Kirsty Tuxford spoke with Mohan Vivekanandan, Group Executive: Strategy at the Development Bank of Southern Africa (DBSA), about the new strategy that has taken the bank into profit
In 2012 the bank initiated a new strategy to enhance its developmental impact and optimise its reach and activities. In 2013, there was another reorganisation of the bank’s operations including the transfer of the DBSA Development Fund into the bank. By September 2014, there were reports that the bank had swung into profit. How did the restructuring of the bank’s strategy help it to become profitable?
The DBSA aims to continuously assess and adapt its strategy to address changes in its operating environment and fulfil shareholder expectations. An extensive organisational review undertaken in 2012/13 aimed to address the deteriorating performance of the bank and to ensure that core activities were realigned and focused on the bank’s mandate of infrastructure financing, infrastructure delivery and programme implementation support.
After three successful funding rounds, responsibility for the management of the Jobs Fund was transferred to the Government Technical Advisory Centre (GTAC) and the National Treasury, effective 1 October 2014. The transfer allowed the DBSA to focus on its core lending and development finance responsibilities.
As part of the organisational review, the relationship between the DBSA and the DBSA Development Fund was assessed. The Fund supported the DBSA in providing technical, operational and capacity development support directly to different levels of the government’s delivery value chain. During 2012/13, some of the functions of the Fund were absorbed into government departments, while others were incorporated into the DBSA. Financial assistance to the DBSA Development Fund was discontinued.
This resulted in a turnaround from a loss of 826 million South African rand (US$67 million) in 2012/13 to a profit of 787 million South African rand in 2013/14. A key driver was a reduction in the cost-to-income ratio from 48.9 percent to 28.4 percent, indicating enhanced operational efficiency and effectiveness. Disbursements also increased from 9.2 billion South African rand to 12.7 billion South African rand pointing to continued financial sustainability. The DBSA will continue to provide strong support for infrastructure development by municipalities as before.
The bank has funded projects in solar power, wind and solar photovoltaic, while reducing its lending to mining, tourism and logistics- related projects. Will the bank’s strategy going forward continue to focus more on green energy projects?
Our core business is in energy, transport, water and ICTs with an added focus of health and education in South Africa. We do not support mining or tourism but provide related infrastructure in our core areas that might facilitate development in those industries. Logistics is coming back on line again as our SA Financing Division focuses on transport value chains.
In terms of green energy, the DBSA has provided financing of 6.7 billion rand for Round 1 and 2 projects as part of the Renewable Energy Independent Power Producer Programme, through senior debt and financing for community and empowerment components. The DBSA is also working with the Department of Energy to develop a support framework for the Small Projects Independent Power Producer Programme. The framework will support small developers to implement projects of capacities of 1-5 megawatts. Going forward, the DBSA will continue to support green energy projects.
The DBSA is a member of the Infrastructure Consortium for Africa (ICA), which supports the African Union’s Programme for Infrastructure Development in Africa (PIDA)–and the DBSA holds a key role in unlocking and preparing projects under the North-South Corridor. Can you provide more detail on the role that the DBSA plays?
The DBSA’s key aims are to support regional integration across the continent and to facilitate effective participation of South African entities and companies in corridor development (including the North- South Corridor). The DBSA is currently supporting the President of South Africa in his role as Champion of the North- South Corridor to advance priority projects to a bankable stage. The DBSA provides advisory, financing of project preparation, and infrastructure financing. With the expansion of its mandate beyond the South African Development Community, the DBSA provides support to the Programme for Infrastructure Development Africa more broadly. In particular, the DBSA currently supports the development of the Central Corridor through the co- funding of an Investor Forum to be held on 26 March in Arusha. The forum will showcase Central Corridor projects.
DBSA manages the Green Fund to support green initiatives to assist South Africa’s transition to a low-carbon, resource efficient and climate resilient development path delivering high impact economic, environmental and social benefits. What impact has the Green Fund had?
In partnership with key government and other private and public sector stakeholders, the Green Fund continues to maintain its emphasis on catalytic funding for innovative and green initiatives through project development, research aimed at informing policy, and capacity development. Financing through concessional loans and recoverable grants is available through the Green Fund’s three funding windows, aimed at the realisation of a low-carbon economy, environmental and natural resource management and the development of green cities and towns.
Financing has been awarded primarily to projects in the waste management, renewable energy, sustainable housing and environmental resource management sectors. The Green Fund has to date approved 40 investments amounting to 634 million South African rand across initiatives in capacity development, project development and research focus areas. Research grants were awarded to 16 institutions to provide insight into South Africa’s green economy sectors.
What strategy is the bank taking in terms of innovative development finance solutions and partnerships with other institutions?
The DBSA is looking at new ways of offering integrated infrastructure solutions, across the infrastructure value chain from planning, preparation, financing, delivery, and operations and maintenance. For example, the DBSA’s Infrastructure Delivery Division is incorporating innovative building technologies into existing clinics in National Health Insurance districts. Partnering with the private, public and multilateral/donor sectors is a key part of this strategy, for example: the Infrastructure Delivery Division is also partnering with Sasol and Anglo American to strengthen municipalities’ institutional capacity and working with the Department of Water Affairs to review water delivery models with the aim of reducing water losses.
The DBSA is also developing its relationships with other development finance institutions. For example, the DBSA is a member of the BRICS Reference Banks group with BNDES, Vnesheconombank, China Development Bank and India Exim. These reference banks meet at the BRICS summit annually to coordinate their approaches to development finance in Africa and other parts of the developing world. The banks have signed agreements on local currency loans, green finance and innovation financing.
Can you provide more detail on the support given to municipalities? How do you finance cities without credit ratings or credit history?
The DBSA has always used its own credit ratings of cities and other municipalities. We have our own credit rating system to determine risk exposure. For those municipalities that are not able to borrow based on the strength of their balance sheet, we provide bridge financing for their Municipal Infrastructure Grant from central government (MIG). By doing this we hope to strengthen their service delivery capacity. The bank also provides technical capacity to some municipalities in order to support them in the rollout of their infrastructure development programmes.
In terms of municipal finance, the DBSA signed a 488 million South African rand loan agreement towards the end of 2014 with Tshwane Rapid Transit (TRT) to support the purchase of 171 buses for the A Re Yeng (meaning “let’s go”) Bus Rapid Transit (BRT) system. TRT will be owned by operators within Tshwane from the taxi and bus industries. The project is part of a national programme of 13 BRT projects in different cities and towns, aiming to address challenges related to poor capacity, congestion and unsafe road conditions. In particular, apartheid spatial planning has resulted in a legacy of long travel times for the poor through congestion and difficult transfers; inaccessibility of public transport for people with disabilities, the aged and infirm; and inadequate historical investment in public transport.