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PORTFOLIO AND SELECT COMMITTEES ON FINANCE
15 August 2000
DEVELOPMENT BANK OF SOUTHERN AFRICA: ANNUAL REPORT
Documents handed out
Annual report of Development Bank of Southern Africa
DBSA presented a positive annual report. They emphasised that the Bank is only intended to act as a catalyst and it does not want to crowd out other players. One of their biggest clients has been local authorities. The problem exists that the local governments which need them the most, cannot afford their services. They will not be making loans to local government authorities for new projects until approximately the middle of next year. This is because local authorities will not be in a position to absorb funding due to the forthcoming municipal elections and changes in local councils. The South African Development Community is their second major client group. A new product that they are currently conducting a feasibility study on is a SADC political risk insurance.
Dr Goldin, the CEO of DBSA, said that the Development Bank of Southern Africa
is intended to be ‘’an addition’’ and ‘’a catalyst. It is not there to replace anyone’’. They do not want to replace the role of the public and private sector. The public sector, at national and provincial level, and the private sector must co-finance these projects. The question they must ask is whether the DBSA is crowding the other players out or in. The DBSA believes that they are not crowding the others out but encouraging inclusion. Their vision for the future is to see long-term incremental growth in the Bank’s activities.
They have impacted on access to services. The biggest impact has been on water and electricity at local government level. An extra 252 000 and 502 000 households respectively now have access to these services.
Forty percent of the loans they provide has gone to local government. They have provided loans to national governments outside of South Africa. The first loan they provided to the South African National Government was 100 million rand for flood relief.
They are the largest client of the African Development Bank. They have a better relationship with this bank than with the World Bank. This is regarded as a good sign because they are both African institutions.
Mr Jay Naidoo is to become the next chairperson of the Board on 24 August. The present chairperson will still remain a member of the Board. The Board’s term has been extended by one year by the Finance Minister.
They want to establish a prudent level of returns on government assets. The Bank has received no money from government since 1995 as they provide voluntary services to government.
The apparent decline in non-performing loans from 1999 to 2000 reflects a change which took place in the accounting standard and not an actual deterioration in non-performing loans. They also provide loans which are government guaranteed. Some of these loans have been in arrears for a long time. Instead of calling them in they are trying to turn the particular institution around. This is a new policy.
There have been no material write-offs and a conservative provisioning of 7.3%.
The importance of the difference between writing off a debt and provisioning was highlighted. If a debt is written off it means that it will never get paid back, it is unrecoverable. Provisioning involves arrears. The money will get paid back. It is either a government guaranteed loan or the institution will be turned around.
A strategic question for the bank is whether they are taking enough risk.
Local authorities are not in a position to absorb much funding until approximately the middle of next year. Therefore DBSA will not be lending to them for new projects.
Their principle support to local authorities has been through intermediaries. This is crucial for the future. A problem is that there is no intermediary to deal with rural projects. The demarcation process will be positive. They want to engage in the restructuring of local authorities. They have a rule that they will not expose more than 10% of their equity to one client.
SADC is their second major client group. Mozambique has a credit limit of 900 million rand. This credit limit includes public and private projects. 560 million has already been distributed and they have approved projects close to 900 million rand.
The Bank’s strengths are its developmental finance skills. The financial base of the bank is not inconsequential. They believe that they must continue to operate with the same set of products but they must be more innovative.
Their agency functions are very important. Technical assistance is also vital and they need it to grow. They want to create a window focusing on technical assistance in a bigger way than now. At the moment there are feasibility studies underway to create new products. There is a problem that often those who need them cannot afford them. They want to create a development fund in order to reach the poor areas that they cannot reach now due to unaffordability. They also want to create SADC political risk insurance.
They believe that all institutions should pay dividends to the government. However they believe that their dividend payment should be delayed. They want the Bank to be a more effective catalyst. A crucial question is that ‘’If the Bank slows down its lending then what can it do to increase the lending of others?’’
They want to provide technical assistance to local authorities. There is an extent to which they can support local government without crowding out others. By lending to local government they have to take security from them. They fear that if they take too much security then other institutions cannot lend to local authorities because they will not have enough security left.
The Bank is going to engage in an active marketing strategy such as advertising in newspapers. They have never marketed the DBSA before.
They proposed three amendments to the DBSA Act which would not affect the fundamentals of the Bank:
1) The limit of 15 Board members should be extended to 20.
2) To maintain the close proximity of government to the Board, provision should be made for senior persons to act as alternate directors if the directors cannot attend board meetings. Presently the three Board directors (Maria Ramos is one of them) cannot always attend Board meetings because of time constraints.
3) The ambiguity over the delegation powers of the CEO should be clarified.
Dr Rabie (NNP) referred to their comment that the new accounting standard they had adopted, created the appearance that there was a decrease in surplus. He asked for further explanation of this.
The response was that that there had been a change in accounting policy. The effect of this change in accounting standard changed the valuation of loans in foreign currency. Previously a fixed rate ruling at the end of the financial year was used. This was a system of ‘’locking’’. The change in the accounting system negated the effect of the previous ‘’locking’’. Thus it seemed as if the profits of the previous year improved and the current year’s profit went down.
Professor Turok (ANC) commented that there was a lack of project management capacity in the country and asked if DBSA could ‘’meet the need’’. He referred to the "prohibition" on loans to local authorities during the transition period of the next year and asked for an explanation.
Dr Goldin replied that project management failure must be dealt with on an operational and intellectual level. They must understand why the projects failed and then learn from this. In respect of project management skills DBSA can contribute. (For example, they can help COSATU to manage their Employment Fund. In this way they can contribute. On the other hand the DBSA does not want to spread themselves too thin and they do not want to step on the toes of others by getting involved in an area which is the responsibility of another institution). Presently, managing through agency programmes was a big way of contributing. They can also bring people in for training.
Regarding the prohibition on loans, Dr Goldin said that Infrastructure Finance Corporation Limited (INCA) is also affected by the fact that local authorities cannot borrow for capital purposes during the transitional period.
The transitional period (the change in local government) will have an effect on local government. There will be a slowdown in capital investments by these governments for approximately the next eighteen months. There will be a period to prepare for the elections and a period for the new councils to settle down. Small local authorities are in a difficult financial phase now. Some local authorities have no economic base to support new projects. In the future the Bank want to assist them.
Dr Davies (ANC) asked the panel to expand on the political risk insurance for the SADC countries.
Dr Goldin said that this is a new idea and that they are still looking at the principles. They have to create a credit enhancement. The idea is to reduce South African liability within the region. Are the richer countries prepared to underwrite the political risk of South African undertakings in these countries. Who will manage this? It will either be an existing expert such as an American insurance group or the DBSA. Nothing has been finalised yet. They are in the feasibility stage. It could deal with exposure issues in SADC.
Ms Taljaard (DP) asked Dr Goldin to comment on DBSA’s institutional linkages with MIIU, Black Economic Empowerment and ESKOM. She also asked how much have they targeted metering in respect of household electricity and if they have made an impact assessment in respect of taxation on foreign dividends.
Dr Goldin replied:
On MIIU: DBSA has a sector focusing on investment in MIIU. There is close collaboration between the two. They do joint work. However DBSA cannot write regulations and then invest in the opportunities created by those regulations. Therefore MIIU is separate to DBSA. They have different boards and the head of MIIU does not report to the CEO of DBSA. They cannot push their business onto local authorities.
BNEF: they are working on a policy paper. They are in close contact with the Department of Trade and Industry. The process is at early development now.
ESKOM: the restructuring of ESKOM will not impact on the creditworthiness of ESKOM. They have a legal contract with ESKOM which makes it clear that it must still fulfill its obligations. ESKOM is one of the most creditworthy of all DBSA’s clients.
Metering – they try to promote this as far as possible. Many SADC countries are also opting for this.
Tax incentives – he gave no comment. He did say that it was his personal opinion that tax incentives were not the way to encourage investment in infrastructure.
Mr Feinstein (ANC) asked for a comment on the Nelspruit Water Project and DBSA’s relationship with the World Bank. He referred to their annual report which said that there had been no significant loss due to fraud or theft and asked how much had in fact been lost.
Dr Goldin replied that Nelspruit had been a ‘’long slow process’’. It has been difficult but all had learned from the experience. The roleplayers must come out satisfied. These roleplayers are:
Government – has to come out satisfied
Consumer – has to feel protected
Private sector – must get a proper risk reward
These three elements must be balanced in order for the project to be sustainable.
World Bank – they have had policy advice and assistance from them. However DBSA found that when it comes to their core business which is banking the World Bank is uncompetitive for the DBSA because DBSA can raise money cheaper elsewhere.
Fraud - They have not had corporate governance problems in this way but they are not saying that it can never happen. They do however have auditors to trace fraud. There has been litigation with clients (in respect of the Lesotho Water Highlands Project) but the DBSA has not been implicated.
The Chairperson congratulated the panel on the work they have done and the meeting was adjourned.
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