Closed Pensions Fund Amendment; DBSA report: briefing

Meeting report

FINANCE PORTFOLIO COMMITTEE
31 August 1999
ADOPTION OF CLOSED PENSIONS FUND AMENDMENT BILL AND PRESENTATION OF DBSA ANNUAL REPORT

Documents handed out:
DBSA Annual Report Launch Address by Trevor Manuel, Minister of Finance
Press Release 1 DBSA Soars to record Disbursements
Press Release 2 DBSA Lends R1,3 bn to Local Authorities
Press Release 3 DBSA Projects to create estimated 37 900 sustainable jobs
DBSA Projects of 1998/9
DBSA Annual Report 1999

SUMMARY
The committee adopted the Closed Pension Fund Amendment Bill. Mr I Goldin, Chief Executive and Managing Director of the DBSA, presented the annual report of the DBSA to the committee.

MINUTES
Adoption of Closed Pension Fund Amendment Bill
The Chairperson said the Auditor General's office is satisfied with the Bill and the State Law Advisor concluded that there are no deficiencies. No objections were made and therefore the Bill was passed.

Development Bank of Southern Africa (DBSA) Presentation
Mr I Goldin, Chief Executive and Managing Director of the DBSA, said the DBSA as a creation of an act of Parliament (Development Bank of Southern Africa Act, No 13 of 1997) is committed to perform and fulfill the role placed on them by this act. The guiding principles and objectives under which the DBSA function are:
- to maximise development impact
- be additional and
- follow sound banking principles.
In its efforts to follow sound banking principles the DBSA purports to be sustainable as a financial institution by raising own funding and not receiving subsidies from government.

Operations Overview
Cumulative
- R19.5 billion cumulative loan approvals
- R 0.4 billion cumulative guarantees and equities
- 611 borrowers and 900 plus clients
- 474 local authority clients
- 11 agency functions
- Policy role
A majority of the DBSA clients are local authorities, the DBSA took over the Local Authorities Loan Fund. Mr Goldin believes that all local authorities will pay their loans and that no loans should be written off. The DBSA, because of their investments in local authorities, is interested in the developments concerning local authorities especially pertaining to the current issue of demarcation of municipal boundaries.

The Year
- R 2 470 million disbursements (i.e. money used in projects)
- R 2 062 million investment loans approved
- Total project value - R 8 724 million
- Record leverage ratio - 1 : 3.2 (R1 to R3.2 of Other People's Money)
- 121 new projects were approved
- Rapid SADC growth - 32% of approvals outside South Africa (Projects in
12 of 14 SADC countries)

Development Impact in South Africa
Estimated
Economic Development Impact

Access to Services

Financial Review
- 3,6 % return on average assets
- 93,6% loan term debt to equity ratio
- Operating expense to total income = 9,6%
- Surplus : R 509 million (way above surplus of previous years)

Risk Management
- No write off in 1998/9
- Conservative provisioning of 6,3%
- Premier credit rating

Human Resources
Core Competence
- Reduction in staff turnover by 49%
- Delaying of management
- Staff number down 15%

Employment Equity Act
Affirmative Action achievements include:
- 64% black managers
- 23% women managers

Goals for 1999/2000
- Increase Development Impact
- Expand role in SADC
- Maintain financial strength
- Enhance risk management strategies
- Strengthen performance measurement
- Increasing communication with stakeholders

Questions by Committee
Dr R Davies (ANC) : Given that a third of DBSA business is outside the country, any thoughts of having someone outside South Africa sit on board of DBSA?
Reponse : That is a decision for the Governor and government to take. It does make sense to have someone from outside the country, especially considering accountability of the DBSA. An option is the creation of a separate fund for outside countries.

Prof B Turok (ANC) : The Municipal Systems Bill will call upon Local Authorities to do more and therefore would need more assistance, how do you intend expanding in this area in order to cater for those additional needs of the Local Authorities?
Response : The DBSA allocated money for technical assistance and an overwhelming part thereof goes to Local Authorities. We have already changed guidelines to give effect to any changes to be imposed by the Municipal Systems Bill, and this mainly means that we will provide assistance when needed by our clients.

Dr L Luyt (FA) : The DBSA performance is good and you do compare yourself with companies. Bearing that in mind, what do you fall under, are you a company? Do you have share capital?
Response : The South African Government wholly owns the DBSA share capital. The DBSA is not registered as a company, but functions as a company in terms of the Companies Act 61 of 1973.

Mr M Lekgoro (ANC) : I am very happy to see that the DBSA is well on track of the provisions stipulated in the Employment Equity Act, but I am still very much concerned, any comments on that?
Response : To function in accordance with the Employment Equity Act is a priority for the organisation. In the management team, a quarter of the personnel consists of women, we would like it to be at least 50%, but in general it is much better than a few years ago.

Ms S Rajbally (MF) : In what way can the DBSA help in the Cape Town area that was hit by a disaster this weekend?
Response : The Western Cape is one of our major clients and therefore we have an interest. We have agreed to make a contribution to the Disaster Fund.

Ms F Marshoff (ANC) : What is the DBSA policy regarding disability representation (staff)?
Response : We have a commitment of equal development of people and we have made buildings more accessible for the disabled. In fact we have a staff member who was recently disabled and we are in the process of accommodating him properly.

Since there were no further questions the meeting was closed.

Appendix 1:

DBSA ANNUAL REPORT LAUNCH

TREVOR MANUEL, MP

MINISTER OF FINANCE

Friday 27 August, 1999


I wish to congratulate the DBSA on the very positive results it has achieved over the past year. The DBSA has undergone a massive transformation over the past few years, and as the results released today show us, the changes brought about by the process of transformation have been enormously successful. The Bank has clearly become a leading development agency and is set to grow in this role in the future. This success story is all the more remarkable because the Bank has not received any funding from the Government since 1994.

During the past year the DBSA has posted a number of achievements. (I am in the fortunate position of having had a pre-sight of the report, and can talk about a number of these achievements, although the CEO will deal with the details):

· The DBSA over the past year has disbursed a record amount of R2.46 billion, which is an increase of 13 percent on the previous years results.
· Moreover, in the 121 projects it approved this past year, the Bank was able to leverage funding from other role players such as the public and private sectors and donor agencies. This resulted in a total project value of R8,7 billion.
· The Bank estimates that the projects in which it invested will annually add R1,8 billion to GDP and provide 37900 sustainable jobs opportunities over the longer term (20 years).
· It has also had no debt-write-off, despite a relatively risky client base and difficult conditions such as high interest rates, personal debt, and unemployment.
· Therefore the Bank's growth has been based on its increased efficiency and on the results of the ongoing transformation process.

The DBSA has targeted the bulk of its resources at empowering Local Authorities, which has been the single largest grouping of clients for the Bank this past year. This was indeed the mandate set for the Bank as part of its transformation. It pushes the Bank to act as a key provider to ensure that there is investment in infrastructure within the sphere of local authorities. This is very important in the context of the need to grow the economy, because local authorities are probably the key delivery institutions for most people. It is the local council, the local municipality, which provides goods services closest to people.

However, many local authorities simply do not have sufficient income generating capacity to meet their developmental needs. They are therefore
dependent on interventions by others to attend to these needs. Moreover, a problem for local authorities for a long time is that lending to them has been seen as a high-risk activity by private sector investors. The DBSA has positioned itself to attract private sector funding while mitigating the risks. It has done this by seeking to leverage funding as well as actively pursue co-financing arrangements with the private sector, thereby taking over the risk component. In so doing, it has also been able to expand the role of private sector capital in the municipal sector. The challenge to the DBSA by its shareholder is to respond to development finance needs. This is the response - it has taken the risk and leverage funding for infrastructure development in a sector badly in need of finance.

There are presently successful partnerships between the DBSA and 474 Local Authorities, which represent 75% of all its borrowers. In the past year (1998/9), the DBSA has lent R1,3 billion to local authorities. They represent about 43,5% of the Bank's total loan book. This means that it has lent a total of R7,8 billion to local authorities over the past few years. It has specifically targeted those municipalities with limited access to funding, although it also supports other municipalities by providing technical assistance to enable such municipalities to develop the necessary capacity themselves.

The Bank has also been able to leverage an additional R3,2 billion in private and public sector contributions to fund local authorities. This has contributed to the increase in the portion of total projects funded by other sources from 17% in 1997/8 to the current 71%.

The DBSA has also joined with the Departments of Finance and Constitutional Development to establish the Municipal Infrastructure Investment Unit to focus on and to provide technical support to municipalities. The intention is to ensure that local authorities are able to become financially sustainable.

As a result of the interventions, the Bank estimates that in the past year, it has been able to ensure that 632 300 households have been able to obtain access to more than one type of local government service. For example, 224 000 households were connected to water supplies; 579 000 to sanitation; 250
000 to electricity; while 155 000 households gained access to bulk infrastructure. This is indeed an impressive contribution to meeting the country's development needs.

The Bank is playing an increasingly important role within the Southern African region, SADC, giving expression to its new mandate, and demonstrating its willingness to help in generating a Renaissance on the African continent. SADC has become a significant entry in the Bank's loan book this year, with 32% of new approvals going to the SADC region. At present the cumulative loans in SADC have reached R3,7 billion. The DBSA will press ahead to identify new and greater opportunities within the region next year and in the years ahead, thereby helping to build regional bridges throughout the region.

A total of 13 projects outside South Africa, with a DBSA contribution of R713 million, were approved during the year mainly for infrastructure and telecommunications projects.

The major projects include:
· The Mozal Aluminium Smelter valued at R6,9 billion in Mozambique (DBSA contributing R322 million);
· A submarine fibre optics cable valued at R225 million in Mozambique (DBSA contributing R1O5 million);
· A cellular network in Zambia (DBSA contributing R26,3 million); and
· Telecommunications in Tanzania (DBSA contributing R76,2 million).

These are all significant projects, which will have a marked impact on the local economies.

As Government, we would hope that the Bank responds to the challenges of
this sphere, including:
· Redefining development finance;
· Facilitating NGOs and private sector work with local authorities and communities
· Continuing to examine the extension of benefits to small cash strapped communities
· Assist local government through technical assistance including grants, capacity-building initiative and policy support;
· Building institutional capacity of borrowers by sharing in an analysis of both partnerships and instruments.

The DBSA is heading in the right direction, the strategic direction is correct. It has grown out of the period of transformation, and is in a good position to consolidate and develop its new areas of focus.

But the challenges ahead of it are enormous. I have no doubt the DBSA will rise to these challenges, and continue to play its role as one of the country's leading development finance institutions.

I wish to thank and congratulate the following:
· The DBSA staff who have clearly put in that extra bit of effort in helping the Bank to the successes it has had;
· The DBSA Board which has spent so many hours in overseeing the transformation and providing the strategic direction of the Bank; The senior management and the CEO who, in the end, have made the results possible.

It is with pride that I receive the 1998/9 Annual Report of the Development Bank of Southern Africa.