Development Bank of Southern Africa 2005/06 Annual Report: briefing

NCOP Finance

23 October 2006
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FINANCE PORTFOLIO COMMITTEE

SELECT FINANCE COMMITTEE
28 October 2006
DEVELOPMENT BANK OF SOUTHERN AFRICA 2005/06 ANNUAL REPORT: BRIEFING

Chairperson: Mr T Ralane (ANC) (Free State)

Document handed out:
Development Bank of Southern Africa (DBSA) 2005/06 Annual Report

SUMMARY
The Development Bank of Southern Africa presented their 2005/06 Annual Report to the Committee. There were significant changes to the bank’s vision, the bank’s role was expanded and significant initiatives and projects were initiated. The challenge in South Africa was that 15% of the country did not have access to water; 17% had no sanitation services; 41% had no refuse removal; 30% no electricity and 30% had no housing. In the rest of the South African Development Community (SADC) region, there were massive infrastructure gaps; a lack of bankable projects; low capacity to manage project preparation and inadequate risk capital.

In the public sector market, municipal needs differentiated according to socio-economic and capacity considerations and there were huge backlogs mainly in Markets 2 and 3. Capacity constraints were still high and demands on municipalities were increasing due to migration patterns and demands in anticipation of the 2010 World Cup.

In terms of service delivery, 20% of the contract value was awarded to small and emerging contractors. Also 244 households received access to services per each R1 million approved and 1.2 million households benefited in total. With the view to the 2010 World Cup, they were working closely with the Local Organising Committee.

Some of the challenges to their Siyenza Manje project were cash flow problems in municipalities due to a lack of management. There was lack of operational capacity and there were limited processes and procedures implementation such as in supply chain management and tender processes.

The bank had an overall positive financial performance. In terms of their developmental loans, their net book value grew from R15 607 million in 2005 to R17 299 million in 2006 and their gross loan book grew by 7.9%.

MINUTES
Mr Admassu Tadesse, DBSA Corporate Strategy Manager, said that in the year under review there were significant changes to the bank’s vision, the bank’s role was expanded, significant initiatives and projects were initiated and expanded partnerships with the Government and the private sector were implemented. The bank’s vision was aimed at developing a prosperous and integrated region progressively free of poverty and dependency. Their mission was to drive development impact in the region through expanding access to development finance and effectively integrating and implementing sustainable development solutions. From 2006 onwards, the bank would become a financier; a partner; an advisor; implementer and an integrator.

There were two major themes. The first was to generate investment in physical, human, social and institutional assets that served the poor, directly and indirectly, and that supported broad-based wealth creation (infrastructural and productive capital). The second was to mobilise, develop, apply and manage knowledge in support of greater development effectiveness, innovation and an enabling developmental environment.

The corporate strategy was to co-deliver social and economic infrastructure; build human and institutional capacity; promote broad based economic growth, job creation, co-operation, integration and prosperity; serve as a centre of excellence for development financing, knowledge and effectiveness and engender external and internal sustainability.

The challenge in South Africa was that 15% of the country did not have access to water; 17% had no sanitation services; 41% had no refuse removal; 30% no electricity and 30% had no housing. In the rest of the SADC region, there were massive infrastructure gaps; a lack of bankable projects; low capacity to manage project preparation; inadequate risk capital; power shortages; shallow capital and financial markets and weak capacity among project sponsors.
 
Mr L Mashaba, the Executive Manager of South African Operations, said that in response to these challenges, a target of R2.75 billion in development investments was approved for South Africa and R6.96 billion had actually been spent. In the SADC region, a target of R750 million was approved and R1.1 billion had actually been spent. In total, for South Africa and SADC, R3 billion had been approved and R8 billion had been spent. In South Africa, a target of R2.2 billion was set for disbursements on loans and equity investments but R2.5 billion was actually disbursed. In terms of technical assistance, a target of R12 million was set but R20 million had been spent. 

The potential impact of the bank’s activities on South Africa’s GDP was R18 billion in 2005/06 compared to R7 billion in 2004/05. The impact on employment was the creation of 2900 jobs in 2004/05 and 14 150 in 2005/06. In total 1.1 million households would benefit. In the SADC region, a target of R800 million was set for disbursements on loans and equity investments but R600 million was actually disbursed. The potential impact of the bank’s activities on SADC’s GDP was R2.4 billion in 2005/06 compared to R400 million in 2004/05.

Mr Tadesse then gave an overview of their public sector support for 2005/06. In the public sector market, municipal needs differentiated according to socio-economic and capacity considerations and there were huge backlogs mainly in Markets 2 and 3.. Capacity constraints were still high and demands on municipalities were increasing due to migration patterns and demands in anticipation of the 2010 World Cup. There was increased participation in the more developed portions of the market by the private sector and they were beginning to dominate the bidding process. Failures in the market had led to utilities and other institutions delivering services. There was an inability to integrate development flows and utilise the available funding. Some re-capacitating occurred in many areas after the elections and there was increased competition in prices in better developed markets.
 
Six municipalities were in Market 1, 119 in Market 2 and 158 in Market 3. The bank’s total investment approvals were R5.1 billion (9 billion including co-funding). R3.6 billion (71%) had been converted to date into agreements, bids of R4.3 billion had been made and bids of R1.8 billion had not been converted. The average size of the approvals was R49 million with R489 million in Market 1, R28 million in Market 2 and R9 million in Market 3. Municipalities made up R2.9 billion (57%) of the approvals, parastatals and utilities made up R2.1 billion (40%) and Further Education and Training (FET) institutions R130 million (3%).

The Market 1 Municipalities made up 6% of the number of projects but 55% of the value of the investments. The Market 2 ones made 82% of the number of projects and, 41% of the value of the investments while the Market 3 ones made up 12% of the number of projects but only 4% of the value of the investments.

In terms of delivery, R2 billion in disbursements was achieved following a Provincial approval trend. In the Targeted Infrastructure Programme, R449 million was spent on 39 interventions which was 14% of the total value of their public sector support. To date 35% had been disbursed and of this, R160 million was transferred to Market 3 communities in metros.

In terms of service delivery, 20% of the contract value was awarded to small and emerging contractors. Also 244 households received access to services per each R1 million approved and 1.2 million households benefited in total. They estimated that 6% of the current backlogs in South Africa had been potentially eradicated by their operations. For every R1 approved, R1.88 was mobilised from other sources.

In helping to build capacity, R20 million was approved on 90 interventions. R53 million had been approved by the Development Fund, R15 million disbursed by the bank. 90% on the approvals were in Municipalities and 70% in Markets 2 and 3.

With the view to the 2010 World Cup, they were working closely with the Local Organising Committee. They provided analysis of business cases for stadiums and reported to the Ministries of Sport and Finance. They also provided a management system for conditional grants and gave general assistance to Government Departments on various financial aspects.

Ms J Nhlapho, the Executive Manager of Capacity Development and Deployment, said that through their Development Fund, in 2005/06, 2556 municipal officials had been trained, exceeding the target of 250. 50 new systems had been implemented, exceeding the target of 30 and 80 projects were approved, which was ten more than was targeted.

A total of 30 agency programmes were managed during 2005/06, with a combined flow of R300 million. These projects were diverse in nature and included joint ventures, independent contractor assignments and management contracts. Strategic relationships were extended with the World Bank and National Treasury to provide municipal management training and capacity support to Provinces for service delivery in education and health.

Some of the challenges to their Siyenza Manje project were cash flow problems in municipalities due to a lack of management. There was lack of operational capacity and there were limited processes and procedures implementation such as in supply chain management and tender processes. There were many staff vacancies with many under-qualified employees. In some cases political agendas were more important than infrastructure implementation. This impeded the decision-making process.

The Siyenza Manje status at present was that there were 48 people deployed with 13 more to join in November 2006. There were 31 Project Managers/Technical experts, three planners and 13 financial experts. In total, 36 Municipalities were involved and the process of formalising Service Level Agreements for mainly water and sanitation projects was underway. 

Some of the lessons learned through the Siyenza Manje project were that communication and support from Provincial Government was essential. There had to be better focus on infrastructure implementation and things like administration, systems, policies and procedures and general management formed the foundation for municipal functioning.

She then described the concept of the Local Investment Agency (LIA). It was a joint DBSA and Old Mutual initiative with R8 million set aside for capitalising the LIA Company.
R500 million was allocated as an investment facility. There would be commercial investment in poverty-stricken areas with economic potential. To facilitate project development and investment the LIA would have to overcome investment constraints; leverage resources into viable commercial projects; create a link between development and commercial ventures and accelerate economic growth and job creation.

The Wild Coast LIA would operate as the first phase. The mission here was focused on project development, preparation and packaging. It would also focus on private and commercially sound ventures. And include all economic sectors, subject to a triple bottom line. The life span would be ten years and 19 projects had been identified to date. There was going to be linkage to other funding and support from the DBSA and Old Mutual and synergy and alignment with Government policies and programmes as well as collaboration with other role players.

Another major project was the need to mobilise knowledge. The DBSA would operate as a learning organisation.
Investment in training as a percentage of their budgeted payroll in 2004/05 was 5% and 6.1% in 2005/06. They also had some research publications including the “DBSA Infrastructure Barometer 2006: Economic and municipal infrastructure in SA”; the “Quantification of poverty in South Africa: An inter-regional profile”; “A Guide to Best Practise in the Operation, Maintenance and Safety of Dams” and “The employment of people with Disabilities in South Africa.”

Some of their knowledge impact development partners were the Office of the President in the National Spatial Development Perspective and the ASGI-SA National Skills Database/Internet Website. With National Treasury, they had the Project Consolidate Municipal Transformation Programme; Asset Management Policy and Infrastructure Planning; the Infrastructure Delivery Improvement Programme; the Municipal Finance Management Training Programme and the Public Private Partnership Training Programme. With the Department of Trade & Industry they had the Regional Spatial Development Initiative; the Expanded Public Works Programme with the National Department of Public Works; the Risk Management Training Programme with the Department of Water Affairs & Forestry and the Municipal Health Services Programme with the Department of Health.

Ms Leonie Van Lelyveld, the Chief Risk and Chief Financial Officer, said that the DBSA had achieved a AAA credit rating with Fitch, Baa1 with Moody’s and BBB+ with Standard & Poors. The bank had an overall positive financial performance. In terms of their developmental loans, their net book value grew from R15 607 million in 2005 to R17 299 million in 2006 and their gross loan book grew by 7.9%.

Mid-way through the 2006/07 financial year, their operating surplus was 10% ahead of their budget; the net interest income was 4% below budget; approvals were below the same time last year (probably because last year was exceptional); disbursements were ahead of last year and the total amount in default was stable. Also, operating expenses were 16% below the budget, the cost to income ratio was below budget, other ratios were all on target and the balance sheet was stable.

Discussion
Mr Goeieman (ANC) (Northern Cape) asked what an “overall positive financial performance” meant.

Mr Tadesse replied that this meant that they were doing well in terms of their credit ratings being upgraded, being able to mediate financially between the public and private sectors and that they were doing well in a number of indicators they identified as being essential for financial stability. Ms Van Leylveld added that to be sustainable, the bank had to get their balance sheet right.

Mr Z Kolweni (ANC) (North West) asked if the DBSA had any plans for the redevelopment of former mining towns where there were many unemployed people who had relied on mining activities in the area.  

Ms Nhlapho said that in cases like this, a Provincial Programme Manager would be deployed to the area. Then various projects in construction, water and sanitation for instance would be implemented. Also learnership projects would be started to teach the locals how to implement some of those infrastructure programmes.

Mr E Sogoni (ANC) (Gauteng) said that they had targeted to spend R3 billion for development investment but had actually spent R8 billion. The gap was too wide between what was planned and what was spent.


The meeting was adjourned.

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