8b. The latter would be raised by R15.2b, making a total of R20.2b in share capital.  Internationally, AAA-rated development finance institutions used these same structures.

Financial models run by DBSA had shown that there was the need to increase the capital by R15.2b.  In 2009 already, the Minister had wanted to increase the share capital structure, but was not able to do so.

Ms Kekana asked how quickly municipalities could fast-track infrastructure projects.

Mr Mokheseng said that question was being addressed at present by the DBSA, which was working on Municipal Infrastructure Grant (MIG) and Integrated National Electrification Programme (INEP) projects.
Mr Radikeledi said interest rates were not related to legislation, but to the pricing model.
On whether the DBSA or government should subsidise interest rates charged to municipalities, he said it should be government.  He added that the same process and issues were occurring with the Land Bank.
Dr George said the bottom line was that the government had to pay for callable capital in the event something happened.
Regarding the regulatory-making powers of the Minister, Adv Van Schoor said they were specific to the area  of regulations and were detailed, not general, powers.
The history of the bill was that since 1997 there had been no amendments to it.
The public comment received was an e-mail from the South Africa Development Partnership Agency, whose mandate was not set in law but was rather a notice issued by the Department of International Relations.
She said the timing of the call for comment was done so that the bill could be tabled and passed before the elections, but this had not occurred.
She had not thought about the criteria to be used in selecting a country.
Dr Khoza said DBSA, with its share capital, would not be able to cater for the developmental work needed in Africa beyond SADC, and DBSA should thus be working with BRICS.

Mr Radikeledi said DBSA was co-financing only.  DBSA had an agreement with the Minister that he had to know the country, what kind of project was taking place and how it related to regional integration.
Mr Mokheseng said BRICS had a banking mechanism, and DBSA was a partner in that mechanism.  DBSA would do the projects with BRICS, but would also do them alone if need be.
DBSA had been given extra funds to expand its mandate, but also had to ensure that it did not stretch itself.
On who the other shareholders could be, he said government did not currently want to dilute its shareholding, but other possible shareholders were pension funds, through the issuing of preferred shares.
The meeting was adjourned.