DBSA on last quarterly report, implementation of mandate, impact of COVID-19 and recent civil unrest on its programme

Meeting report

The Chairperson welcomed all present, but advised he had to leave the meeting early. Mr E Njadu (ANC, Western Cape), would chair the meeting after he left. The Development Bank of Southern Africa (DBSA) was invited to begin its presentation.

DBSA Quarterly Performance Report

Ms Boitumelo Mosako, Chief Financial Officer: Development Bank of Southern Africa (DBSA), referred to the organisation's operational environment, and said there had been a notable fallout from the COVID-19 pandemic. In the last year, the DBSA had experienced two downgrades, the capital market meltdown, the creditworthiness of clients, some clients who had found the environment quite challenging, and the implementation of work from home. Fortunately, the DBSA was prepared to work from home, as it had implemented Office 365 for its employees, so there was a smooth transition. There had also been social unrest.

There had been a decline in economic growth, but the DBSA expected the trade balance to remain positive for now. Regarding exchange rate risk, less than 30% of the DBSA’s loan was dominated by foreign currency. It remained susceptible to foreign currency risk, but the rand had strengthened in the last year.

See slide 7 for the detailed table on the ‘forecast on domestic macroeconomic factors.’

One of the key goals the DBSA had achieved was the building of its in-house economics department. It could generate economic data and models, and release opinion pieces. These might have been seen published in the media by its chief economists.

Integrated infrastructure development

The DBSA’s integrated infrastructure development approach was adopted when it revised its strategy and went through an organisational review. It wanted to ensure that went it built its organisation, it played along the infrastructure development value chain. This meant that from an infrastructure perspective, the DBSA supported under-resourced municipalities to enable them to unlock infrastructure opportunities. There was a dedicated team within the DBSA that did this work, and there was also a budget allocation to procure any technical experts needed to develop these plans. It also had pilot projects with some municipalities on asset management and revenue enhancement. The DBSA went beyond mere infrastructure development.

There was also a dedicated project preparation division within the bank that identified projects, did feasibility studies, and developed programmes. One of the key programmes in the division was the flagship Student Housing Infrastructure Programme (SHIP) for student housing, while other programmes would be implemented through the infrastructure fund. The DBSA provided finance through loans and project funding.

The DBSA implemented and maintained infrastructure on behalf of government departments and state-owned enterprises (SOEs), which assists with the maintenance of infrastructure. The sectors that it focuses on, which were refined in 2012/13, were water and sanitation, transport, information communication technology (ICT), energy, education, health and human settlements. Its main clients were SOEs and municipalities, metros, and under-resourced municipalities, but it also did projects with the private sector in the form of public-private partnerships (PPPs).

Value Chain: Planning, project preparation, financing and delivery

See slide 9 for further detail on the work done in planning.

The DBSA had prepared over R50 billion worth of projects in the last five years. Catalysation, smart partnerships and collaboration were key for the achievement of accelerated development impact. With project preparation, the DBSA de-risked projects to enable crowd-funding so that projects could be instituted accordingly.

From 2017 to 2020, the DBSA had averaged R12.25 billion in disbursements, which went towards infrastructure projects in South Africa and the region.

Further details can be found on slide 10.

In the last five years, the DBSA had assisted its clients -- the SOEs and government departments -- to deliver R16.2 billion in infrastructure. Since the inception of the infrastructure delivery division in 2013, it had managed to deliver over R20 billion in infrastructure.

The table on slide 12 provides details on the 50 000 jobs being created annually, the spending on small, medium and micro enterprises (SMMEs), schools that have been refurbished, new schools being built, and health facilities. This had a significant impact on social infrastructure by ensuring that children were taught in well-structured and well looked after infrastructure and lived in dignity – which was a basic requirement for any human being.

See slide 13 for further detail on infrastructure delivery.

Performance report -- Value Chain

Key performance highlights for the year ended 31 March 2020, and for the first quarter of 2021/22, were:

• In 2019/20, infrastructure unlocked was R1.4 billion.
• In 2019/20, the projects prepared and committed for funding were R2.4 billion.
• In 2019/20, the total disbursements were R15.4 billion, and in Q1 of 2021/22 it was R5.8 billion, most of which had gone towards supporting metros.
• In 2019/20, the total funds catalysed had been R43.1 billion.
• In 2019/20, the infrastructure delivered by the infrastructure delivery division (IDD) was R4.1 billion, and in Q1 of 2021/22 it was R793 million. This was lower due to the impact of lockdown.

Performance Report – Disbursement

Slide 15 describes the disbursements and where they have gone in the last three years.

Secondary municipalities had limited balance sheet opportunities and most municipalities could not borrow. Last year, the DBSA found that fewer secondary municipalities went looking for funding in the market. The DBSA was in a challenging position from a cost of funding perspective, and this was influenced by the rating downgrade and COVID-19, where there was no liquidity in the market for some time. However, things had managed to stabilise, and the DBSA had been able to raise funding from institutional investors. It had also been affected by the Land Bank contagion risk.

The DBSA continued to support metros with disbursements. Secondary cities were on an increasing scale, and slide 15 illustrates how this moved from 2018 to 2020. In 2021, there was a decline in disbursements to secondary cities, as commercial banks priced aggressively to fund them.

Economic infrastructure increased from 2018 to 2020. There had been an increase for the rest of Africa. This was a complex environment to do business in, and it was a key area of business for the DBSA, as a development finance institution, to participate in. It saw some countries that it supported face challenges due to COVID-19 and physical constraints.

Performance Report – Indicators

The DBSA had remained resilient through a time of difficulty, looking at the balance sheet and income statements. The net interest margin had been strengthening from 2017 to 2020. Sustainable earnings had remained above inflation, which was important for the DBSA to ensure that it preserved its capital to be able to leverage it for greater development impact for funding projects. In 2020, there had been a decline in sustainable earnings -- it was in the negative. However, net profits had been positive. This was the impact of COVID-19. The DBSA had finalised its financials in September last year, and it had had the opportunity to capture some of the forecasted impact of COVID-19 in its numbers. It had expected high credit losses for 2020 which had resulted in negative sustainable earnings.

Cost containment had remained within acceptable levels. In its financial strategy, as an institution, it ensured cost optimisation as it embarked on its future-fit DBSA journey.

Performance Report – Assets

See slide 17.

As an institution, the DBSA had a legislated debt/equity ratio of 250%. Total equity, and the DBSA’s asset base, had been growing from 2017 to 2020 from R84 billion to over R100 billion. This was a great achievement for the DBSA, considering the operating environment it found itself in.

The entity's total liability was made up of its listed bonds on the JSE and lines of credit that it utilised from international development finance institutions. One of the things that Treasury did well last year, when money could not be raised in local currency, was to expand the sources of funds base and raise money in dollars to meet its disbursement requirements. Non-performing loans remained within acceptable levels at just over 7%.

Performance Report – Impact

Slide 18 indicated the development impact of the DBSA’s achievements in Q4 of 2020/21. It showed the number of jobs created, the number of learners that benefited from the new schools built, over 154 000 households that benefited, while infrastructure valued at R2.4 billion was delivered by black-owned entities, and 1 301 SMMEs and sub-contractors were employed in the construction of projects.

Performance Report – Municipal Support

In 2019/20, R1.7 billion in infrastructure was unlocked in eight municipalities, which resulted in 98 infrastructure projects. In 2020/21, R1.4 billion in value of infrastructure was unlocked in 14 municipalities, which resulted in 278 infrastructure projects. Slide 19 indicates the increase in households' access to water and sanitation, electricity, roads and jobs created. Water supplied to households increased from over 145 000 in 2020, to over 149 000 in 2021. Road constructions increased from 6.2km in 2020, to 32km in 2021.

The municipal lending graph showed approvals, commitments, and disbursements achieved in 2021.

District Development Model (DDM)

The DDM was an initiative where the DBSA was providing support to the Department of Cooperative Governance and Traditional Affairs (COGTA) for implementation. It had also provided some funding for the initial operationalisation of the DDM office. Its involvement included:

• Project Management Office (PMO) and district hub (DH) set up -- these were established and fully functional. This was an achievement, because they were set up at the height of the lockdown, where everything was done online. The human capital division put in a lot of effort to ensure that the office was up and running to deliver on the requirements.
• The development of ‘One Plan’ for OR Tambo, Waterberg and Ethekwini had been completed and public consultations were under way.
• The 'One Plan' module of the information and decision support management system was expected to be completed in September 2021.
• The draft Local Economic Development (LED) national implementation plan had been completed.
• The employment of staff for the National Disaster Management Centre (NDMC) had been completed.

Development Laboratories (DLABS)

This was one of the key initiatives the DBSA had started developing, to see how the township economy could be stimulated. This referred to its mandate on economic development and skills and human capital capacity development. Here, the DBSA had partnered with various stakeholders to stimulate economic development and build Fourth Industrial Revolution (4IR) skills. This had been done through the DLABS programme. It had implemented two sites as part of the pilot stage -- one in Jabulani, Soweto, and another in Westridge, Mitchells Plain. The DBSA was looking at expanding this and doing a pilot in the rural environment to gather data for a bigger rollout.

In Soweto, the achievements were  310 trained students and 70 jobs created. The DBSA had put R16.7 million into this facility. SMME support and achievements for Mitchells Plain were also provided. 4IR skills referred to skills such as coding, which were critical for youth in these communities, and the current knowledge economy and what was required for economic development.

Green Funding/Climate Finance

The DBSA's involvement in this area included an Integrated Just Transition Framework, which was underpinned by the Integrated Resource Plan (IRP) that would inform investment decisions of the institution going forward. The key focus was to minimise the impact on economic stranded assets, and create opportunities for new industries to be developed, and in that, a green climate. The DBSA had a dedicated green financing division. The presentation indicated the various funds raised to execute the green climate financing mandate, and the key international partnerships.

Infrastructure Fund

The DBSA had signed a memorandum of Agreement (MOA) between the DBSA, the Infrastructure Fund (IF) and National Treasury last year. The IF was fully operational and had already submitted projects for approval to the Budget Facility for Infrastructure (BFI). This was to accelerate development impact, and the DBSA was moving with speed on this.

Details of the Infrastructure Fund initial pipeline were shown in slide 26, and an overview of the entity's exposure in the Southern African Development Community (SADC) and the rest of Africa was also provided.

Outcome of forensic investigation

There were allegations raised by Mr Bantu Holomisa last year, and this matter was currently sitting with the Standing Committee on Public Accounts (SCOPA).

The DBSA had released a media statement on the allegations being unfounded. It had completed a forensic investigation. The outcome had been that although there were some gaps on things that the DBSA could have done better, there was no evidence of a conflict of interest, collusion, or fraud on transactions.

The DBSA had categorically stated that the appointment of board members had been done in a fair and transparent manner. It had followed the process approved by the Minister at the time. It described the robust investment process it undergoes as a financial institution, highlighting the strong governance and decision-making process in investment decisions.

Land Bank contagion effect

The Land Bank contagion continued to negatively impact the DBSA’s fundraising. It had had to raise funding in Euros and US dollars. This had resulted in placing a premium on its pricing. It was aware that there had been efforts to resolve this, but it needed to highlight the negative effect it had had on the financial institution.

Update on DBSA COVID-19 response

The Committee was given an overview of all the initiatives the DBSA had implemented during COVID-19 pandemic. R150 million had been set aside for these initiatives. These included:

• Support for the National Disaster Management Centre (NDMC).
• Collaboration with the Council for Scientific and Industrial Research (CSIR) to increase its testing capacity and develop a ventilator prototype.
• Support provided to SADC member states.
• The provision of patient isolation pods.

Recent Social Unrest

The DBSA was currently implementing 631 projects, and no significant impact was reported. It would continue to support municipalities during this time to enable quicker reconstruction of damaged infrastructure. It was also in discussions with its sister development finance Institutions (DFIs) on how it would support SMMEs.

As a development finance institution, the DBSA was expected to play a counter-cyclical role during times of difficulty, such as COVID-19 over the last year. A lot of support had been provided to the financial sector, such as to commercial banks, where guarantees were provided. As much as the DBSA was expected to respond, it had to rely on its resources and strategic partners to be able to execute its mandate. This needed to be looked at closely to see what support could be provided to DFIs during difficult times.

Discussion

The Chairperson apologised to the DBSA for having to leave the meeting early. He had comments on the presentation.

The last few slides were important, but had been rushed through. He suggested that the Committee allow the DBSA to elaborate on those slides further, as it would be useful. The number and scope of questions asked would also allow it time to fill in any missing information. 

He was glad that the Committee’s researchers’ overview had reached the DBSA, because all the questions had been answered. He had not picked up on the question of rural municipalities, but his mind may have drifted. Members may not be content with the answers given, and if not, he hoped that these matters could be pursued further.  

Overall, given the public entities that had appeared before Parliament and the Committee, the DBSA seemed to be doing reasonably well. To the extent that this was accurate, there may be lessons that the DBSA could share with the Committee on how they had got things right, notwithstanding  the inadequacies. Was there a general lesson that could be drawn from the DBSA’s experiences?

He knew about the good work on the district development model, and it was impressive. The DBSA had been involved since the outset of the concept.

There had been some talk about the Land Bank and the DBSA cooperating more effectively towards the possibility of one entity being created. While this was a policy matter for the government, the DBSA might have discussed this matter and had a policy position. If not, it should share some of its views on that.

Mr Njadu, taking over as acting Chairperson, agreed that important points had been made in the last slides, and that not enough time had been spent on them. If time allowed, the DBSA should deal with them again, especially the points on the COVID-19 impact and social unrest.

Mr S Du Toit (FF+, North West) said he also would have liked the DBSA to have spent more time on the last few slides of the presentation, particularly on the ‘Land Bank contagion’ aspect. There had been a presentation from the Land Bank to the Committee before the constituency period, where the bank had said that it had turned away about 30% of its paying customers due to financial constraints and its political mandate, as he would call it, even though it should be apolitical. The DBSA had indicated that “the uncured default of the Land Bank had resulted in a muted funding appetite from local and some international investors.” During that Land Bank presentation, it had been asked whether it would still fulfil its mandate should expropriation without compensation be implemented. The answer had been yes -- it would still provide support, despite being financially hampered. What role would the DBSA play, and how did it see this situation play out should expropriation without compensation be implemented? The DBSA had already said that the dire state of the Land Bank negatively affected it overall, and this negatively affected development and infrastructure in South Africa. Should South Africa experience further social unrest, what effect on development in the country did the DBSA anticipate?

Mr M Moletsane (EFF, Free State) referred to the DBSA’s infrastructure fund pipeline, in which it was stated that there were national water programmes in six municipalities. Which municipalities were those?

On the DBSA’s COVID-19 response, to what extent had the DBSA’s interventions focused on rural municipalities?

Mr Njadu said that in the performance report, 14 and eight municipalities had been mentioned. Clarity was needed on which municipalities those were, and what issues they had that had been addressed by the DBSA’s support.

DBSA's response

Ms Mosako said she would begin with Mr Du Toit’s question on expropriation without compensation, and link that to the Chairperson’s question on the Land Bank.

The DBSA worked within a system of national policy as a state-owned entity. This drove most of its  activities, and it did collaborate with the Land Bank. However, if there was an intention to merge the Land Bank and the DBSA, that would be a policy decision and policy position that must be driven by the Ministry that the banks report to. This was also underpinned by economic policy.

On expropriation without compensation and impact on the DBSA, the Land Bank played a significant role in the agricultural space and enhanced food security not only for South Africa, but also for the region and for export purposes. The DBSA, as a development financial institution, would continue to provide bulk infrastructure financing to enable sustainability and growth in this specific sector. This was its current role, and it would continue to play this role.

On the DBSA’s COVID-19 initiatives, she had already talked about the support the DBSA provided to the National Disaster Management Centre, the provision of testing capacity with the CSIR, and isolation patient pods.

On the support for rural municipalities, the DBSA had provided treatment works, 40 energised boreholes, and water tankers. It also supported the Department of Education through the infrastructure delivery division, which enabled a quick response to addressing water and sanitation challenges at schools.

Mr Mohale Rakgate, Chief Investment Officer: Infrastructure Fund, DBSA, referred to the Infrastructure Fund, and said that the six municipalities supported by the national water programme were the Sekhukhune district municipality, the Vhembe district municipality, the Ugu district municipality, the Ilembe district municipality, the Ray Nkoyeni local municipality and the Sol Plaatje local municipality. This was also in line with the district development model.

Prof Mark Swilling, Deputy Chairperson, DBSA, said that he would address the Chairperson’s question on lessons for other SOEs. He was responding in his capacity as a board member of the DBSA and a professor who had studied SOEs in detail. There were three relevant factors.

Firstly, there was very little evidence of problematic political interference within the DBSA. The entity's Minister was the Minister of Finance, and over the years that relationship had been well managed. This was not always true for other SOEs.

Secondly, on board governance, there was a strong board of independent-minded people and, as the previous DBSA Chief Executive Officer, Jabu Moleketi, had said, the strength of the DBSA was that the decisions of the board took place within the boardroom.

Thirdly, the DBSA had been able to attract high-quality managers who could have earned more in other institutions, but believed in its mission. That ethos of public service, rather than an ethos of accumulation, was critical.

The DBSA and Land Bank merger, this had not been discussed by the board and the DBSA cannot say that it had a view on the matter. His view was that a solution to a problematic institution was not to merge it with a good one. However, that was a general point and may not be relevant to this specific context, the DBSA should remain open to the conversation, but it does not have a view on the matter.

Mr Njadu thanked Prof Swilling for his response, and asked for further questions.

There were no further questions.

Mr Njadu said that the Committee had received a comprehensive report from the DBSA on its broad scope of work. As an oversight Committee, it was necessary to understand the impact the recent developments of COVID-19 and civil unrest had had on the DBSA and its operations, functions and if there were any obstacles to the performance of its duties and mandate. The meeting’s purpose was for the Committee to understand that impact.

Members were asked for any further questions or comments. If there was no further input from Members, the DBSA could go back to their presentation and raise anything of importance that it may have rushed through when presenting.

There was no further input from Members.

Ms Mosaku said that she had detailed the support provided by the DBSA at a national level to the National Disaster Management Centre (NMDC) in terms of human capital support, the provision of screening units, isolation pods, enhanced testing capacity, and support to SADC member states. There was also a range of support to municipalities, and in the infrastructure delivery development division.

The DBSA had responded at different levels, in line with its mandate. It was able to respond quickly and service its clients, which were the national departments, and assist them with their response initiatives and provide the necessary capacity at a municipal level. It was able to collaborate with its technical infrastructure entities in the form of the CSIR, to see how it could respond by enhancing testing capacity and the development of ventilators. This showed how important collaboration between government departments and SOEs was. The DBSA’s response to COVID-19 was a clear demonstration that within the government space, when there was collaboration, ‘a lot could get done’.

Regarding the social unrest, the DBSA continued to support municipal clients to enable quicker reconstruction of damaged infrastructure. It would also be providing support to SMMEs. This was through another collaboration with its sister DFIs at the national and provincial level. It had already allocated funds to see how it could enhance SMME support. The DBSA saw challenges in the construction sector, which was a sector it relied upon for implementation. It had also developed financing products for its clients to start implementing projects on its behalf, and to see how it could support them to enable infrastructure delivery.

Regarding the expansion of the DBSA’s investor base to obtain the necessary funding for implementation, government support for DFIs had been highlighted. This was important, considering the expectation of them playing a counter-cyclical role.

Mr Njadu asked for any further responses from the DBSA or the Committee.

Prof Swilling replied to Mr Du Toit’s question on the negative impact the Land Bank’s situation had on the DBSA. Mr Du Toit was correct, particularly with the DBSA trying to access its traditional source of funding. The DBSA’s funders became nervous because of what had happened to the Land Bank.

He was ignorant about the relationship between the Land Bank’s situation and the expropriation without compensation policy, but Mr Du Toit’s question seemed to imply that if expropriation without compensation went ahead, it could make the Land Bank’s situation worse which, in turn, would negatively impact the DBSA. The DBSA had no view on what that relationship was, but what could be said was that many of the DBSA’s development projects were with municipalities, particularly smaller municipalities – which were the epicentres of rural economies – and that anything negative that happened within the rural economy affected what the DBSA could do with those municipalities.

Whether the expropriation without compensation would be positive or negative, anything that negatively affected the Land Bank’s financial future and could make the current situation worse, would be problematic for the DBSA. Land was not the only issue in rural economies. The DBSA had started to get involved in rural infrastructure projects which had an indirect impact on agriculture.

Mr Njadu thanked Prof Swilling, and asked for further input.

There was no further input.

Mr Njadu reiterated that the purpose of the meeting was the Committee’s oversight on the current developments, and to understand the impact of those developments on the DBSA. The presentation had allowed the Committee to understand the mandate of the DBSA and its scope of work. The presentation was detailed on its operational issues, how those issues were handled, and its interactions and engagements. Interestingly, the involvement of the DBSA with the district development model was key for the development which the government was looking for in the municipalities, specifically rural municipalities.

The meeting was adjourned.