Stay­ing ahead of risk fac­tors

A se­ries of strin­gent fea­si­bil­ity pro­grammes en­sures that each project meets its tar­gets within the set time and cost

Financial Mail - Investors Monthly - - Special Report dbsa - Spon­sored by the DBSA

In a con­strained econ­omy, al­le­vi­at­ing risk as far as pos­si­ble be­comes in­creas­ingly im­per­a­tive. The DBSA’s Project Prepa­ra­tion Unit (PPU) was es­tab­lished to ac­com­plish ex­actly this in con­junc­tion with de­vel­op­ing projects from con­cep­tual stage to the point where they are bank­able and ready to be im­ple­mented.

Project prepa­ra­tion is a rel­a­tively new phe­nom­e­non within de­vel­op­ment banks, says DBSA GM for project prepa­ra­tion Mohale Rak­gate, born in part to mit­i­gate against the risk of projects not reach­ing fruition. His­tor­i­cally there has been lit­tle fund­ing tar­geted at the prepa­ra­tion of projects within the public sec­tor. As a re­sult the per­cent­age of projects that were suc­cess­fully im­ple­mented was low.

“The big­gest chal­lenge fac­ing most de­vel­op­ment banks is around govern­ment ca­pac­ity to see projects through to com­ple­tion,” says Rak­gate. “Within the SADC re­gion, SA is ac­tu­ally bet­ter than most, but many govern­ments just don’t have an en­abling en­vi­ron­ment when it comes to in­fra­struc­ture projects. As such, mo­bil­is­ing fund­ing for project prepa­ra­tion is par­tic­u­larly chal­leng­ing.”

In an ef­fort to en­sure a greater pro­por­tion of projects reach fi­nan­cial clo­sure, project prepa­ra­tion was ini­ti­ated to iden­tify and elim­i­nate key risks at the ear­li­est pos­si­ble stage. “Both SA and the re­gion have a huge need for in­fra­struc­ture de­vel­op­ment,” says Rak­gate. “How­ever, one of the big­gest bot­tle­necks is the de­vel­op­ment and prepa­ra­tion of bank­able projects, given that plan­ning and de­liv­er­ing a large in­fra­struc­ture project is usu­ally com­plex and fraught with risk.”

Rak­gate says it can take sev­eral years of project prepa­ra­tion be­fore a large-scale in­fra­struc­ture project is ready to be im­ple­mented. When a project fails, comes in over bud­get or runs sig­nif­i­cantly over time, it be­comes an even more costly ex­er­cise. Project prepa­ra­tion, there­fore, seeks to mit­i­gate against this risk by iden­ti­fy­ing prob­lems early in the process.

The DBSA’s PPU was es­tab­lished four years ago to of­fer an end-to-end project de­vel­op­ment and prepa­ra­tion busi­ness that de­risks projects and de­liv­ers them from con­cepts to bank­a­bil­ity.

“Un­der the broad um­brella of de­liv­er­ing de­vel­op­men­tal in­fra­struc­ture both in SA and the rest of the con­ti­nent, our role within the PPU is to en­sure that a pro­posed project is fea­si­ble, ap­pro­pri­ate and ready for im­ple­men­ta­tion,” says Rak­gate.

“Our man­date in­cludes con­duct­ing scop­ing pro­files on projects while still at a con­cep­tual stage, prefea­si­bil­ity stud­ies, de­tailed bank­a­bil­ity stud­ies, fi­nan­cial struc­tur­ing as well as le­gal, en­vi­ron­ment and tech­ni­cal as­sess­ments on the pro­posed project.”

Es­sen­tially, he says, it is about as­sess­ing the de­gree of risk in­volved in the project, analysing whether the pro­posed teams in­volved in de­vel­op­ing the project have the re­quired ca­pa­bil­i­ties to en­sure the project is im­ple­mented, analysing the eco­nomic im­pact of the pro­posed project and en­sur­ing the project is com­pli­ant en­vi­ron­men­tally, leg­isla­tively, legally and fi­nan­cially.

Crit­i­cally, says Rak­gate, ev­ery project needs to fit into the DBSA’s man­date of pro­vid­ing in­fras­truc-

ture de­vel­op­ment to al­le­vi­ate poverty and grow the econ­omy.

“Our aim is to in­vest only in projects that have a sig­nif­i­cant eco­nomic im­pact,” says Rak­gate, adding that the unit works with a num­ber of part­ner or­gan­i­sa­tions to mo­bilise fund­ing, in­clud­ing the French de­vel­op­ment Bank, Agence Fran­caise de Devel­oppe­ment (AFD), KfW and the Euro­pean In­vest­ment Bank. Ear­lier this year AFD an­nounced an agree­ment to in­crease fund­ing and tech­ni­cal co­op­er­a­tion to the DBSA for in­fra­struc­ture projects.

In ad­di­tion, the In­fra­struc­ture In­vest­ment Pro­gramme for SA (IIPSA) is a joint EU and SA govern­ment ini­tia­tive, ad­min­is­tered by the DBSA, which pro­vides fund­ing for in­fra­struc­ture projects. The EU and KfW also fi­nance the SADC Project Prepa­ra­tion & De­vel­op­ment Fa­cil­ity (PPDF) which pro­vides tech­ni­cal as­sis­tance for in­fra­struc­ture iden­ti­fi­ca­tion, prepa­ra­tion and fea­si­bil­ity stud­ies in or­der to en­sure projects are bank­able and there­fore more at­trac­tive to in­vestors.

The DBSA acts as both an im­ple­men­ta­tion agent and fund man­ager for SADC’s project prepa­ra­tion and de­vel­op­ment fa­cil­ity.

The DBSA also pro­vides funds both for project prepa­ra­tion and project fi­nanc­ing via its own in­ter­nal fund­ing mech­a­nism, the DBSA project prepa­ra­tion fund, for projects in the trans­port, en­ergy, ICT, and wa­ter and san­i­ta­tion sec­tors in SA, the SADC re­gion and se­lected African coun­tries. The fund, says Rak­gate, pro­vides fund­ing for prefea­si­bil­ity stud­ies, bank­able fea­si­bil­ity stud­ies as well as as­sis­tance with costs in or­der for the project to reach com­ple­tion and fi­nan­cial clo­sure.

“In or­der to lever­age our lim­ited fund­ing abil­i­ties we never wholly fund projects but in­stead try to co­fund with like-minded or­gan­i­sa­tions in­clud­ing pri­vate com­pa­nies.”

Of ne­ces­sity the DBSA is very se­lec­tive in terms of the type of projects it will take on. These are typ­i­cally lim­ited to the in­fra­struc­ture, en­ergy, wa­ter, ICT, telecom­mu­ni­ca­tions and trans­port sec­tors. “Our pro­gramme of projects are all in line with govern­ment’s na­tional plans,” says Rak­gate.

While the PPU does suc­cess­fully mit­i­gate against the risk of projects not be­ing con­cluded, it’s im­pos­si­ble to to­tally elim­i­nate risk, con­cedes Rak­gate. “Dur­ing the project prepa­ra­tion phase we en­sure that not only does ev­ery part­ner we work with have a track record, but ‘skin in the game’, so to speak. Our goal is that at least one-third of projects reach fruition and fi­nan­cial clo­sure. We make ev­ery ef­fort to exit projects that are not deemed to be fea­si­ble as early as pos­si­ble in the project prepa­ra­tion phase.”

The es­tab­lish­ment of the PPU has made a sig­nif­i­cant dif­fer­ence in terms of the qual­ity of projects that not only reach bank­a­bil­ity stage, but are im­ple­mented and fi­nalised, he says.

“Cur­rently, we are work­ing with Gau­train re­gard­ing their ex­ten­sions. We re­cently an­nounced a public pri­vate part­ner­ship (PPP) in­volv­ing the Cen­tral En­ergy Fund, and we have a strong fo­cus on the mu­nic­i­pal sec­tor, with ded­i­cated ring-fenced fund­ing to sup­port them with project prepa­ra­tion for lo­cal in­fras­truc­tural projects,” says Rak­gate.

The DBSA’s cur­rent project pipe­line is healthy with a to­tal of 40 projects that have been ap­proved and com­mit­ted. “This is a mul­ti­year game with projects typ­i­cally hav­ing a three to five-year hori­zon. Scop­ing and prefea­si­bil­ity stages typ­i­cally take around three years or longer to come on board. It’s a dy­namic pipe­line with new projects con­tin­u­ally com­ing on board,” says Rak­gate.

The chal­lenge, he says, is to main­tain and even scale up the pipe­line. “To date ap­prox­i­mately two-thirds of projects are based in SA, with around a third out­side SA, pri­mar­ily in the SADC re­gion, but also in­clud­ing projects be­yond SADC in Ethiopia and Ghana.”

nance of roads and pro­vides sup­port in the im­ple­men­ta­tion of mu­nic­i­pal in­fra­struc­ture. This typ­i­cally in­cludes de­sign, con­struc­tion and re­pairs.

The pro­gramme man­age­ment com­po­nent of the IDD’s of­fer­ing en­tails ca­pac­ity sup­port for na­tional, pro­vin­cial and lo­cal govern­ment.

“We have also been asked to ven­ture into the SADC re­gion for the con­struc­tion of wa­ter and san­i­ta­tion in­fra­struc­ture,” he says.

The IDD’s key ar­eas of fo­cus in­clude projects in health, ed­u­ca­tion, hous­ing, wa­ter, trans­port and mu­nic­i­pal­i­ties.

Its in­volve­ment in these projects ex­tends to pro­vid­ing a rapid pro­cure­ment process to en­able fast project ini­ti­a­tion and ex­e­cu­tion, ac­cu­rate project mon­i­tor­ing and re­port­ing, as well as the de­liv­ery of in­fra­struc­ture through a mul­ti­dis­ci­plinary team of pro­fes­sion­als and tech­ni­cal spe­cial­ists.

A to­tal of 125 peo­ple are em­ployed by the di­vi­sion, though pri­vate sec­tor spe­cial­ists are brought in for par­tic­u­lar projects when the need arises.

“We em­ploy a range of dis­ci­plines in­clud­ing engi­neers, project man­agers, con­struc­tion ac­coun­tants and quan­tity sur­vey­ors,” says Bhabha.

In 2016 the IDD man­aged a to­tal of R3.34bn worth of projects in var­i­ous stages of de­vel­op­ment on be­half of clients.

“Some projects were at an in­cep­tion stage while oth­ers were near­ing com­ple­tion,” says Bhabha. “In to­tal the DBSA has built 129 schools worth R4.5m and in 2016 alone we com­pleted 35 schools. In the health sec­tor, 136 clin­ics have been re­fur­bished since 2013 at a to­tal cost of R176m.

“We are busy with the main­te­nance and re­fur­bish­ment of two hos­pi­tals, a nurs­ing col­lege and over 100 clin­ics with a to­tal value of R816m.”

In keep­ing with the DBSA’s man­date to make a pos­i­tive de­vel­op­men­tal im­pact, Bhabha says the IDD’s first pri­or­ity on any project is to cre­ate em­ploy­ment op­por­tu­ni­ties.

“Since the be­gin­ning of 2016 we have cre­ated over 9,000 jobs as well as op­por­tu­ni­ties for 500 SMMEs. In to­tal we have un­locked a work pack­age of around R493m for these SMMEs to work with,” he says.

The school re­fur­bish­ment and build­ing pro­gramme, he adds, has en­abled 4,254 ad­di­tional learn­ers to be en­rolled at these schools in 2016/2017, while a to­tal of 43,632 learn­ers have been pos­i­tively af­fected since 2013.

The hospi­tal and clinic pro­gramme, mean­while, has given 266,516 peo­ple ac­cess to health coun­selling and test­ing in iden­ti­fied clin­ics in Lim­popo and North­ern Cape. With re­gard to ca­pac­ity build­ing, he says 45 mu­nic­i­pal of­fi­cials and 219 tra­di­tional lead­ers and coun­cil­lors re­ceived train­ing in lead­er­ship, in­te­grated de­vel­op­ment plans and eco­nomic de­vel­op­ment skills.

An­other project in­volved the re­fur­bish­ment of in­dus­trial parks, which re­sulted in a 75% av­er­age oc­cu­pa­tion rate by emerg­ing in­dus­tri­al­ists and small busi­nesses, rang­ing from smelt­ing works to pack­ag­ing com­pa­nies.

It’s dif­fi­cult to quan­tify the eco­nomic im­pact of some of the projects, says Bhabha, re­fer­ring to the fact that with the build­ing of roads, ac­cess to mar­kets is now avail­able to some of the most re­mote ru­ral ar­eas.

Within the hous­ing sec­tor the IDD was in­volved in the so­cial hous­ing projects in Ekurhu­leni.

“These hous­ing projects are lo­cated in the city cen­tre, thereby ad­dress­ing the legacy of apartheid ac­com­mo­da­tion is­sues, and sub­se­quently re­duc­ing the cost of travel for the most vul­ner­a­ble.” he says.

“Though it’s dif­fi­cult to quan­tify the eco­nomic im­pact of these par­tic­u­lar projects, the so­cial im­pact is ev­i­dent through the sig­nif­i­cant con­tri­bu­tion to so­cial co­he­sion, par­tic­u­larly with the cre­ation of recre­ational parks and eas­ier prox­im­ity to places of work.”

The IDD’s im­ple­men­ta­tion model em­pha­sises sus­tain­abil­ity with de­vel­op­men­tal im­pact be­ing the ul­ti­mate goal.

“There is sig­nif­i­cant room for the ex­pan­sion of the IDD’s foot­print. Not only could we ex­pand our foot­print to more prov­inces and met­ros, but we could also fo­cus on na­tional de­part­ments like roads, wa­ter and san­i­ta­tion.”

Mohale Rak­gate: DBSA’s cur­rent pipe­line con­sists of projects that have been ap­proved and com­mit­ted

Hous­ing sec­tor: New hous­ing projects are ad­dress­ing the legacy of apartheid ac­com­mo­da­tion is­sues

Paving the way: Road in­fra­struc­ture projects cre­ated much-needed jobs in the sec­tor

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