Development Bank of South Africa (DBSA) Quarterly Reports; Committee Oversight Visit Reports

Meeting report

Opening Remarks
The Chairperson stated that the Committee would have to conclude the business of the previous day, i.e. the Committee Reports on the Oversight Visits to SASRIA, the Land Bank, and the Financial and Fiscal Commission, before the briefing by the Development Bank of Southern Africa on its Quarterly Report 2021/22.

Committee Report on Oversight Visits
The Secretariat explained that the support staff had separated the three entities so that the Committee could present a separate report on each entity.

Mr F Shivambu (EFF) had liaised with the secretariat and had provided three additional paragraphs. There had also been some technical corrections from National Treasury to the main body of the report. The secretariat presented the additional paragraphs sent in by Mr Shivambu, that had been incorporated into the report.

Committee Report on Oversight Visit to the Land Bank
Additional recommendations:
9.11 The Committee is therefore concerned that the loan book of the Land Bank is not representative of the demographics of South Africa. Women and youth constitute less than 17 per cent of the Banks’ loan book and Africans are not adequately and reflectively represented. This means that the larger number of the Land Bank’s loan recipients remains white males. This is a cause for concern and calls for a loan book that is reflective of the demographics of South Africa.

9.12. The Committee, in consultation or liaison with the leadership of the Land Bank, the National Treasury and the Ministry and Department of Agriculture, Land Reform and Rural Development, will consider the legislative re-construction of the Land Bank in order to position it as a development finance institution that will play a leading and meaningful role in the financing and support of small scale farmers, developmental agriculture and food production. The Committee believes that this will help realise some of the objectives of the Land Bank, which according to the Land and Agricultural Development Bank Act include (a) promotion, facilitation, and support of equitable ownership of agricultural land, in particular, the increase of ownership of agricultural land by historically disadvantaged persons; (b) agrarian reform, land redistribution or development programmes aimed at historically disadvantaged persons or groups of such persons for the development of farming enterprises and agricultural purposes; (c) the removal of the legacy of past racial and gender discrimination in the agricultural sector; (d) programmes that contribute to agricultural aspects of rural development and job creation; and (e) food security.

9.13. The legislative reconstruction of the Land Bank should, among other options, include its repositioning into a development finance institution which will equitably provide agricultural finance and grants to all people in a manner that is representative of South Africa’s racial, gender and age demographics. It should also necessarily include an alteration of the Land Bank’s financing model in a manner that will make it not wholly dependent on capital markets, but additionally on the National Revenue Fund to finance, support, harness and enhance inclusive agricultural development for all the people of South Africa and in all areas.

Mr Shivambu confirmed that the additions were correct and he moved for immediate adoption of the report. The proposal was seconded and adopted, but the DA reserved its position

Committee Report on Oversight Visit to the South African Special Risk Insurance Association (SASRIA)
The Secretariat had included all Members who were present at the venue. No additions had been submitted to the secretariat and so there were no changes, except to the date.

The Committee adopted the report, with the DA reserving its position.

Committee Report on Oversight Visit to the Financial and Fiscal Commission (FFC)
This report had also been extracted from the original combined report. There were no changes, except to the date.

The Committee adopted the report, with the DA reserving its position.

Presentation by Development Bank of Southern Africa (DBSA)
Mr Mark Swilling, Board Chairperson, DBSA, introduced the presentation and informed Members that the CEO, Mr Patrick Dlamini, would lead the Committee through the presentation.

Mr Swilling stated that despite the challenges of the very difficult Covid years, the DBSA had achieved and even, in some cases, overachieved its targets. The DBSA had continued its long track record of clean audits and it continued to play a significant role in building project management units and offices in various parts of the state in order to assist with the post-state capture reconstruction of state capability. As always, the DBSA was deeply involved in local government, which was very challenging, but the bank was broadening its book which currently stood at R100 billion. It wanted to diversify its book and one of the big opportunities going forward, both in SA and Africa was the Just Transition. That was the board’s position on the Bank. He affirmed the board’s confidence in its CEO.

Mr Dlamini informed the Committee that DBSA was listed on the Johannesburg Stock Exchange (JSE) for its bond so the Bank could not get into specifics of the financial performance as it was a closed period until the audit was complete. It was a public engagement, so the DBSA was limited in that respect at the moment. The focus would be on non-financial performance. However, he assured the Committee that the DBSA was in a sound and strong financial position. It was still on top of the game as far as its financial performance was concerned.

Mr Dlamini explained DBSA was a creature of policy and 100% owned by the SA Government. DBSA was linked to the state rating on the finance markets. It raised funds through bonds and was accredited by international organisations. It had five key strategic actions that it considered strategic accelerators and each was linked to the other: capital and liquidity management; Just Transition; scale-up and fast-track infrastructure development; Intensify and accelerate B-BBEE funding, and being fit for purpose.  The Bank tried to ensure that more attention was paid to the poor and the funding of businesses in poor areas, but it was a big ask but that led to the third point. The scaling up and fast-tracking of infrastructure development were because much more needed to be done following the pandemic and it was trying to structure B-BBEE funding in the field of infrastructure. DBSA worked, as an enabler and a catalyst, with other spheres of government. National Treasury was core to supporting local government, but the capacity of the municipalities was a huge problem. It was difficult to fund a municipality that had a disclaimer or qualified opinion from the Auditor-General.

There had recently been tapering off of SA and African markets after the post-Covid growth while developed countries had already moved back to pre-Covid levels. Inflation was a huge problem and was currently being driven by the soaring oil prices.

Mr Dlamini listed a number of opportunities that he saw for DBSA. The Bank’s intention was to:
-Facilitate and drive infrastructure-led economic recovery.
-Leverage multilateral, BRICS (Brazil, Russia, India, China, South Africa), bilateral and grant funding for infrastructure.
-Increase and diversify the investor base.
-Diversify sector investments.
-Seek self-generated and strategic infrastructure funding opportunities.
-Participate in and influence the just transition.

However, he admitted that there were major challenges facing the bank. He listed the challenges as:
-Macroeconomic cyclicality and post-lockdown effects on clients and projects
-High cost of funding and foreign borrowing limits.
-Increased competition in the municipal finance environment.
-Credit quality deterioration, particularly NPLs (non-performing loans) in the African business.
-New DFI (development finance institution) empowerment scorecard and SOE (state-owned enterprise) remuneration policy.
-Uncertainty on procurement legislation.
-The Construction Mafia.

(See presentation)

Discussion
Mr Shivambu asked what DBSA understood by ‘Just Transition’. He heard the use of the term in relation to energy but what did it do in terms of job creation? A lot of people used the term Just Transition without any understanding of the concept of Just Transition. There was no Just Transition effort in SA. The International Labour Organisation understood it to mean that in the process of decarbonising the sun and the wind for energy purposes, jobs had to be created which would otherwise be created in the arena of fossil fuels but there was no effort, no factories that were manufacturing all the renewable energies and no other energy equipment. What did DBSA mean by Just Transition and what did the bank think it was doing?

Mrs P Abraham (ANC) stated that many questions had been answered in the latter part of the presentation. She asked how the Bank saw itself denting the giants of poverty, unemployment, and inequality in the country, seeing that it was a development bank. What were the demographics of infrastructure development? Where was it happening? She wanted examples of the kind of assistance the country enjoying from DBSA. The CEO had spoken of borrowing from international finance houses. At what cost was the bank borrowing? Was it healthy borrowing to support borrowing in the country or was it at a high cost without the returns internally?

She referred to the funding available to the municipalities. She had heard Mr Dlamini say that if the AG’s opinions were adverse, that was to the disadvantage of an institution. Was that the only criteria used by the bank? If not, what were the other criteria? She was happy that DBSA was talking about giving assistance to Eskom. Could he also share what was being done about following up and monitoring funds given to Eskom? Was there any foul play in Eskom and what was the Bank doing about any irregularities found?

Ms M Mabiletsa (ANC) congratulated DBSA on the creation of 70 000 jobs but the country needed more jobs than that in the coming year. She appreciated the development of the township economy for youth, but what had been achieved? Were there any achievements?

She referred to the challenges in the municipality environment that Mr Dlamini had said were due to the lack of capacity and audit reports. Why did the bank not find a way to capacitate them, and could the Bank not go straight to the project, without going through the municipality, as it was the people that should benefit? The lack of capacity and audit reports would go on and on. She was looking for more.

The Chairperson acknowledged the opportunities and the challenges, but the matter of the municipalities was a serious one. National Treasury had made a presentation the previous week and the picture did not look good. A sizeable number of municipalities faced financial difficulties, to the extent that the courts had ordered National Treasury to run Lekwa Municipality. That was not sustainable, and it would be disastrous if the national government had to take over another sphere of government. Municipalities were not honouring payments to Eskom and the Waterboards. If they borrowed money from DBSA, did those municipalities service the loans or did they default?

He agreed that the issue of unemployment was very high, with youth unemployment at more than 74% and general unemployment standing at 34% to 35% in the country. Mr Dlamini had mentioned the DBSA Development Laboratories but he, the Chairperson, did not know much about it and whether it was related to the Innovation Hub. Did DBSA have projects driven by young people, funded by DBSA, and which were productive and successful? Success as a country could only be measured by projects run by youth and women. So, what examples could Mr Dlamini present?

Mr Swilling responded to the question about the DBSA’s perspective on the Just Transition as raised by Mr Shivambu. The notion of the Just Transition had four different meanings across the landscape. Briefly, the meanings were: 1. Decarbonisation; 2. Decarbonisation plus looking after workers affected by coal closure and mitigating damage to workers in the coal mines and power stations; 3. Accepting the second position (as described) but adding upstream development and industrialisation to create jobs and seeing it as the biggest driving force of job creation since 1994. That was sometimes referred to as green industrialisation or renewables-led industrialisation. That was a much broader concept of Just Transition and was probably what Mr Shivambu was referring to. That conception would depend on the pricing of renewals. If prices were pushed too low through competitive capitalists, the only way one could build renewables, was to use international companies that had access to climate funds, or to import everything from China. What DBSA wanted was for SA companies to open up manufacturing plants that would create jobs and businesses upstream, making them financially viable, but currently, prices were almost too low for SA companies as a result of competitive dynamics. The fourth position, as advocated by trade unions such as NUMSA, was one of a post-capitalist transformation based on the assumption if SA moved away from mineral extraction, which was the basis of highly exploitative capitalism, SA could fundamentally transform society. Those were the four positions.

The position of DBSA, explained Mr Swilling, was to support the third concept as it was interested in funding the renewables and the transmission grid and also to ensure that it was linked to upstream industrialisation and job creation. The number of jobs to be created in the construction and maintenance of five GW per annum, which was what SA would need, would be more jobs than in the coal mines and power stations. But, if one considered the huge potential for creating jobs upstream, there was the potential for the biggest job creation since 1994. The Just Transition was transformative and was not limited to the impact of addressing the problem of those who would lose jobs. That was a much too limited perception of the potential of the Just Transition.

Mr Dlamini said that SA had a huge chance to benefit if people worked hard and smart. As the board Chairman had said, the introduction of carbon tax globally would have a huge impact on SA’s exports globally. SA would be competing with countries like Brazil which had 95% renewable energy because of its hydropower and renewables that it could put in place while SA’s products came from 90% coal-fired energy. However, the Just Transition meant that SA could be very smart, especially in respect of industrialisation in the platinum group of metals. SA had 80% of the reserves of iridium, globally, and electrolysers used iridium in their production. The raw material was available in NW and in some parts of Limpopo.  SA could become the exporter of electrolysers for hydrogen production.

If SA could sort out the issue of capacity, it was looking at a lot of land available that did not need deforestation. The Northern Cape had the space and the high levels of irradiation to drive the production of renewable energy that could be used to produce hydrogen. There would have to be sufficient transmission capacity in the Northern Cape but that would be a massive export opportunity because many countries did not have those opportunities for production. SA would have competitive advantages in the production of electrolysers. Ammonium for ships could become the early off-takers of hydrogen. Ships would also use hydrogen to minimise the carbon tax on the goods that they carry. In addition, there was wind in the Eastern Cape and other coastal areas so there were opportunities to create sustainable jobs at local levels but SA had to come up with a strategy to utilise the opportunities for job creation, SMMEs, and black empowerment.

Mr Dlamini stated that Ms Abraham had touched on the two challenges that the country was facing. DBSA had to be very bold and very decisive but energy issues stood in the way because one could not deal with issues of unemployment and poverty until the matter of energy had been addressed. It was extremely, extremely important. Security of energy was the most important consideration and if SA did not deal with that issue, SA would be sabotaging itself. The country had to do whatever it could to deal with the issue. The International Partners Group had pledged $5 Billion and that would go a long way to moving to renewables.

He said the challenges were across all spheres of government and across all provinces and so DBSA was spread right across the country. He agreed that the cost of borrowing was high as DBSA was linked to the country’s sovereign rating and was downgraded when the country was downgraded. DBSA had been raising funds in dollars and swopping to ZAR to still be competitive, but the Bank wanted to work on reducing the costs of borrowing.

Mr Dlamini agreed with the Chairperson that funding municipalities were a challenge. The AG spoke of the qualified audits and disclaimers and 90% of the municipalities had capacity issues. Those were not the only criteria that the DBSA used but those factors talked to the accountability and capacity of the municipalities. The Bank was working with National Treasury to try and capacitate municipalities. Municipalities were highly dependent on government funding so it was something that DBSA could work with the government to find a model that would work for the country as that was where the people were based and where they needed assistance.

Regarding assistance to Eskom, Mr Dlamini explained that the Bank had invested over R22 billion in Eskom and it continued to work with Eskom, considering the role that the electricity supply entity plays in the economy. DBSA was trying to include the private sector in finding a long-term solution.

He informed Ms Mabiletsa that DBSA was talking to municipalities and offering planning and implementation support. It worked with provincial governments as well, usually deploying its own resources. The Bank tried to bring in the private sector, but it was not a challenge that it could walk away from as it was central to the development of the country. He said that the Planning and Infrastructure sector of DBSA helped municipalities unlock infrastructure projects at no cost to the municipalities as they were not in a position to pay for such things. Mr Mhlongo was responsible for that work.

Mr Chucheka Mhlongo, General Manager: Infrastructure Finance, DBSA, stated that the CEO had largely covered the issue but he could provide specific details. Municipal shortcomings ranged from an inability to plan – for which a lot of resources had been deployed, to the deteriorating state of finances. Additional programmes had been deployed to improve their financial situation, which included the growing revenue enhancement programme that was consistent with National Treasury’s footprint of municipalities that required such support. The DBSA had seen market increases in municipalities it was supporting, to the extent that some municipalities had been able to obtain small loans from the Bank.

He said that DBSA’s capacitation programme was not done alone but in partnership with a lot of private sector partners as well as the government. The Bank worked with Anglo, Sasol, the National Business Initiative, Rolf Meyer Foundation and other private sector organisations. He could provide a detailed list of support packages. There had been 101 projects in the past two years and there were 68 projects in the pipeline.

He added that an ad hoc approach was not sufficient, so the bank adopted municipalities for five years and was able to measure the impact on new and established infrastructure, collection of revenue, governance structures and the management of assets, etc. DBSA had recognised the poor skills in local government, especially in rural areas and was working with the Municipal Infrastructure Support Agent (MISA) to take financial skills to the municipalities.

Mr Dlamini agreed with Committee Chairperson that the Bank was worried about the state of municipalities. It was in line with unemployment and joblessness, which also meant that municipalities could not get payment from the citizenry for utilities that they had used. Some municipalities serviced their loans quite well, but the smaller municipalities battled to do so. The DBSA was attempting to address unemployment by accessing funding to spread across the country more aggressively and to absorb more youth in the programmes. In terms of projects funded by DBSA that were driven by the youth, more than 50% of the projects related to renewables. Infrastructure was driven by youth. Women-owned 53% of Young Daughters Hospital. The Bank had created a number of lines of funding for SMMEs that were working with DFIs. It was using the model of countries like Germany and Japan where SMMEs drove job creation.

The Chairperson said it had a challenge with DFIs, for which the Committee had responsibility, with regard to non-performing loans. That meant the DFIs wrote off debts. Did DBSA have experience in writing off debts? There was a serious challenge in that debts were just being written off because loans were not properly serviced, but money in the DBSA’s custody (as an example) belonged to the people of SA, so it could not just write off debts. What criteria did the bank use when it had to write off debt? Was the DBSA involved in research and development and were the results of that research published online or in journals?

Mr Dlamini replied that NPLs were a common occurrence that happened in any funding institution for varying reasons, but the DBSA had policies and prescripts for handling the book. It followed international reporting standards and looked at the performance of a loan throughout its lifetime, so it was forward-looking, but at the same time, DBSA looked at a number of factors, assigned the probabilities of default, and looked at what the bank stood to lose if it became a loss-giving default. DBSA followed international standard policy and global practice to make provisions that were different from writing off but was done so that the bank was not overstating its assets or interest income. The Bank was conservative in its reporting. The performance in the country for various sectors and industries was checked and the loans were monitored over time. If necessary, the Bank would adapt its provisioning. That was the way DBSA approached private sponsored deals and government-sponsored deals in SA and across Africa. It looked at the probability of the organisation repaying and adjusted its provisioning accordingly.

Mr Michael Hillary, Group Executive: Financing Operations, DBSA, stated that there were two distinct processes. One was the accounting process and that was to value the loan accurately and to reflect it appropriately in terms of the fair value of the loan and what could be expected in recovery – that was at the accounting level. That was about the fair provision of the reports and separate from the engagement with the customer.

He explained that as a DFI, it was in the business of lending and that had risks so the Bank looked at the portfolio of investments and loans on the book. Over a long period of time, DBSA had produced very good results which incorporated the accounting provisions on the book. The retained earnings of the institution in the 2020/21 financial year were R24 billion so, over the period of time, the bank had built collective reserves of R28 billion. DBSA also looked very carefully at the monies lent to it. In 2020/21, the bank had re-raised close to R24 billion from the market. It was very critical that in making the advances and in collecting, it did a good job because it was dependent on the markets for significant amounts of monies.

He added that, in terms of write-offs, DBSA was very, very conservative in making a provision on the book and then it sat with the customers and what the DBSA had seen was that, over time, the bank was able to claw back the provisions and to collect monies from the customers. One of the tools used was to sit down with the various parts of government, e.g. foreign affairs if it was a cross-border transaction, etc. Most of the time, giving customers extra time usually helped to get monies back. In some cases, the DBSA did have to physically write off a loan because every opportunity to claw back had been explored. The question was whether DBSA had plans to get money back and it did; from the legal route to calling in security, it had a range of plans. What the Bank did find when it wrote off a loan, the shareholders themselves had lost a lot of money in the process. At some point, it was no longer economic to pursue a loan. Usually, those businesses were smaller or the entity had been closed down through a court of law, etc.

Mr Dlamini said that DBSA also took into account the collateral management and Mr Hillary worked with the teams. Funded deals in Angola and Senegal were backstopped by their oil revenue but when the prices came down, Angola was usually very good in meeting payments, but some of the other countries would approach the Bank to see how deals could be restructured to accommodate their difficulties but as soon as there was a recovery, the debt had to be repaid up to date. There were staging criteria as well and so the number of repayments already made was taken into account. DBSA had very rigorous, very strong processes in place. The bank was sitting at just under 5% of non-performing loans, which had been at 9%, so the organisation was quite happy. The board had various committees that looked at and approved such issues. Control had been tightened over the years.

In terms of R&D, Mr Dlamini informed the Chairperson that DBSA did produce some journals that he could make available to the Committee, details of journals etc.

Prof Swilling added that R&D (research and development) was extremely important as it talked about how DBSA contributed to learning and innovation in the economy. DBSA had appointed a Chief Economist who was responsible for a robust research programme and he had presented significant research papers to the board, e.g. government involvement in renewables, the state of the water sector, the funding of backlogs and so forth. DBSA was looking at setting up a journal on infrastructure and what it means in broader terms. He was a Commissioner on the National Planning Commission and there was an agreement to collaborate on the Infrastructure Plan 2050, which was approved by Cabinet some weeks ago, so they were making progress in that space. He added that in his day job as a professor, that matter was close to his heart.

In closing, Prof Swilling stated that, internationally, DBSA was well-regarded, and it was a member of the International Development Finance Club. Since 2007, there had been an expansion of DFIs across the world because they had a long-termist perspective, as opposed to commercial banks and could take high risk when necessary, i.e. when things were not going so well. That combination of factors had positioned the DBSA well because institutionally, it had survived the state capture years, had a clean audit and had an expanding loan book at just over R100 billion. It was well-positioned to make a significant contribution in SA and in Africa, especially as the AfCFTA came into play.

The Chairperson thanked the DBSA. He asked for a write-up on the women- and youth-driven projects that DBSA was involved in and whether they were creating jobs. How much was invested in those projects? He was quite worried because those two sectors had been hardest hit by the socio-economic conditions in the country.

The municipalities were a headache to the Chairperson and the Committee which had recently had a meeting with National Treasury. The Committee had discovered that the Minister was serving as mayor in some municipalities and that was not proper. It sent a wrong message to the country that municipalities had failed and could not be resuscitated. He asked DBSA to write down how it was involved with municipalities and the impact that it was making in the municipalities. He thought it should be COGTA that ran the municipalities and he was disturbed that the courts were telling the Minister of Finance to run municipalities. National Treasury should not be managing local government. The DBSA could present case studies that the Committee could show to other municipalities that were facing challenges. He noted that the DBSA was also involved in the DDM (District Development Model), which was a new initiative.

Closing Remarks
The Chairperson acknowledged that DBSA was one of the few institutions that were performing well and did not need to ask for money. He was pleased with the DBSA and the Public Investment Corporation and acknowledged their good work, not only at the executive level, but even those at the lowest rank.

The Chairperson acknowledged the presence of officials from National Treasury that had oversight over DBSA.
                                                       
The meeting was adjourned.