Development Bank of Southern Africa: briefing

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Finance Standing Committee

16 November 1999
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FINANCE SELECT COMMITTEE
17 November 1999
DEVELOPMENT BANK OF SOUTHERN AFRICA: BRIEFING


Documents Handed Out:
Presentation on Development Bank of Southern Africa Joint Committee on Preferential Procurement Policy Framework Bill: Draft Programme
[Note: these documents are appended to these minutes]

SUMMARY
A delegation from the Development Bank of Southern Africa briefed members about the bank, its history and its projects related to building infrastructure in South Africa and SADC countries. Questions were fielded about the bank's extraordinary growth, affirmative action, lack of rural development, interactions outside South Africa, municipality demarcation and the ability of local authorities to raise money.

The Draft Programme for the Joint Committee on Preferential Procurement Policy Framework Bill was perused. The chair asked members to consult with their province regarding provincial public hearings and to inform her which provinces would be holding hearings.

MINUTES
Dr Ian Goldin, Chief Executive and Managing Director of the Development Bank of Southern Africa (DBSA), said that the DBSA had had good interaction with the Portfolio Committee on Finance for the past three years and looked forward to building a relationship with the Select Committee as well.

He explained that the bank was established in 1983 by the National Party to address the developmental needs of the homelands. In 1994, the new administration had to decide whether to ''kill the beast or transform it.'' It decided to transform the bank because it had a large skills base in development expertise, project appraisal and financial management and the bank had a deep financial base. It then underwent three major changes.

First, in 1995, under the leadership of then Minister of Finance, Alec Erwin, the DBSA moved its focus solely to infrastructure finance and removed itself from agrarian, housing and small business finance. Secondly, since 1994 it has received no governmental subsidies or transfers and has become self-sustainable. Finally, it has opened business to the SADC region. He added that as the SADC region has grown, so has the area of SADC's operations.

As the structure changed, so did the bank's personnel. The company went from sixty-five managers in 1994 to twenty-five in 1999. It has also added risk management to its costs. Previously, the government backed all its loans so the company had zero risk management but since the government no longer funds the DBSA, customers are now charged for this cost. All the costs of the company are borne by those who pay for its services, for example, people paying for water through the DBSA are helping to pay the salaries of its employees. He explained that the bank works a wholesaler and does not conduct projects by itself but must have a local backer for the project. He added that it maintains close interaction with the Finance Ministry and Department, provincial MECs and local authorities. Local authorities are its biggest client, comprising 40% of loans granted since 1994. Examples of infrastructure funding of the DBSA are sewer, roads, telecommunications, community facilities and bus shelters.

Last year the company had no write-offs and Dr Goldin emphasized that the bank is being re-paid by its borrowers. It also works closely with parastals such as Eskom. Outside of South Africa it also works with parastals such as the Namibia Development Corporation and the Malawi Development Corporation. DBSA has also been working with private loans for two years, dealing with infrastructure as an engine for job growth. It will not subsidise over 20% of a private project, however. The best examples of private projects include the toll roads in South Africa and a certain airport outside the country.

He explained the importance of the bank keeping its AAA Premier Rating because it helps the DBSA build its reserves. It is also important on the international market when the bank issues bonds. Pointing to an Asset growth chart, he told the committee that the bank has doubled in size since 1996. When going over the breakdown of commitments (see Appendix 1) he noted that large projects, such as the R 1.4 billion loan to Johannesburg can distort the figures.

The bank provides loans in areas where people are willing to begin a project and are able to repay the loans. However Dr Goldin explained this does not reflect the needs of the people hence their low loan rate in the Northern Province. Sixteen percent of DBSA loans are to SADC members and another 4% are to other African countries. The restrictions on these external loans are that no more than 1/3 of total loans can be given to other countries.

He then told members that there is a big debate on the issue over how much money should be given to SADC countries or the whole of Africa. He assured members that there was enough credit for everyone and that no outside loan has caused a problem with loans within the country but that if it ever did, the process would have to be re-evaluated. The projects in SADC countries do benefit South Africa, Dr Goldin explained, such as the Lesotho Highlands project. When South Africa negotiates a loan outside of the country, it uses the same principle as with domestic agreements. Consultation occurs with local and provincial authorities as well as the Finance, Foreign Affairs and the Trade and Industry Departments.

Dr Goldin then gave a sector breakdown of loans: 1/3 dealt with water, 1/3 with energy and 20% with transport. It is currently engaged working out a five year plan and is seeking feedback for the DBSA's future direction.

He admitted that the bank has neglected rural development and wanted to know how to serve those areas better citing that it was difficult because there was not as much effective coordination as in more urban areas. He continued by saying that instead of issuing dividends, the bank was developing a plan to use the money for a capacity building fund aimed at giving grants and concessional funding. He concluded by inviting members to visit the banks' website at
http://www.DBSA.org

Discussion
Question: Does the bank have contact with rural development in the rest of Africa or SADC countries only and what areas are being developed?
Response: The bank has no relationships with ECO and is restricted to SADC.

In response to a query about currency, the bank replied that Rands are being used as a currency for many of its transactions, which is easier since its clients pay in Rands. However, some of its projects must be paid for in hard currency. It must invest in SADC in dollars. On the world market, working with the ADB (African Development Bank) is good because it has a better credit rating than the DBSA.

Question: How does the bank deal with areas where the local government is non-structured?
Response: The bank identifies projects in some provinces which it wants to focus on and will locate and work with the government in developing these projects, forming a partnership to develop these services. There is a mandate from the government to focus in rural areas but there are isolated pockets of success. In order to be more effective, efforts need to be coordinated between departments.

Question: How will the bank support energy provision in poorer provinces such as the Northern Province?
Response: In principle, the bank supports the Northern Province getting energy, and wants to support and encourage clients who come with an application to the bank.

The Chairperson Ms Q Mahlanga (Mpumalanga, ANC) asked if the bank thought that provincial power for raising money was declining and what was the future prospects of local authorities raising revenue?
Response: It is not sceptical about the power of local authorities to raise revenue. The bank has had good experience with the local authorities.

Question: In anticipation of the EU agreement, what role will the bank be playing that would enhance energy provision? Can the DBSA comment on nuclear power stations?
Response: There is an oversupply of energy currently so why would there need to be nuclear energy? It must be evaluated if individuals will benefit from nuclear power.

Question: Could the bank explain the massive growth it has experienced without the need of government subsidies?
Response: Because of restructuring within the bank, it has experienced rapid growth since 1994. However, the growth is starting to slow down and the bank does not expect it to continue doubling.

Question: Could the bank comment on the mining struggle in the North West Province?
Response: The bank had a meeting this Monday to explore the possibilities of providing energy and transport to small-scale mining.

In answer to a query about its involvement in the DRC, the DBSA has gone to the Congo to talk to the government twice, part of a government mission of rehabilitation team. It was sent to see what goals could be set for the region. However, after identifying possible projects, nothing came of it because war escalated again.

Question: From the Northern Province we can see power lines extending from Pretoria to Mozambique but yet we still do not have power. Why does the bank seem so happy to secure projects in other countries? To what extent is the bank focusing on minerals and energy in South Africa? What will the bank do for power generation, transmission and distribution of energy?
Response: The bank engages in debate openly. All the activities it takes part in are working for a new South Africa. The bank does not own its projects, but is responsible to the local authorities. It measures it success many different ways, such as, the number of households connected and the amount of money given out. The bank has grown enormously in recent years but if people are not feeling the effects of this transformation then the reasons for this need to be established. The bank added that its activities outside South Africa have not led to a shortage of money for projects within the country. The bank has actually convinced Eskom not to electrify communities who do not have water yet. This is because issues such as water are more urgent and until people have water, electricity is less important.

Question: What is the composition of personnel at the DBSA? What is the next five-year commitment on job creation?
Response: The number of bank staffers has dropped since 1994. It is in the process of implementing employment equity programs by means of early retirement and large internship programs. The last twelve vacancies were filled by means of affirmative action, but only twenty jobs a year are opened. The company does not strive to create jobs within the bank but from its projects. It creates jobs in the short term through labour intensive work. It also seeks to hire small businesses for construction work as well as women in construction. Jobs are also created from spin-off operations. The long-term jobs created come from maintenance of the projects and the spin-off jobs created (such as jobs created from building a harbor). The bank estimates that it created 38,000 jobs last year from its projects.

The chair ended the meeting by recommending to the DBSA that it submit a user-friendly document for MPs to distribute to the provinces about the DBSA.

Appendix 1:
DEVELOPMENT BANK OF SOUTHERN AFRICA

NCOP SELECT COMMITTEE ON FINANCE
17 November 1999

DBSA Transformation
· 1994 constitutional, fiscal and economic transformation of South Africa
· Globalisation - joining the international development finance fraternity
· 1995 Transformation Report under the leadership of Minister Erwin
· Development Finance System
· DBSA to be self-sustainable
· Change in structure / staffing / management

DBSA ACT
· 1997 Promulgation of the Development Bank of Southern Africa Act
· The regulations provide that
- the region is defined to include the SADC countries
- mandate is defined to be infrastructure broadly defined as opposed to the role of the other NDFIs and
- the DBSA is focuses on wholesale funding

DBSA 1999
Vision: to be a key change agent for socio-economic development in southern Africa

Mission: to maximise our contribution to development by mobilising and providing finance and expertise for infrastructure development in order to improve the quality of life of the people of southern Africa

Mandate:
- investment in infrastructure and facilitation of the provision of infrastructure development finance - broadly defined
- finance sustainable development in partnership with the public and private sectors
- respond to development demand and act as a catalyst for investment

Operational principles
- Alignment of activities to national policies, regional programmes and local priorities
- Sensitivity to the needs of the poor and responsiveness to the demands of clients
- Implementation of a best-practice policy
- Collaboration & partnerships with public/private sector institutions, NGOs & CBOs
- Maximise development impact
- Seek to add value in all activities (additionality)
- Economic, efficient and effective delivery (sound banking principle)

DBSA structure
· Minister of Finance: Shareholder representative
· Board of Directors: 3 D-Gs, commercial bankers, private sector representatives, human resource specialists
· Chief Executive
· Three Executive Managers responsible for operations, finance and corporate services
· 6 operational units (regional and PSI)
· corporate relations, treasury, finance, risk, evaluation, human resources, IT, general and secretarial services

DBSA financial results 1999
HIGHLIGHTS


Mar 99 Mar 98


Total Assets R15.6 bn R12.0 bn

Return on Assets 3,7% 1,8%

Surplus for the year R509m R177m

Premier Rating AAA AAA


COMMITMENTS 1999

Mpumalanga - 9%
Kwazulu Natal - 14%
Eastern Cape - 13%
Free State - 5%
Northern Cape - 1%
Western Cape - 7%
Africa - 4%
SADC and multiregional - 16%
National 2%
North West - 9%
Gauteng - 14%
Northern Province 6%

VISION 2004

·
Fundamental macro-economic and political changes in the external national and
international environments
· 5 year passage since transformation of South Africa
· Annual business planning cycle with a regular review of going concern issues

Process
·
Interaction with shareholder representative and other stakeholders
· Interactive workshop of management based on the change design strategic
planning process
· Board ratification
· Consultation with staff and staff representative groups
· Developing annual business plan, three year milestones and vision 2004

DBSA strengths
· scarce development skills
· finance skills
· existing alliances and relationships in the region and globally
· commitment to development

Future markets
· private sector
· public sector

New products and services
· rural development
· tourism market
· private sector
· capital markets
· knowledge management
New geographical spread

The competitive advantage of the DBSA and its staff is that it:
· understands its client's business
· cares about development
· has the means to make it happen
· delivers a flexible, professional and prompt service

DBSA 2004
a one stop shop in development delivery excellence that offers comprehensive and tailor made delivery packages

Appendix 2:
Joint Committee on Preferential Procurement Policy
Framework Bill

Draft Programme
· 11 November 1999
- Establishment of Joint Committee to Joint Rule 1"1 (No 22, Minutes of NA, pg. 388)

· 17 November 1999
- Cabinet approval

· 18/19 November 1999
- Publishing of Bill in Government Gazette

· 23 November 1999
- Briefing of Joint Committee
(Provincial Chairpersons to be invited to attend this briefing)

· 28 - 3 December 1999
- Briefing of Standing Committees in Provinces
(Provincial Legislatures need to agree that Standing Committees will sit and obtain
Negotiating Mandates
)

· 6 December 1999
- Public hearing in Cape Town on PPPB
(Provincial Chairpersons and provincial role-players to be invited to attend this hearing)

· 8 - 9 December1999
- Public hearings in Provinces (subject to agreement.) (Standing Committees to obtain provincial mandates if hearings are not held)

· 13-14 December 1999
- Joint Committee deliberations if hearings are held on 8 - 9 December 1999

December Vacation Period

· 13-l4January 2000
- Joint Committee deliberates

· 17-l9January 2000
- Final Mandates - Provinces (Need Agreement of Provincial Legislature to sit from 17/1/2000)

· 20-21 January 2000
- Formal consideration by the Joint Committee on Preferential Procurement Policy Bill

· 2 February 2000
- NA Plenary

· 3 February 2000
- NCOP Plenary

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