Development Bank of Southern Africa and Financial Services Board 2004/05 Annual Reports: briefings

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Finance Standing Committee

27 March 2006
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FINANCE PORTFOLIO COMMITTEE
28 March 2006
DEVELOPMENT BANK OF SOUTHERN AFRICA AND FINANCIAL SERVICES BOARD 2004/05 ANNUAL REPORTS: BRIEFINGS

Chairperson:
Mr N Nene (ANC)

Documents handed out:
Presentation by the Development Bank of Southern Africa
Presentation by the Financial Services Board

SUMMARY
The Development Bank of Southern Africa and the Financial Services Board presented the Committee with their 2004/05 Annual Reports. The Development Bank said that in the 2004/05 financial year, the bank drew up ‘Vision 2014’ to align itself with the Government’s development programme and to be a strategic partner. As a bank, the DBSA’s financial position was important, but only as a means to an end. There were investment project approvals to the value of R3.94 billion which was an increase of 17% over 2003/04. The DBSA was committed to broadening its outreach, including increasing investment project approvals from 58 in 2003/04 to 86 in 2005.

The Financial Services Board said that the Financial Advisory and Intermediary Services Act that was introduced in 2004 compelled it to introduce a risk-based approach to resourcing and research. In the area of human resources, the number of employees had risen from 148 in 2000 to 251 on 31 March 2005, with 51% being women, and 60% persons from previously disadvantaged backgrounds. The Board had also initiated a consumer education programme and there was an increase in the number of industries it supported. The Board was in the process of reforming pension fund legislation and had to deal with issues arising from the Pension Adjudicator rulings.

Members asked questions about non-performing loans and poor target setting by the Development Bank and the consumer education programmes and large salary bill of the Board.

MINUTES
Presentation by the Development Bank of Southern Africa (DBSA)
Mr M Gantsho, the Chief Executive Officer and Managing Director, said that in the 2004/05 financial year, the bank drew up ‘Vision 2014’ to align itself with the Government’s development programme and to be a strategic partner. It also wanted to play a major role in the empowerment and integration of the region to remove poverty, inequity and dependency. This was to be done by combining knowledge, partnerships, and finance to create new, innovative solutions.

As a bank, the DBSA’s financial position was important, but only as a means to an end. There were investment project approvals to the value of R3.94 billion which was an increase of 17% over 2003/04. This represented an increase of 8% over a five-year period. The disbursements to investment projects amounted to R3 billion which was 7% more than last year, or a 9.9% increase over a five-year period. About 36 000 jobs were created, which was an increase of 45% from last year; there was a R6.9 billion contribution to the Gross Domestic Product (GDP), which was an increase of R2.6 billion from last year; 1.9 million households benefited from their interventions, which was an increase of 300% from last year, and there was a 60% increase in the focus on the provision of basic services.

The DBSA was committed to broadening its outreach, including increasing investment project approvals from 58 in 2003/04 to 86 in 2005. This strategy led to a lower average in the value of project approvals from R57.7 million in 2003/04 to R45.9 million in 2004/05. They believed that smaller amounts benefited smaller, rural communities directly. The DBSA’s support of various sectors could be broken down as follows: 22.6% of their funds went to water; 18% to social infrastructure; 10.5% to sanitation and 9% went to energy. Some of the places where the DBSA had a direct impact were in the Franschhoek Municipality and the Aquarius Platinum Mine in Mpumalanga.

The DBSA was a regional institution so it was necessary to show its activities outside of South Africa. New projects to the value of R514 million were approved in the Southern African Development Community (SADC) region, bringing the total of DBSA projects outside of the country to R8.8 billion. The bank’s private sector and international business division worked well also. The total project approval amount was R1 billion, with disbursements of R1.6 billion. This was 60% above their target and R785 million above the R900 million achieved in 2003/04. For example, Zesco in Zambia had received R625 million between 1998 and 2005 to rehabilitate its electricity generation and transmission systems.

The DBSA’s Development Fund was established in 2001 to support sustainable capacity building at municipal level. Approvals of capacity-building grants increased by 11% to R170 million compared to R153 million in 2003/04, which was 86% above DBSA’s target. Total grant disbursements amounted to R73.5 million which was 79% better than the previous year. An example here was the KwaZulu-Natal Capacity Building Programme which incorporated land use management systems with a local government training programme.

The bank’s financial rating remained sound and its investment grade international rating was further upgraded by Moody’s to Baa1. The total assets held by the bank increased by 4.6% to R24 billion. Its debt to equity ratio remained in the 250% policy limit at 102.8%. The total impairment as a percentage of development loans was 8.2% compared to 6.6% last year. This was in line with the aims of increasing the bank’s development outreach, which required a slightly higher level of risk. There had been a major review of the DBSA pricing model which led to the ‘return relationship’ being inverted.

‘Smart Partnerships’ remained a key to unlocking development potential and removing constraints. Such partnerships were created in supporting Project Consolidate, which was a Government-sponsored initiative to improve capacity and delivery in municipalities. The bank provided ongoing support for the project at the National Advisory Working Group and the Project Management Group levels. The bank had also assisted the Department of Sport and Recreation in quantifying and identifying key infrastructural requirements in preparation for the 2010 Soccer World Cup.

Discussion
Mr K Moloto (ANC) asked what was happening with the non-performing loans of municipalities. The non-performing loans to Swaziland amounted to R7 million in 2004 but had jumped to R154 million. Why? How did they manage the risk for their long-term loans, some of which were for 24 years, and how did they determine whether they were going to use fixed rate or variable interest rate loans?

Mr Gantsho replied that the jump in the loan to Swaziland was due to a large loan of about R120 million to Swaziland Post and Tele-communications. Work was being done to move this loan out of the ‘non-performing’ category soon. The determination of risk and of whether the loans were fixed or variable were done mainly by ‘assets and liability matching.’ There was also an aspect of hedging involved in this.

Mr B Mnguni (ANC) asked, since the DBSA had exceeded their targets in many areas, did this reveal that they were poor at planning? How did the DBSA finance poor municipalities and at what rate did they give them loans? In working with the Department of Provincial and Local Government (DPLG) on Project Consolidate, was there any duplication of resources or activities?

Mr Gantsho replied that this report was almost 12 months old and a lot of work had been done on Project Consolidate since it was first drawn up. DBSA’s focus was on providing services that the DPLG could not in implementing the projects. This niche was in the financial, legal and project management expertise areas. There was no duplication of work. Exceeding targets by large amounts was evidence that the targets were set incorrectly in the first instance, and this an area that had to be looked at further. The DBSA offered their clients the option of fixed rate or variable rate loans. In practice, the more sophisticated ones chose variable rate loans in South Africa’s declining interest rate environment where they managed the risk themselves. The DBSA advised poor municipalities to choose this ‘floating’ rate, but ultimately the decision was theirs. The trend generally was towards municipalities taking fixed rate loans due to concerns about the risks associated with this.

Presentation by the Financial Services Board (FSB)
Mr R Barrow, the FSB Executive Officer, said that the 2005 Annual Report was now to a large extent history but it was important to outline some of the highlights and challenges. The Financial Advisory and Intermediary Services Act (FAISA) legislation was introduced on 1 September 2004 which compelled the FSB to introduce a risk-based approach to resourcing and research. There was also continued involvement with regulatory bodies such as the Competition Commission, the Reserve Bank and the Registrar of Medical Schemes.

In the area of human resources, the number of employees had risen from 148 in 2000 to 251 on 31 March 2005, with 51% being women, and 60% persons from previously disadvantaged backgrounds. The number of staff would rise to 350 in the current year. Considerable management effort was being dedicated to creating a performance driven, professional workforce.

The FSB had also initiated a consumer education programme and there was an increase in the number of industries it supported. This was supported by the outstanding performance of the Johannesburg Stock Exchange (JSE) last year and the efforts of the FSB to reduce insider trading. This trend was due to continue in 2006 as the JSE was again showing positive results.

One of the challenges the FSB faced was the full implementation of risk-based supervision, especially the FAISA legislation. This was a major task as the FSB had to supervise over 12 500 entities. The FSB was in the process of reforming pension fund legislation and had to deal with issues arising from the Pension Adjudicator rulings. The FSB also had to supervise the implementation of the Financial Intelligence Centre Act. There also had to be the continued promotion of the consumer education programme and interaction with the Financial Sector Charter codes.

Ms N Molope, the Chief Financial Officer, then gave the Committee an overview of the Annual Financial Statements. The FSB’s main sources of income were from levies and fees. They received about R6 million from fines and other cost recoveries. Their operational expenditure was about R129 million, with about R90 million of that going to salaries and other employee-related expenditure. The FSB’s net surplus for the year was R13, 7 million which contributed to its healthy balance sheet. There was also an increase in the net cash and cash equivalents inflow to the value of R6 million.


Mr D Tshidi, the Deputy Executive Officer of Retirement Funds outlined some of the legislative issues that faced the FSB. In reviewing the law that related to pension funds, the main objective was to ensure consistency and to resolve problems created by the piece-meal amendments that were effected over a long time. The review was also aimed at consolidating and integrating the various retirement funds arrangements into one piece of legislation to replace the current one that was 45 years old.

However, even before the proposed new legislation was brought before the Committee, there were some urgent amendments that had to be made as soon as possible. For example, the Minister of Finance had to be given the power to appoint a Deputy Adjudicator. Other issues that the new legislation would deal with were the problems the FSB faced in tracing some of the beneficiaries of pension funds. Also, in the past there had been too much focus on the role of trustees of pension funds, and not enough on general governance issues. A solution may be to strengthen the powers of the Regulators.

Discussion
Mr Moloto asked what issues they had raised with the Reserve Bank.

Mr Barrows replied that the meetings involved an exchange of information and the concept of ‘Consolidated Supervision’ where there were large institutions that dealt with a number of related aspects to do with finance and pensions and accounting and so on. The supervisory role here would be to ensure that there was no double-counting of assets and to identify scams that involved more than one industry.

Dr Van Dyk (DA) asked what the consumer education programme entailed, what its results were and how they were measured. Why did they spend so much on salaries and remuneration? Were they over-staffed or was their wage bill simply too high?

Mr Barrows replied that the FSB had brought in consultants to set up benchmarks to assess the level of penetration of their education drive to measure its success. As a regulator, the FSB’s role was not to conduct the education, but to co-ordinate the efforts of the industries under their supervision. The FSB was neither over-staffed nor over-paid. It was operating in the financial services sector where high salaries were the norm and all the salaries were market-related.

The meeting was adjourned.

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