Unlocking investment

The DBSA’s refined strategy focuses on projects that play an active role in the broader economy

The overarching goal of the Development Bank of Southern Africa (DBSA) is to deliver R100bn worth of sustainable infrastructure.

This ambitious goal is set against a challenging macroeconomic environment.

A global slowdown and consequent fall in commodity prices has affected GDP growth both in SA and on the rest of the continent.

Not surprisingly, the challenging economic environment has led to a slowdown in infrastructure investment and a weakening counterparty credit environment.

Both the DBSA’s mandate and emerging global consensus call for the DBSA to play a “catalytic” role in enabling sustainable infrastructure, says DBSA group executive for strategy Mohan Vivekanandan.

Catalysing infrastructure, he says, is a broad overarching term which denotes the DBSA’s monetary and nonmonetary contribution towards stimulating positive developmental change.

“The most appropriate basis for recognising the timing of catalytic values is on the financial close of the transaction, in other words, on commitment,” he says.

Globally, says Vivekanandan, development finance institutions are being called on to take greater early-stage risk, deploy guarantees, expand their loan syndication and focus on sustainable infrastructure.

“Around five years ago the bank went through a restructuring process in order to refocus the organisation on its core business, which is sustainable development impact.

At the time the bank was in a difficult position financially, and we realised that we needed to focus on growing our own balance sheet and make the most of the revenue from the capital of long-term loans.”

The level of infrastructure investment required by both SA and the African continent is not something that the DBSA can manage on its own. In the 2015/2016 financial year the DBSA lent R17bn.

It is estimated that US$40bn to $50bn/year is required by the continent to be invested in infrastructure.

Experts have suggested that SA invests between 2% and 3% of GDP in infrastructure per year. This, says Vivekanandan, equates to around R100bn/year.

“The scale of the infrastructure gap in SA and the continent is much greater than our lending capacity,” he says.

Coupled with this, he says, many of the DBSA’s traditional clients don’t have the ability to borrow for infrastructure projects due to challenging economies.

The DBSA therefore realised it needed to play a different role to unlock infrastructure development by developing new products and services to continue to grow the development impact.

“In particular, we needed to derisk project finance structures in order to crowd-in third party funding and we needed to get more projects to a ‘bankable’ stage,” says Vivekanandan.

Historically, he says, relatively few infrastructure projects get to the bankable stage, primarily because of the lack of an open and transparent process, and secondly, because it’s expensive to get a project to this stage.

However, as this capital expenditure provides limited financial return, the private sector is reluctant to invest in ensuring projects are bankable.

As a development bank that prioritised infrastructure delivery and development impact over profits, the DBSA was perfectly positioned

to leverage its balance sheet and fund projects until they became bankable, at which point they could attract private investment.

The DBSA’s refined strategy uses a number of ways to encourage more capital flow towards sustainable infrastructure, including focusing more investment on early-stage programme and project preparation facilities, and technical assistance to increase the “bankability of project pipelines”; using the bank’s developmental capital to provide financing for the incremental upfront capital spending required to make infrastructure projects sustainable as well as increasing the bank’s guarantee programmes for sustainable infrastructure by expanding access to guarantees.

It is also developing structured products and funding structures to unlock infrastructure and crowd-in third party investment as well as establishing project management offices and focusing on the maintenance of public infrastructure.

Value is unlocked via a number of services and programmes that the DBSA now offers.

The Project Preparation Unit supports the de-risking of infrastructure projects and delivers pro- ject concepts to bankability while the Infrastructure Delivery Division (IDD) provides project management and implementation support.

Project Preparation Funding (PPF) makes funding available for project preparation while the Infrastructure Investment Programme for SA (IIPSA) provides the actual funding for infrastructure projects — usually in partnership with other investors.

The Project Preparation & Development Facility (PPDF) meanwhile, is financed by the EU and the German development bank, KfW, and assists the SADC to address the implementation of the SADC Regional Infrastructure Development Master Plan.

“In 2010 we made R80m available to the renewable energy programme in order to ensure an open and transparent procurement process. That initial investment has attracted about R200bn into the programme,” says Vivekanandan.

More recently, the DBSA has provided the base line R120m for the Liquid Natural Gas (LNG) programme and is also financing the next phase of the Gautrain’s development.

“Getting these projects to the bankability stage takes investment and expertise — both areas in which the DBSA excels,” says Vivekanandan.

“Our strategy is to move away from purely financing to adding value along the entire project value chain.”

However, financing will continue to be a priority, given that commercial banks are not prepared to lend for longer periods when it comes to infrastructure.

“Typically, they don’t like to lend beyond seven to eight years, whereas the DBSA is not similarly constrained,” he says.

“We can provide loans for infrastructure projects for 10 or 20 years, can take a greater riskreturn profile, and are prepared to take a subordinated position.”

Since acting as an implementing agent for social infrastructure, including schools, clinics and hospitals, the DBSA discovered an opportunity to help government departments maintain infrastructure.