Un­lock­ing in­vest­ment

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

Financial Mail - Investors Monthly - - Special Report dbsa - Mohan Vivekanan­dan: Scale of in­fra­struc­ture gap is much greater than DBSA’s lend­ing ca­pac­ity

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.