Financial Mail - Investors Monthly
Staying ahead of risk factors
A series of stringent feasibility programmes ensures that each project meets its targets within the set time and cost
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.”