DBSA on its R3.5 billion SAA loan, mandate and activities

NCOP Finance

04 February 2020
Chairperson: Mr Y Carrim (ANC; KZN)
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Meeting Summary

The Development Bank of Southern Africa (DBSA) gave a briefing on how it was fulfilling its mandate as a government-owned development finance institution tasked with promoting economic growth and human resource development.

However, much of the discussion centered on what one Committee member described as “the elephant in the room” -- the DBSA’s R3.5 billion loan to South African Airways (SAA). Members raised concerns about the value to be gained from the loan.

The Committee was told the SAA loan was intended to assist the business rescue process being carried out at SAA. DBSA had been approached collectively by the business rescue practitioners, the Department of Public Enterprises and National Treasury to provide bridging finance to cover money the Treasury had committed to providing, but which it could not raise in time. The aim was to provide stability and space for the business rescue practitioners to do their job. Failure to do that would have resulted in the collapse of the process and probably the liquidation of SAA. The aim was the retention of economic value rather than the wholesale destruction of that value in an uncontrolled liquidation. The loan was short-term and guaranteed by the government.

On the mandate of the DBSA, the Committee was told that its primary purpose was promoting economic development by mobilising financial and other resources for sustainable development projects and programmes in South Africa and the wider African continent. The Bank was responsible for appraising, planning and monitoring the implementation of development projects and providing technical assistance.

The Committee was told the Bank’s total assets were R89.5 billion. It consistently received unqualified audits and Moody’s credit rating agency had given it a foreign currency rating of Baa3.

DBSA presented case studies of some of the programmes in which it was involved. These included countrywide student accommodation projects, electricity projects in Mozambique and Ghana and rural infrastructure development.

Committee members sought assurances that funding and assistance was accessible for smaller and rural municipalities and that a wide range of businesses benefited from DBSA projects.

Meeting report

The Chairperson said the meeting with the DBSA was as a result of a decision taken by the previous Select Committee in the Fifth Parliament. The aim was to assess DBSA’s performance in the light of enhanced powers given to it by an amendment to the DBSA Act. He invited DBSA officials to make their presentation.

Mr Paul Currie, Chief Investment Officer and Acting CEO, said the Bank was wholly owned by the SA Government. Its total assets were R89.5 billion. It was well governed, received unqualified audits and its Moody’s foreign currency rating was Baa3.

The DBSA Act mandated the Bank as a development finance institution (DFI). Its primary purpose was promoting economic development, human resource development and institutional capacity building. It did this by mobilising financial and other resources from the national and international private and public sectors for sustainable development projects and programmes in South Africa and the wider African continent. The Bank was responsible for appraising, planning and monitoring the implementation of development projects and providing technical assistance. The mandate also extended to the developmental requirements of the SADC region and the rest of Africa.

Mr Currie said the DBSA supported under resourced municipalities to unlock key infrastructure programmes. It facilitated crowding in of private sector funders through syndication. Projects were aligned with key policy frameworks such as the National Development Plan (NDP) and Broad-based Black Economic Empowerment.

Infrastructure delivery
Mr Chuene Ramphele, Group Executive for Infrastructure Delivery, spoke on DBSA’s Infrastructure Delivery Division. He said a multi-disciplinary team of professionals and technical specialists assisted with project management in key sectors of education, health, housing and municipal infrastructure. It provided rapid procurement to enable fast execution of projects and it provided accurate project monitoring and reporting. Its clients were national and provincial governments, municipalities and state-owned institutions.

Development impact
Ms Boitumelo Mosako, Chief Financial Officer, outlined the development impact of the Bank’s activities:

• 433 297 households would benefit from funds committed to municipalities;

• 6 728 learners benefited from eight newly built schools;

• 47 035 learners benefited from new and refurbished schools;

• 1 087 local SMMEs and subcontractors were employed in the construction of projects;

• 61 500 people gained access to improved health facilities;

• R3.2 billion in project preparation funding was approved for black-owned entities;

• R1.9 billion was approved for lending for projects by black owned entities.

Ms Zodwa Mbele, Group Executive: Transacting, outlined several projects which she said gave a flavour of the Bank’s activities:

• The Renewable Energy Independent Power Producers (REIPP) Programme received funding of R17 billion for 33 projects;

• Funding of R40.4 million which enabled the Mbizana Municipality to access grant funding from National Treasury for the electrification of 2 559 rural households;

• A social loan of R748 million for a wind project at Jeffrey’s Bay;

• Funding of R1.236 billion for student accommodation. The DBSA had been approached by the Department of Higher Education to assist with the roll out of 300 000 beds over the next 10 years at 26 universities and TVET colleges, at an estimated cost R65 billion;

• Investing in the SA Connect Programme of the Department of Telecommunications and Postal Services (DTPS) to provide broadband connectivity to 46 000 government facilities countrywide.

• An investment of USD142 million in an urgent project to prevent the collapse of Mozambique’s electricity network;

• An investment of USD 50 million in a liquid fuel and natural gas power generation plant in Ghana.

Mr D Ryder (DA, Gauteng) praised DBSA for its work. He noted that the Bank reported to the Minister of Finance. What oversight did the Reserve Bank exercise over DBSA and did it comply with the Basel banking requirements? Did DBSA price for risk? This was an important issue when lending to municipalities. He noted that a lot of the bank’s lending was geared towards large metros. He commented that DBSA’s figure of 433 297 households benefitting from funds committed to municipalities seemed a bit low.

Mr Ryder then referred to what he termed “the elephant in the room”-- DBSA’s loan of R3.5 billion to South Africa Airways (SAA). He referred to a comment on a radio show by Ms Mbele of DBSA that SAA was not expected to repay the loan. Did this mean that the government had guaranteed the loan? Was there a due diligence exercise? What conditions were set? DBSA’s total disbursements for the previous year had been R9 billion. The SAA loan appeared to be out of line with the norm. Given that DBSA was able to make this loan and the fact that the bank was well capitalised at present, could there be similar advances to Eskom in coming weeks or months?

Mr S Aucamp (DA, Northern Cape) said there were instances where bail-outs for state owned enterprises (SOEs) had jeopardised the delivery of infrastructure to people on the ground. DBSA said its core mandate was the delivery of developmental infrastructure, yet it had provided R3.5 billion to SAA -- “a failing state owned enterprise”. What degree of independence did DBSA enjoy and under what pressure was it to grant the SAA loan?

Mr F du Toit (FF+, North West) said SAA had last made a profit in 2011. It was troublesome to be putting in more money now. On DBSA's business development initiatives, he asked if all South Africans could benefit or whether some minority groups were excluded from taking part. With the Land Bank’s credit rating having been downgraded to junk status, were there plans for DBSA to assist the Land Bank in supporting emerging farmers?

Mr Z Mkiva, (ANC, Eastern Cape) asked about the geographic spread of DBSA funding. Did the money reach the rural areas of the country? He asked to be provided with one example of a flagship infrastructure project in a rural area. Was the Bank’s approach to funding proactive in ensuring that it was accessible to rural communities or was it a reactive one – waiting for approaches to be made to it? Student accommodation was a real problem for rural education institutions. Would DBSA consider funding student accommodation in a rural area where there were no title deeds to the land?

Ms D Mahlangu (ANC, Mpumalanga) asked how accessible DBSA was to provincial and local governments which might be prevented from benefiting from programmes due to a lack of information about DBSA. On the SAA loan, she asked what had convinced the bank that there was value for money in SAA. The provision of R3.5 billion appeared to be “putting money in a bottomless tin.”

The Chairperson said there were huge inequalities between provinces. Did DBSA see a role for itself in narrowing the gaps? This could help in reducing migration to areas like Gauteng. On SAA, he asked if the R3.5 billion had been earmarked for other projects which had now been foregone. He cautioned against jumping to conclusions about the loan before there was a clearer sense of government’s intentions for the airline.

In response to questions, Mr Currie said DBSA typically did not fund individuals but rather entities such as municipalities that provided services. DBSA reported directly to National Treasury which acted as its regulator. The bank was not subject to Basel requirements but it did price for risk and did have credit models aligned to those types of principles. The bank had to earn returns to remain sustainable.

On SAA, Mr Currie replied that this type of funding for SOEs was done only in exceptional circumstances and had to be core to DBSA’s primary sectors of power, water, ICT and transportation. The bank had funded Eskom in 2010 when there was a funding gap for its mega projects. Draw-down requirements ensured that the “massive” loan of R15 billion would not affect DBSA’s liquidity. Eskom had honoured all of its obligations. More recently DBSA had participated with commercial banks in providing bridge funding for a liquidity crisis at Eskom. SAA had approached DBSA on a number of occasions in the past but the bank had declined to provide funding. Commercial banks had provided funds on the back of Treasury guarantees.

Mr Currie said one of the key issues for a development finance institution was to help provide stability in cases of market failure, such as when Eskom could not raise funds on its own. The loan agreement also set governance requirements which Eskom had to meet.

In the case of SAA, the airline was in business rescue -- a legal process in which an independent party assessed the inherent value of the organisation and plotted a way forward. The bank had been approached collectively by the business rescue practitioners, the Department of Public Enterprises and National Treasury to provide bridging funds for Treasury’s contribution to finance the rescue process. The aim was to provide stability and space for the business rescue practitioners to do their job. Failure to do that would have resulted in the collapse of the process and probably the liquidation of SAA. The aim was the retention of economic value rather than the wholesale destruction of that value in an uncontrolled liquidation. SAA was part of an “ecosystem of transport”.

Mr Currie said the loan was short-term and guaranteed by government. He said no undue pressure had been placed on DBSA. The bank was in a sound financial position, it had strong leadership and good business practices which created an environment that was resistant to pressure. DBSA was aware that its decision to grant the funding would be controversial but had decided that doing so was in the best interests of the country. The funding was not provided at the expense of other earmarked investments. It was raised in the financial markets which were happy to provide the funds.

Ms Zodwa Mbele, Group Executive: Transacting at DBSA, elaborated on reasons for the loan request. She said the business rescue package required that a total of R4 billion be raised, of which Treasury committed R2 billion. However, Treasury could not deliver the funds on time. If SAA assets were sold to raise the money, it would have to be paid into the National Revenue Fund and would be subject to a parliamentary process and budgetary cycle.

Mr Aucamp said it was of concern that the SAA loan was in effect bridging finance for the government. At some stage Parliament would be asked to appropriate the money. It would have little choice in the matter because SAA would already have received the money. Parliament’s right to do a proper appropriation was being bypassed.

The Chairperson said DBSA had acted within its mandate. The question raised by Mr Aucamp should be taken up with the Minister of Finance.

Mr du Toit asked whether any loans to Eskom were in the pipeline.

Mr Currie replied that DBSA’s exposure to Eskom was high and prudential limits meant there would be no new loans.

On the provision of student accommodation, Mr Currie replied that this was a programme which fell within DBSA’s infrastructure fund. It was designed to support projects which were less attractive to commercial developers. It involved 150 facilities at 70 entities throughout the country.

Mr Mkiva said there was a tendency for projects to be awarded to the same group of contractors regardless of where the projects were located.

Mr Ramphele agreed that there was a need to ensure that contracts were more widely spread. For example, totally different contractors were involved in projects at Alice in the Eastern Cape and in Limpopo Province.

Ms Martie Janse van Rensburg, DBSA Board Director, addressed questions about the accessibility of DBSA funding. She said there were no pre-qualifying criteria which would exclude certain municipalities. However challenges arose when a municipality was not financially sustainable. In these cases the DBSA Local Government Support Unit would assist the municipality to draw up financial and infrastructure plans which would enable them to qualify for government grants.

The Chairperson asked what the key challenges were in assisting local government.

Mr Currie replied that many municipalities did not have the resources to plan properly. DBSA had several initiatives to assist them. While the initial aim had been to enable them to apply for loans, it had become clear that even with planning assistance, some were still not creditworthy. The emphasis now was helping them unlock government grants. DBSA was also working the Department of Cooperative Governance and Traditional Affairs on pilot projects to establish district councils. DBSA placed a big emphasis on improving the quality of life in rural areas so that people were comfortable living there. People should be taught how to use their capital, whether that is land, cattle or skills. One opportunity was the growing trend towards remotely performed work. DBSA was investigating the potential for call centres or data centres to be located far from urban areas.

The Chairperson asked for DBSA’s response to complaints that it charged high interest rates and that in some cases commercial loans were cheaper.

Mr Currie replied that development finance institutions should not be trying to price commercial banks out of the market. DBSA took higher risks and had to charge for this. However, he acknowledged that there had been some unintended consequences during the restructuring and recapitalisation of DBSA which had resulted in smaller loans being priced disproportionately to bigger loans. There was a process to make these loans more affordable.

Mr Mkiva said a meeting between traditional leaders and DBSA had been held in 2009. He would like to see this engagement repeated so that DBSA could familiarise itself with the work done by traditional councils. These were structures of government that were often overlooked.

In his closing remarks, the Chairperson said DBSA’s answers on the SAA loan had been “very competent.” However, the parliamentary committees would have to deal more fully with the issue of SAA. He praised the work being done by DBSA and urged them to keep it up.

The meeting adjourned.

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