Lev­er­ag­ing the bal­ance sheet

The fo­cus is less on a com­mer­cial rate of re­turn, but rather a de­vel­op­men­tal im­pact re­turn

Financial Mail - Investors Monthly - - Special Report dbsa -

In the past few years de­vel­op­ment fi­nance in­sti­tu­tions (DFIs) glob­ally have been re­view­ing their pur­pose and po­si­tion in an ef­fort to fa­cil­i­tate de­vel­op­ment projects that are more than the sum of their parts. As a re­sult, many DFIs are cre­at­ing a more holis­tic strat­egy and as such they are seek­ing to cre­ate plat­forms for public-pri­vate part­ner­ships.

“This is a world­wide phe­nom­e­non given the global Sus­tain­able De­vel­op­ment Goals (SDGs) and in­fra­struc­ture needs of both de­vel­oped and de­vel­op­ing economies,” says DBSA chief risk of­fi­cer Paul Cur­rie. The goals ema- nat­ing from the Septem­ber 2015 UN Sum­mit on Sus­tain­able De­vel­op­ment (COP21) in Paris, France, in­volve lev­els of in­vest­ment in in­fra­struc­ture and in­no­va­tion for these to be achieved.

“Goal nine fo­cuses spe­cific at­ten­tion on the de­vel­op­ment of qual­ity, re­li­able, sus­tain­able and re­silient in­fra­struc­ture and refers to the fact that by 2030 all ex­ist­ing in­fra­struc­ture needs to be up­graded,” says Cur­rie.

His­tor­i­cally, the DBSA was pre­dom­i­nantly a loans-based bank fo­cus­ing pri­mar­ily on mu­nic­i­pal­i­ties and large in­fra­struc­ture projects in SA and the SADC re­gion. In the past four years it has be­come in­volved with project prepa­ra­tion and project im­ple­men­ta­tion, en­sur­ing an end-to-end so­lu­tion and con­se­quently con­tribut­ing sig­nif­i­cantly to the bank’s now ex­tended value chain.

Though the DBSA has strong prod­ucts and solid re­la­tion­ships with govern­ment and the pri­vate sec­tor, it is cog­nisant of the need to lever­age its bal­ance sheet in or­der to meet the in­fra­struc­ture needs of SA and the re­gion as well as sup­port­ing the sus­tain­able de­vel­op­ment goals.

The DBSA’s goal for the past few years, says Cur­rie, has been to ex­pand the bank’s im­pact be­yond what its his­toric ap­proach could achieve, while at the same time en­sur­ing that both credit and op­er­a­tional risks are shared with coin­vestors.

“We be­lieve there is a role here for in­sti­tu­tional in­vestors in­clud­ing

as­set and fund man­agers to in­vest in in­fra­struc­ture projects,” says Cur­rie. “Cur­rently, the state has lim­ited re­sources, so it makes sense to lever­age pri­vate in­vest­ment in in­stances where we can cre­ate a prod­uct to suit their pro­file and which is for­mally rated.”

The in­ter­na­tional in­vest­ment space, he adds, is cur­rently cap­i­tal­heavy, of­fer­ing low yields.

“There is a sig­nif­i­cant amount of cap­i­tal in the de­vel­oped world look­ing for de­vel­op­ment projects. Our in­ten­tion is to lever­age some of this pri­vate cap­i­tal, both lo­cal and in­ter­na­tional, us­ing our bal­ance sheet to en­able more of these large-scale in­fra­struc­ture projects.”

Whereas the DBSA had his­tor­i­cally eval­u­ated its ef­fi­cacy by means of how much it had dis­bursed, it has re­cently in­tro­duced mea­sures which re­flect broader lev­els of “ad­di­tion­al­ity” as­so­ci­ated with its de­vel­op­ment man­date.

Ad­di­tion­al­ity — in the DFI con- text — refers to a role that adds to the to­tal level of in­vest­ment and de­vel­op­ment, says Cur­rie. “The op­po­site in this in­stance would be sub­sti­tu­tion, where the to­tal in­vest­ment re­mains con­stant, but cer­tain fun­ders are pushed out.”

As such, ef­fi­cacy is now as­sessed based on how much pri­vate in­vest­ment the DBSA has been able to at­tract into in­fra­struc­ture de­vel­op­ment. It’s about catalysing ad­di­tional in­vest­ment into in­fra­struc­ture de­vel­op­ment, says Cur­rie. “We have set our­selves a tar­get of R100bn/an­num by 2020 even though our bal­ance sheet is only R80bn strong. The DBSA has ad­e­quate risk cap­i­tal, which can be lever­aged and strate­gi­cally in­vested, pri­mar­ily through credit en­hance­ment, to at­tract pri­vate cap­i­tal. Ul­ti­mately, it’s about us­ing our bal­ance sheet more ef­fec­tively. As a de­vel­op­ment bank we’re not look­ing for a com­mer­cial rate of re­turn but a de­vel­op­men­tal im­pact re­turn while re­main­ing sus­tain­able.”

As a re­sult the DBSA is con­sid­er­ing a num­ber of prod­ucts and has es­tab­lished a team in­ter­nally to look at spe­cific types of so­lu­tions to cre­ate op­por­tu­ni­ties for catalysing pri­vate in­vest­ment. “It’s about cre­at­ing ‘ad­di­tion­al­ity’ type prod­ucts across a range of sec­tors in­clud­ing trans­port, wa­ter and re­new­able en­ergy,” says Cur­rie, adding that the bank is in the process of set­ting up a num­ber of part­ner­ships.

Most re­cently, the DBSA per­formed ad­di­tion­al­ity through the cur­rent re­new­able en­ergy pro­gramme where it played a crit­i­cal role in the de­sign, fund­ing and es­tab­lish­ment of the pro­gramme. The bank has also his­tor­i­cally pi­o­neered mu­nic­i­pal lend­ing, which is now core to com­mer­cial banks in the larger mu­nic­i­pal­i­ties. The DBSA, says Cur­rie, aims to fill this gap and pro­mote the de­vel­op­ment of qual­ity sus­tain­able in­fra­struc­ture.

Paul Cur­rie: DBSA has set it­self a tar­get of R100bn/an­num by 2020

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