Financial Mail - Investors Monthly
Leveraging the balance sheet
The focus is less on a commercial rate of return, but rather a developmental impact return
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.