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THE EXISTING PORTFOLIO OF
INVESTMENTS BY THE STATE
IN STRATEGIC BUSINESSES
TOR POSITION PAPER: FOR PRC ON SOE’S
BUSINESS CASE AND VIABILITY WORKSTREAM
PRESENTED BY NOMBULELO MKHUMANE
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TABLE OF CONTENTS
EXECUTIVE SUMMARY ............................................................................................................................ 4
1. INTRODUCTION ................................................................................................................................... 7
2. BACKGROOUND .................................................................................................................................. 8
2.1 The Mandate of a development finance institution ....................................................................... 11
3. OVERVIEW OF SOUTH AFRICAN DEVELOPMENTAL FINANCE INSTITUTIONS ................................... 12
3.1 Conclusion ....................................................................................................................................... 21
4. REVIEW OF THE DEVELOPMENTAL FINANCE SYSTEMS .................................................................... 22
5. “AS IS” ANALYSIS ............................................................................................................................... 35
6.INTERNATIONAL EXPERIENCE ............................................................................................................ 12
7. CONCLUSION .................................................................................................................................... 38
8.RECOMMENDATIONS ........................................................................................................................ 44
PROVINCIAL OVERVIEW OF DFIs and DA’s................................................................................................
An overview of one of the Provincial structures. .....................................................................................
References ............................................................................................................................................ 44
The KZN Growth Fund ........................................................................................................................... 45
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1. THE EXISTING PORTFOLIO OF INVESTMENT BY THE STATE IN STRATEGIC BUSINESSES
2. PROBLEM STATEMENT
Is the existing portfolio of investments by the State in Strategic businesses structured to
support the developmental agenda?
3. FOCAL POINT
The state should provide overarching SOE Strategy/Shared Vision that is aligned to
developmental state objectives
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EXECUTIVE SUMMARY
The existing portfolio of investments by the State in Strategic businesses is one of the terms
of reference of the PRC, under the Business Case and Viability theme. The focus in this TOR
is to present the State’s investment and equity participation in the economy with a view to
understand where the State deploys its resources.
In assessing the existing portfolio of investments by the State in strategic businesses, we
seek to address the question of the State’s participation in the economy and to establish if
the objectives of the State are met through the investments.
The motive of the State is to play a developmental role in strategic sectors of the economy,
which have been determined as strategically important and endowed with the ability to
create value for the shareholder.
The State has various economic policy options at its disposal, which it uses to exercise
ownership and authority over the capital allocations of strategic State Owned Entities. For
the purpose of this review we focus on Development Finance institutions which feature
prominently as fund managers on behalf of the State in the South African economy. There
are structures at National, Provincial and at Municipal level which are involved in
investment activities in the quest of achieving the objectives of a developmental State, a
brief overview of the four major DFI’s forms the context of discussion of the State’s portfolio
in strategic businesses.
There have been a number of reviews on the subject of development finance institutions,
their mandates and the impact on meeting the developmental state objectives. The
performance of the South African Financial Development System is reviewed against
international benchmarks, to provide a comparative in the impact and performance of
similar entities, as Ha-Joon Chang states “public investment has to play a key role in any propoor national development strategy”... “Markets are powerful mechanisms to promote
economic development, but they often fail to produce the economic dynamism and the
social justice that a sustainable economic development requires”.
International Case Studies, suggest that there is no single formula for ‘doing’ a
developmental state in organizational terms. Different countries adopt different formulae
according to their political, ideological and economic constraints. South Africa over the
decades has built a wide range of organisations that are ingredients of a Developmental
State. Furthermore, the institutional capacities of key DFI’s, like the IDC and the DBSA,
together with the technological capability of a significant number of SOE’s, can be mobilized
to propel the Developmental Agenda.
Based on the findings made in this discussion, conclusions and recommendations will be put
forward on how best the State could leverage its resources to promote and direct economic
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development. Amongst the critical issues that this study intends to review, is the State’s
ability to make a positive impact in the direction of the economy using the DFS.
1.INTRODUCTION
The State’s Portfolio of Investments has been defined as the participation in investments
by the State, through agencies or directly, by providing funding and a conducive
regulatory environment for economic development. BC will focus on the investments
made by Developmental Finance Institutions in Strategic business and in the various
sectors of the economy.
The South African market has Developmental Finance institutions and Developmental
Agencies which lead the State’s market reach in the various sectors therefore being a
composite of the portfolio of investments. The core business of the DFIs involves the
provision of risk based financial services approach to increase access to finance for well
defined target clientele, as a function of promoting social and economic development
objectives. A DFIs target clientele may include an array of market segments that the
State deems worthy and in need of support due to being underserviced by the private
sector, this aspect and the additional capacity services that are offered by DFIs tends to
distinguish the products from those of commercial financial institutions.
There is obviously a healthy tension in that the State, understands its constraints and
limitations and consequently what can be achieved in the developmental agenda issues
on its own given the fiscal constraints and the necessity to breed an inclusive economy
with a mature private sector that can drive the growth trajectory. This is in the core of
the activities surrounding the State’s investment which is a display of harnessing
networks and partnerships, in a multiple role of being an activist of its own
transformation, delivering services and creating a conducive environment for
development and as a leader in forging corporate governance frameworks and policies
for those partnerships.
South Africa’s New Growth Path, as released by Minister Ebrahim Patel on the 23
November 2010, highlights the crucial role played by State owned development finance
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institutions (DFIs) in creating jobs, raising shared economic growth and enabling propoor expansion of infrastructure. Further more growth will have to occur in a manner
that is more equitable, inclusive and labour absorbing.
The establishment of SOEs in apartheid South Africa created the conditions for skewed
development aims, irregular infrastructure and service delivery and a host of structural
problems, which has had a limiting effect in the ability of SOEs to adjust to new
requirements and new policies. Despite these conditions the major SOEs represent
massive financial, investment, labour, technology and infrastructure resources in the
South African economy.
The government was of the opinion that the current structure of SOEs is the outcome of
a long period of isolated development in which narrow ‘Strategic’ interests had
preference over broader economic and social development. Investment decisions that
were not always efficient or in line with and development needs that have left a legacy
of poor SOE performance and infrastructure backlogs.
The South African government takes the view that the State has a role to play in the
development of the economy, which is informed by the view that the State shapes the
structure and output of the economy and also that the political objective of attaining a
prosperous, equitable and democratic society. The State can intervene in the economy
either directly or through development agencies, economic actions of SOEs as well as
policy. (Strategic Plans, 08 DPE) Furthermore the State has to institutionalize its
investment framework policy and regulation to direct investment through direct agency
partnerships and strategic procurement which includes investment partnership, and
leveraging broader capital markets to partner with the private sector.
The South Africa government portfolio of investments is mainly manifested in the four
major, DFIs DBSA, the Industrial Development Corporation of South Africa Ltd (IDC),
Land Bank and National Empowerment Fund (NEF), which are the main case study
subjects on this report. Public Investment Corporation (PIC) has a portfolio however the
investments held are on behalf of State employees through their pension funds, it is
important to note that the State is not the owner of the investment.
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The methodology used for the collation of data, was a qualitative and quantitative
questionnaire for the sampled SOE’s and a further matrix which was specific for
developmental finance institutions. The research was carried out by PwC and the HSRC
on behalf of the PRC. The high level findings and recommendations of the PwC report
will feature prominently in this review. A database was produced by KPMG. A detailed
analysis and review was later carried out by Merafe Moloto. This paper will draw
inventory of these investments to the extent of the availability of information, being
mindful of the fact that this is not meant to be valuation of the DFI’s, but a view of their
investment activities. This review takes into cognisance, the seminar series and policy
dialogues of the PRC, including relevant literature and surveys, which serve to inform
the views expressed.
2. Background
Traditionally DFIs provide development finance to address market failures and so
complement both government sources and market financing, however DFIs are now
generally expected to address broader development policy objectives not limited to
market failure such as private sector development, employment creation, income
distribution, the development of poor groups or regions as well as developing new
industrial sectors or boosting weak ones (UN, 2005).
The landscape within which DFIs operate has National and Provincial DFIs and
Development Agencies. The model for DFIs in South Africa is based on a market
differentiation model, which explores specialisation and niche markets.
In all the economically strong and socially equitable states, DFIs have acted as catalysts
for accelerated industrial, economic growth and human resources development.
Development involves both quantitative and qualitative changes. The developmental
State as defined by D & T, encapsulates the objectives of the State when deploying
resources. “a developmental state is one that leads and works with assist government in
coordinating economic development initiatives and ensuring focused implementation
the private sector, state owned entity sector, labour and society to achieve economic
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growth and development through savings and investment, infrastructure and other
assets thereby creating sustainable jobs, improves service delivery, reduces poverty and
inequality, promotes transformation, improves the environment, improves health and
safety develops skills and promotes innovation and reduces crime and corruption”
(Green paper: Role of SOEs in a Developmental State)
2.1 The Mandate of a development finance institution
The State’s intervention in the financial system has frequently been justified on the basis
of different forms of market failure. Development finance can be defined as the
provision of finance to those projects, sectors and sections of the population that are
not well serviced by the financial system as a whole.
DFIs have, played the role of financier for the State in providing development finance for
public goods on which full or partial cost recovery is possible, this is done through
investments in Strategic businesses whose operations compliment and address policy
objectives of the State. Other aspects of the mandate include employment creation,
income redistribution, import substitution and development of poor groups, regions and
sectors, which suggests that DFIs and DA’s should also be measured on social
contribution and not only their financial returns.
Overall, the DFI’s are mandated to facilitate the development of new industries and
value chains. Most important, they have a responsibility to support public and private
investment, and to serve as catalysts for economic growth and sustained development.
The primary role of the DFIs is to reach out to areas where the private sector is not
willing to participate. The role of DFIs is vital in terms of job creation by raising
productivity, boosting exports and promoting greater savings and investment. To
support these objectives, government established the Development Finance Institutions
Council, amongst others, its tasks is to ensure alignment between programmes of the
DFIs and government’s development agenda. (Pravin Gordhan : DFI 2010/11)
The mandates of the four key DFIs, can be deduced to the following:
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The DBSA is committed to accelerating sustainable socio-economic development by
funding physical, social and economic infrastructure. The Bank plays a multiple role
of Financier, Advisor, Partner, Implementer and Integrator to mobilise finance and
expertise for development projects.
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The IDC was set up to promote economic growth and industrial development. It
provides finance for industrial development in South Africa and the Rest of Africa.
•
The LB provides financial services to the commercial farming sector and to agribusiness and makes available new, appropriately designed financial products that
facilitates access to finance by new entrants to agriculture from historically
disadvantaged backgrounds.
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The NEF is focused on economic empowerment and transformation through
supporting Broad-based Black Economic Empowerment (BB-BEE).
The mandates of the DFI’s mentioned above can be viewed as very broad, and this has
enabled each one of them to further define their mission as directed by their shareholder
and their boards at various times. The shareholder governs the relationship and expected
outcomes through the shareholders compact, which serves as a contract of service delivery
to the State and also as a monitoring tool by the relevant bodies that are responsible for the
oversight role on the FDI’s. This arrangement is the sole opportunity for the State to enforce
its developmental agenda for the entity to execute accordingly. In the review done by
National Treasury there is no analysis of the shareholders compact as well as in this
particular study, however aspects of the shareholders compact will be reviewed by the work
stream dealing with efficiency of SOE’s.
The general trend observed with information relating to DFIs is that, beyond their activities
as investments agents of the State there is no shared approach to the sectors and
businesses where these DFI’s invest, each entity interprets its mandate and creates its
strategy for delivery, drawing from the various economic policies and sector policies that
govern their operating environment.
Amongst the areas, reviewed by the National Treasury was the investment policies and
guidelines followed, whereby most of the entities provided their signed agreements with
the reserve bank and the National Treasury on the limits of their borrowing activities, and
nothing else beyond that which would provide a position on the investment criteria, the
investment horizon, policies and thresholds of the State’s appetite, strategies for hedging
and holding strategic investments. One is in no way suggesting that these institutions do not
have these strategies, the point being made is that there is very little indication that the
State plays a leadership role in setting the parameters of this environment, moreover the
different shareholder representation has nuances of varied preferences such as one having
a bias on the focus of the DFI, being on the sector or industry, where investment is in
related or diversified investments, whilst the other having a strong financial bias in their
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activities, this comes across in the investment choices of the entity being in listed companies
and other financial investment assets.
The National Treasury review also highlighted findings which have an impact on the
discussion and analysis of the State’s portfolio of investments, such as:
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Mandates should be monitored and evaluated. The government department from which a
DFI mandate originates should have information on the effectiveness of its mandate and
understand how it fits into the overall strategic direction of the department and
government. Evaluation information is crucial for this purpose and it must be developed and
strengthened.
The mandate generation process for DFIs should be reviewed, standardised and refined to
ensure that there are no unnecessary overlaps in mandates, and gaps between mandates
and resources.
To prevent the risk of mandates becoming opaque and to enable them to keep pace with
the evolution of markets, client needs and government policy objectives, there should be
periodic mandate reviews by the DFS Council.
The DFS Council should determine which DFI should be responsible for a new objective,
priority or directive. This would reduce the risk of inconsistency and overlapping mandates,
while ensuring appropriate delegation of tasks.
Regardless of economic sector, DFIs need to be focused on extending access to financial
services for well-defined target groups by absorbing and sharing the risks involved in
extending such access, and consistently encouraging the private sector to deepen its
participation in these target markets.
In the infrastructure sector, the DBSA should remain focused on financing infrastructure. The
IDT should continue its focus on social infrastructure, restricted to non-lending services.
A single, strong DFI should finance the housing sector. The three housing sector DFIs (the
NHFC, NURCHA and RHLF) should be merged into a single entity with three business
divisions.
In agriculture, the Land Bank’s mandate should be focused on financing commercially
oriented emerging farmers and supporting agriculturally successful land reform. MAFISA
programmes should be absorbed into the Land Bank.
The enterprise financing sector should be rationalised, with greater focus on eliminating
unnecessary overlaps in activities and operating mandates. Institutions involved in enterprise
financing include the IDC, NEF, Khula, UYF and SAMAF, not including the Provincial agencies and
growth fund initiatives set up also in Municipalities. Given the activities of the National DFI’s
who have an extended geographical footprint, the enterprise financing sector would appear as if
the market is saturated but the service delivery complaints which are reported by entrepreneurs
and SMME’s suggests otherwise but further raise questions as to where or what the actual
problem might be.
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3. OVERVIEW OF SOUTH AFRICAN DEVELOPMENTAL FINANCE
INSTITUTIONS
As indicated in an earlier segment of this paper, a brief synopsis of the four major DFIs: the
Development Bank of Southern Africa (DBSA), the IDC, and the National Empowerment Fund.
Development Finance Institutions (DFIs) have a seminal role in social and economic
development. They do so by providing finance that supports infrastructure development,
industrial development, business development, agricultural development and job creation.
Taken as a whole, the DFIs constitute South Africa’s development finance system with DFI
assets equalling almost a tenth of total investment.
To fulfil their developmental role, DFIs should at the minimum, respond to and support
policy (particularly industrial development and infrastructure development) and should
complement (and not directly compete with) the commercial banking sector and the
development of capital markets more generally.
The purpose of this document is to provide an overview of the investments of the
Development Bank of Southern Africa (DBSA), the Industrial Development Corporation
(IDC), the Land Bank (LB) and the National Empowerment Fund (NEF) have made in the past
year in the following priority sectors:
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Energy
Mining
Agriculture
Transport and logistics
Water and Sanitation
Telecoms
In this paper, we merely provide a transaction listing by sector of the transactions that have
been approved/ disbursed over the past year. The information was sourced from National
Treasury, Economic Development Department and the National Empowerment Fund, to
augment information provided by the entities. For the purposes of presenting the current
portfolio using data for the same period, the information has been updated as per published
annual reports, of 2010/11.
It is important to note that this exercise was not a technical valuation of the FDI’s in the
overview.
Financial Status of DFIs
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Table 1 below illustrates that the total asset base of DFIs as at 31 March 2011
amounted to R188 billion with the four DFIs (IDC, DBSA, Land Bank and NEF)
constituting 96% (R178 billion) of the total balance sheet. IDC, DBSA and Land Bank
constitute 92% (R172.5 billion) of the total DFIs’ asset base. These assets are meant to
be channelled towards development lending to facilitate the creation of new
production capacity in different sectors of the economy.
Table 1: Financial Status of DFIs as at 31 March 2011
R 000
DBSA
IDC
Land Bank
NEF
NHFC
Other DFIs
Total
Total assets
47,397,116
106,806,000
18,297,673
5,315,860
2,990,521
7,088,343
187,895,513
Total debt
29,484,094
13,738,000
13,557,919
35,283
713,939
456,034
57,985,269
Total equity
Development
loans
17,913,022
93,068,000
4,739,754
5,280,576
2,276,586
2,110,306
125,388,244
37,845,148
12,053,000
14,299,153
1,109,673
1,330,393
856,514
67,493,881
A. IDC
Introduction
The Industrial Development Corporation (IDC) is a national development finance institution whose
primary objective is to contribute to the creation of balanced and sustainable economic growth in
Africa and to the empowerment of the South African population, thereby promoting the economic
prosperity of all citizens. The IDC achieves this by promoting entrepreneurship through the building
of competitive industries and enterprises based on sound business principles. Alignment of
operations with the New Growth Path (NGP) and the establishment of a Green Industries Business
Unit (IDC Annual Report, 2011; 4). About 97% of new investment approvals in the priority sectors as
identified in the NGP and Industrial Policy Action Plan (IPAP2)
Financial performance
The IDC’s loan funding requirements are sourced mainly from international development agencies
and from commercial facilities raised through the IDC’s relationships with commercial banks. The IDC
Mini Group’s general funding requirements for 2011 amounted to R7,9 billion (2010: R8,7 billion),
consisting of financing advances of R6,4 billion and borrowing redemptions of R1,5 billion. These
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requirements were partly met out of R5,6 billion of internally generated funds, namely repayments
received and profits. New borrowings were increased by R4,7 billion for the year IDC Annual Report,
2011; 48).
The IDC’s total investment book as at 31 March 2011 amounted to R66.9 billion. Listed
shares (equity investments) represent 85% (R57 billion) of this book and only 15% (R9.9
billion) of these assets is dedicated to developmental loans. Figure 2 below indicates the
IDC’s sector split of its investment book as at 31 March 2011.
The IDC recorded a profit of R2,7 billion for the financial year ended 31 March 2011. The 22%
increase in profitability relatives to the previous year which resulted from the improved
performance of Foskor, an IDC subsidiary, and of other equity-accounted investments, as well as
lower impairments and the containment of operating expenses. The Corporation’s capital and
reserves expanded by 17%, from R79 billion to R93 billion, thereby providing a solid financial
platform from which to deliver its ambitious developmental strategies going forward (IDC Annual
Report, 2011; 9)
In the period under review, the IDC’s investment activities were undertaken by three
operational divisions: Industrial Sectors, Resources Sectors and Services Sectors. Each
division incorporates a number of Strategic Business.
Figure 1
Table 2 below depicts more recent funding approvals for the period January to December
2012. Energy, agriculture, mining and telecoms sectors accounted for the bulk (R5.3 billion)
of the disbursements.
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Table 2: IDC funding approvals in selected sectors (January to December 2012)
Sector
Energy1
Mining and minerals beneficiation
Agriculture and agro-processing
Transport and logistics
Water and sanitation
Telecoms
Listed shares2
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Value of funding
approved (R'm)
2 723
1 108
1 135
20
344
85
Notes:
1 - Excludes funding that was approved for renewable energy projects but not accepted in the 1st round bidding
2 - Loan funding approved to a company listed on the JSE (i.e. not funding to buy shares)
IDC’s Significant investment
i.
Hernic Ferrochrome (Pty) Limited
The IDC has a 21,30% equity holding in Hernic Ferrochrome (Pty) Limited, a vertically integrated
ferrochrome producer and the world’s fourth largest, which owns chrome mines and a smelter near
Brits in the North West Province. Ferrochrome is a key ingredient in the manufacturing of stainless
steel. The steel sector consumes approximately 90% of global ferrochrome output. The Ferrochrome
markets recovered modestly from the 2009 economic downturn and the average selling price of
ferrochrome achieved by Hernic was in line with budgeted prices. Stronger market demand resulted
in higher capacity utilisation than in 2010, enabling Hernic to return to profitability after reporting a
loss in 2010 despite the strong Rand against the American Dollar, which impacted negatively on
turnover. The Department of Mineral Resources awarded Hernic a new-order mining right for
Maroelabult Mine. This is a significant milestone for the company, moving Hernic to a position
where it can be self reliant with regard to chrome ore supplies (IDC Annual Report, 2011; 33)
ii.
Grand Gotland (Pty) Limited
Grand Gotland (Pty) Limited is a broad-based black empowerment company funded by the IDC to
acquire a 24% stake in Magatar Investments (Pty) Limited, a junior contract mining group focused on
underground coal mining Magatar boasts specialised expertise in optimising underground coal
mining with its South African developed and patented linear mining methodology, which enables it
to assemble, operate and sequence traditional equipment and machinery in a manner which
improves system utilisation from conventional 30% levels to above 60%, simultaneously reducing
the total cost of production. The efficiencies of the Magatar Methodology facilitate mining of thinner
seams that cannot otherwise be mined in a commercially viable manner. Additional advantages of
the methodology include enhanced safety, greater resource utilisation and lower electricity
consumption per tonne of production (IDC Annual Report, 2011; 33).
The operations began in the second half of 2010, but unforeseen challenges resulted in production
downtime, leading to a lower output than originally forecast. However, Magatar reported a profit for
the six months ending 31 December 2010. Initial challenges have been addressed and operations are
stabilising. An increase in revenue from operations for the remaining six months of the financial year
is expected (IDC Annual Report, 2011; 33)
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iii.
Lesego Platinum (Pty) Limited
Lesego Platinum (Pty) Limited is a black-owned, junior platinum company, which owns the Phosiri
Platinum Project on the eastern limb of the platinum-rich Bushveld Igneous Complex near
Lebowakgomo. The IDC acquired a 28% stake in Lesego, with IDC funding currently being used for
the completion of a feasibility study. Significant progress has been made on the project, with the
results of a Scoping Study, completed in September 2010, proving to be in line with expectations and
indicating that a large, long-life underground platinum mine can be supported by the Lesego
resource. These results led to the initiation of a prefeasibility study; the second phase of the
feasibility study itself. Exploration drilling intersected significantly shallower Merensky and UG2
platinum-bearing reefs during the early stages of the prefeasibility drilling campaign. These
intersections are expected to have a significantly positive impact on the overall economic lifecycle of
the project, reducing time-to-first production considerably thanks to the presence of the shallower
reefs. The prefeasibility study is expected to be completed towards the end of 2011, with the
feasibility study scheduled to start shortly thereafter and planned for completion by the end of
2012. This IDC investment has enabled a black-owned mining company to proceed with the
development of a large-scale mining project (IDC Annual Report, 2011; 33)
iv.
Foskor (Pty) Limited
Foskor (Pty) Limited (Foskor) is a 59% subsidiary of the IDC following the successful conclusion of
a 26% BEE transaction. Current operations are conducted by two divisions a phosphate rock and
copper mining division with production facilities in Phalaborwa, and a phosphoric acid and
fertiliser division situated in Richards Bay. The 2011 financial year saw an improvement in prices
of Foskor products sold in international markets, driven by the worldwide improvement in
commodity prices, although results were tempered by the Rand strength. Milestones are:
conclusion of a BBBEE transaction for 26% of the Foskor equity; entry into new export markets
to expand the African customer base; three new mining licences to continue operations in
Phalaborwa; implementation of Pyroxenite Expansion Projects on time and within budget;
retention of ISO, OHSAS and SANS certifications; the company’s export orientation has recorded
strong recovery results for 2011 in the face of the global economic recession. Trading conditions
in the fertiliser industry remained difficult, despite higher USD prices.
Foskor’s financial performance can be summarised as follows: revenue up by 33% to R4,6 billion
(2010: R3,5 billion); operating profit up by 59% to R547 million (2010: R345 million); and profit
before tax up by 1,043% to R560 million (2010: R48 million) (IDC Annual Report, 2011; 33)
v.
Hans Merensky (Pty) Limited
The IDC is a 43% shareholder in Hans Merensky Holdings (Pty) Limited (HMH). HMH’s operations
comprise a timber business managed under the Merensky brand and consisting of softwood and
hardwood plantations, sawmills, timber product optimising plants, as well as distribution and trading
facilities in Gauteng, the Eastern and Western Cape, KwaZulu-Natal, Mpumalanga and Limpopo
provinces. The fruit business under HMH controls trades as Westfalia and includes operations
consisting of the growing, prepacking, processing, marketing and distribution of subtropical, fresh
and processed fruit products. These operations are situated in the Limpopo, KwaZulu-Natal and
Western Cape provinces of South Africa, as well as in the United Kingdom, Netherlands, France and
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Peru. The milstone for the financial year ending 2011 are: despite depressed economic conditions
across the globe, market demand for subtropical fruit grew in EU markets where the company’s
operations performed better than expected. In EU countries, Westfalia provides a category service
to major retailers, procuring products from several countries of which the South African production
base represents one of the sources; results from Merensky were negatively affected by the
combined effects of the weak demand for softwood structural timber and the rapid fall in demand
from Spain for plywood products. Positive results were achieved from hardwood lumber products
and all forestry operations. Following the weakening demand for plywood products from the Iberian
Peninsula and the strengthening Rand, it was decided to close the plywood plant located in Kokstad;
the global economic climate necessitated the postponement of equity raising for expansion projects
and the rationalisation of minority interests in operating companies. Additional equity will, however,
be needed when the company returns to its intended growth plans (IDC Annual Report, 2011; 34)
vi.
Karsten Group Holdings (Pty) Limited
Karsten Group Holdings (Pty) Limited is a diversified agricultural and exporting company with its
main operations in the Northern Cape. Karsten produces table grapes, dates, nuts, citrus, deciduous
and pome fruits via its subsidiaries. The IDC has a direct shareholding of 36,55% in the company and
in some of the BBBEE subsidiaries that function as project companies. Agricultural risks are mitigated
through geographic diversification, with production spread over a 300km strip down the Orange
River and at Ceres in the Western Cape. Karsten also has a management contract to manage the
Green Valley Division of the IDC. Karsten has an established marketing company in the UK through
which most of its exports are channelled. The company showed consistent growth over the five
years up to 2009, and although an increase in turnover was recorded in the financial year ending
September 2010, profit decreased. The company is a significant job creator and currently employs
850 permanent workers and approximately 4 700 seasonal workers (IDC Annual Report, 2011; 35)
vii.
York Timber Organisation Limited
York Timber Holdings Limited or (“York” or “the Company”) is the largest privately owned forestry
and saw log products company in South Africa with 57 000 hectares of pine plantations, 4 000ha of
eucalyptus plantations and 6 000ha with additional water licences. York is the largest saw-miller in
the country and the second-largest plantation owner. IDC’s investment is in the form of equity with a
direct shareholding of 29,8% in the company, as well as funding for a community and a staff trust
through special-purpose vehicles, which in total hold 12,8% of the ordinary listed shares in York
Timbers. York is certified by the Forestry Stewardship Council (FSC) that promotes the responsible
management of the world’s forests. The FSC certification ensures that forest products are from
responsibly harvested and verified sources. The FSC Principles and Criteria set out how forests
should be managed to meet the social, economic, ecological, cultural and spiritual needs of present
and future generations. These include managerial aspects, as well as environmental and social
requirements. The highlights are : after the collapse in demand for residential construction and two
of the worst fires in recorded history, York restructured in 2009 to realign the Company to market
conditions. A new management team was brought in to effect the change and the Company is now
well positioned to operate profitably within the current economic environment. Over the last two
years, the management team has demonstrated exceptional skill in completely overhauling almost
every aspect of the Company. Since July 2009, cash generated from operations has been positive in
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every month excluding one, and the results of the complete turnaround have been reflected in the
financial results since January 2010.
B. DBSA
The DBSA’s entire loan book as at 31 March 2011 stood at R37.8 billion. This represents only
development loans with equity investment attributable to a further R3.5 billion. Figure 1
below depicts DBSA sector split of its loan book (development loans) as at 31 March 2011.
Figure
2
In 2010/11 financial period, DBSA disbursements amounted to R8.3 billion.
Table 2 below shows DBSA distribution of disbursements for financial year ending 31 March
2011. Energy sector accounts for 26% of disbursements followed by housing (15%),
Transportation (13%), Roads and drainage (8%) and the rest of other sectors accounting for
the remainder.
Table 2: Distribution of disbursements for year ending March 2011
SECTOR
%
DISBURSEMENTS R '000
Social Infrastructure
1%
R 83 360.00
Energy
26%
R 2 167 360.00
Transportation
13%
R 1 083 680.00
Education
4%
R 333 440.00
Water
3%
R 250 080.00
Roads and Drainage
8%
R 666 880.00
Sanitation
1%
R 83 360.00
Mining
4%
R 333 440.00
Agriculture
2%
R 166 720.00
Housing
15%
R 1 250 400.00
ICT
6%
R 500 160.00
Health
5%
R 416 800.00
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Financial services
Manufacturing
Funds
TOTALS
4%
4%
4%
100%
R 333 440.00
R 333 440.00
R 333 440.00
R 8 336 000.00
Sectors of investment
In 200/11, the DBSA surpassed most of its developmental and operational targets for the year, with
record investment approvals of R 37.1 billion of which R 30.79 were projects in South Africa. The
commitments were also high, at R13,9 billion and the disbursements of R8,3 billion were on par with
the previous financial year. The DBSA approved projects to the value of R34,2 billion. The value of
the Bank’s signed agreements with clients was R13,9 billion. (DBSA Annual Report, 2011; 20, 26).
C. NEF
Introduction
Established by the National Empowerment Fund Act No 105 of 1998, the NEF is a driver and a
thought-leader in promoting and facilitating black economic participation through the provision of
financial and non-financial support to black empowered business. The NEF’s role is to support BroadBased Black Economic Empowerment (BB-BEE). As the debate concerning what constitutes
meaningful and sustainable BB-BEE evolves, the NEF anticipates future funding and investment
requirements to help black individuals, communities and businesses achieve each element of the
Codes of Good Practice. These include a focus on preferential procurement, broadening the reach of
black equity ownership, transformation in management and staff and preventing the dilution of
black shareholding. The NEF differentiates itself not only with a focused mandate for BB-BEE, but by
also assuming a predominantly equity-based risk to maximise the Empowerment Dividend. Reward
should balance the risk with the application of sound commercial decisions to support national
priorities and government policy such as the Accelerated and Shared Growth Initiative for South
Africa (AsgiSA) or targeted investments through the Department of Trade and Industry’s (the dti’s)
Industrial Policy Framework (IPF). The work of the NEF therefore straddles and complements other
Development Finance Institutions (DFIs) by allowing the organisations to work in close collaboration
in the promotion of BB-BEE. With them, the NEF can enhance other DFIs and their mandates by
sharing its specialist sector expertise and knowledge of BB-BEE (NEF Annual report, 2011; 7)
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Sector investment
NEF’s total disbursement facilities (loan book) as at 31 March 2011 amounted to R2.08
billion. This represents the development loans since NEF’s inception. NEF disbursed a total
of R552.1 million in the financial year ended 31 March 2011. The NEF also provided latest
data of its invested portfolio by sector in the period April 2011 to December 2011 (table 4
below).
Table 4: NEF Invested Portfolio by sector by value for the period 1 April 2011 - 31 December 2011
Sector
Agro Processing
Arts & Culture
Chemicals & Pharmaceuticals
Construction
Energy
Engineering
Financial Services
Food & Beverages
Franchise
Manufacturing
Mining
Retail
Services
Technology
Tourism & Entertainment
Transport
Total
11 990 000
10 000 000
40 000 000
8 750 000
26 325 000
43 000 000
9 000 000
10 078 200
22 782 194
17 900 000
33 500 000
10 142 000
1 350 000
26 000 000
6 666 460
3 000 000
280 483 854
To date, 14 projects were approved, and together these amount to a pipeline estimated in excess of
R25 billion, with an employment-creation potential of between 150 000 to 200 000 brand new jobs
over the next three to five years. SPF projects have the potential to attract meaningful foreign direct
investment into South Africa. A total of 286 black-empowered businesses to the value of R2.5 billion
were approved (NEF Annual Report, 2011; 23).
During the financial year, NEF approved 62 deals worth R749.3 million (2010: 61 deals worth R749
million). For the year under review, 47% of the NEF’s funded portfolio comprises businesses that are
owned and managed by black women. This includes the approval of 48 deals worth R632.1 million by
the Fund Management Division (FMD) (2010: 54 deals worth R685 million). This was achieved since
its inception, the NEF has funded all different sectors except projects related to the environment,
education and maritime as illustrated in Figure 2. (NEF Annual Report, 2011; 27).
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20
Figure 2: Investment by sector since inception to 31 March 2011
Development Bank of Southern Africa (DBSA)
Introduction:
The DBSA was established in 1983. In 1997, the DBSA was reconstituted as a development finance
institution in terms of the Development Bank of Southern Africa Act, No. 13 of 1997. The
D. Land Bank
Introduction:
The Land Bank was established in 1912 to promote rural and agricultural development. From its
inception until 1936, the Bank provided mortgage loans to emerging and commercial white farmers
and government historically provided funding for the Bank. Post 1936, regulatory boards were
formed and the Land Bank Act was amended giving the Bank powers to lend money to the
respective regulatory boards and for any other purpose for which such regulatory boards may
borrow money in terms of its regulations. In the early 1990s, government removed or drastically
curtailed many institutional support mechanisms. This trend, in line with prevailing market
liberalisation, included reduced state support for agriculture. The absence of the support system
changed the balance of the agricultural sector and made it very difficult for emerging farmers to
enter or succeed in agriculture (Land Bank Annual Report, 2011; 60).
The post-1994 Land Bank remained wholly owned by government and is a key financial player in
agriculture and rural development. It provides retail and wholesale finance to development and
commercial farmers. The Land Bank has an insurance subsidiary and is the sole shareholder of the
LBIC, which provides insurance products to the Bank’s clients and non-clients. The Land Bank’s longterm objectives flow from the Land and Agricultural Bank Act, and are aligned with government
policies and South Africa’s socio-economic needs (Land Bank Annual report, 201; 60)
Three years ago the Bank committed to change from a nonperforming institution with low staff
morale to a sustainable one where business operations are informed by the mandate. Corporate
governance had broken down, profits had plummeted and there was a high volume of nonperforming loans. In the financial year 2010/2011, the annual report indicates that the Bank’s
financial management systems have started to yield results. Capital adequacy is maintained well
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21
above the levels agreed on as one of the conditions for the government guarantee, and liquidity
levels have significantly improved. Efforts to grow the loan book to an acceptable level within the
appropriate risk appetite and framework have begun to pay dividends. The Bank’s traditional clients
are coming back. However, the cost-to-income ratio is expected to remain high over the mediumterm as the Bank installs systems that will secure its financial sustainability, while dealing with legacy
issues.
Government imperatives In line with its mandate, the Bank have put development at the heart of its
business strategy. Following the success of its turnaround strategy in prior years, the Bank is now
working to ensure a sustainable business model, which includes improving its impact in the
development sector. Over the past financial year, the Bank has given extra attention to this strategic
area, including the drafting of a development policy. The approved policy provides a basis for the
Bank’s role in agriculture and rural development. Three crucial instruments are now in place:
• A wholesale finance facility for strategic partners to on lend to qualifying participants
• An emerging farmer support facility, approved by Cabinet and in its pilot phase
• Incentivisation scheme which credits projects with high development impact by reduced
lending rates (cost of credit).
These instruments will aid the Bank’s outreach to its key development clients while reducing
financing, outreach and management risks. The Bank is also designing a dedicated Banking division,
Retail Emerging Markets, to focus on emerging farmers.
Sector Investment
Land Bank’s total loan book as at 31 March 2011 amounted to R11.1 billion. Agribusiness
and forestry, horticultural products and field crops account for 81% (R9.2 billion) of
disbursements. The disbursements for 2011 financial year amounted to R2 billion for these
sectors.
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22
The retail business division operates through a network of 27 branches which are located
throughout the country. The retail business provides funding to commercial and development
clients.
The potential impact of Bank lending approvals on GDP is estimated at R6.1 billion, whereas the
actual estimated development impact of Bank disbursement on GDP is estimated at R19.8 billion.
Economic growth alleviates poverty because it supports a general improvement of welfare (Land
Bank Annual Report, 2011; 30).
Hedged investment
The Bank’s investment portfolio comprises investments held to serve as a hedge for the Bank’s postretirement medical aid liability. These investments have been classified as “fair value through profit
and loss”, and are measured and disclosed at fair value. The fair value of the portfolio increased
from R211.2 million in the prior year to R227.9 million at the end of the current financial year. This
translates to a surplus of R9.0 million (2010: R21.1 million) when compared to the relevant liability.
During the reporting period, the Bank received a furtherR750.0 million from the National Treasury,
in line with government’s commitment to convert its guarantee into cash over a three-year period.
Of the R3.5 billion initial guarantee, R1.75 billion has been converted into cash, with the remainder
expected over the next two financial years.
SUMMARISED VIEW OF THE NATIONAL DFI LANDSCAPE
TABLE A1: NATIONAL DFIs (In KPMG Report –SOE database 2011; Annual reports)
NAME
Industrial
Development
Corporation (IDC)
Functional Mandate
Industrial
development
TOTAL ASSETS
R106.8bn (2011)
GOVERNANCE
Established in 1940
Self-financing state-owned
DFI
Reports to Min of Economic
Development
The Land and
Agricultural
Development Bank
of South Africa
(Land bank)
Agricultural finance
18.2bn (2011)
Established in 1912
Undergoing a transformation
process to normalise its
operations. Recapitalisation
approved subject to
successful transformation.
Reports to Min of Finance
Development Bank
of Southern Africa
(DBSA)
Regional and
National funding
mostly for
infrastructure
Housing Finance
R47.3bn (2011)
Established in 1983
Reports to Min of Finance
R2.9bn (2011)
Established in 1996
Wholesale funder for low and
moderate income
National Housing
Finance Corporation
(NHFC)
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23
communities. Disbursements
increased from R249m to
R511m in 2009.
Reports to Min of Human
Settlements
Established in 1990
Independent
Development Trust
(IDT)
Government
development agency
for social
development
R1.4bn (2008)
Khula Enterprise
Finance Ltd
(Khula)
SMME Development
R1.3bn (2009)
National
Empowerment Fund
(NEF)
Empowerment fund
R4.6bn (2009)
Umsobomvu Youth
Fund (UYF)
Youth development
R 703mil (2008)
Established in 1998
An association not for gain
Board of directors
Rural Housing Loan
Fund (RHLF)
Housing Finance
R280mil (2009)
NURCHA
Construction finance
and support services
(Nurcha)
Construction finance
and support services
R494mil (2010)
South African Microfinance Apex Fund
(Samaf)
SMME
DEVELOPMENT
R151.3mil (2009)
Micro-Agricultural
Finance Initiative of
South Africa
(Mafisa)
Emerging farming
and agricultural
businesses
R200mil (2007)
(will update)
Established in 1996
Section 21 company
Targets the rural areas of all
nine provinces
Section 21
Funded by government and
donor funding.
Operates in 5 of the nine
provinces.
Established in 2006
Built community based
financial institutions and
mobilised deposits.
Shareholders compact with
DTI
Short and medium term
credit and savings
mobilisation.
Delivery through private and
civil society orgs.
Pilot project.
The long-term sustainability
of the IDT has been under
discussion since it became
evident that the organisation
was eroding its capital base in
the execution of its mandate.
Reports to the Min of Public
Works.
Established in 1996 as an
independent agency of DTI.
Khula lends directly to SMME
and nolonger stands surety
for commercial loans.
Established in 1998
Governed by Trustees DTI as
sole shareholder
Reports to Min of DTI
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3.1 Conclusion
The above provides a broad overview of the investments by the four DFIs in selected sectors
over the past year. The combined picture for the financial year ending March 2011
*(excluding the NEF’s investments from April 2011 to December 2011 & IDC’s approved
investments to date) can be depicted as follows:
Sector
Combined Investment by all 4 DFIs as at 31 March 2011
DBSA ; IDC; LAND BANK; NEF*
R 2 376 402 000
Energy
Transport
R 1 138 890 000
Water
R 250 080 000
Sanitation
R 83 360 000
Mining
R 1 142 003 000
Agriculture
R 2 392 325 000
ICT
R 835 807 000
TOTAL
R 8 218 867 000
In total the four DFIs disbursed about R13.2 billion in combined investments in the financial
year ending March 2011. Energy, transport, mining and agriculture constituted 53% (or
R7 billion) of the combined investments while water and sanitation only 2.5% (R0.33 billion).
The latest investments values for the existing State portfolio in listed shares could not be
analysed however, the JSE provided some of the Listing held by the State. This is an
important aspect and will require further investigation. Not least because in some cases the
assets dedicated to development lending or investments is disproportionately smaller than
assets held as financial investments to generate income to cover operating expenses. This
matter will be extensively covered in the financial analyses of “Funding and viability”.
The sector split in terms of investments while important represents a very limited picture of
the four DFIs. As discussed earlier in this paper, regarding previous reviews and the “AS IS”
of the DFIs, issues which would be material to establish in the Sector investments would be
the level of collaboration, synergy and a visibility of champions for the sectors, which would
have assisted in providing a perspective on the findings of a high degree of overlap and
duplication of funding activities as well as achieving limited developmental impacts. These
reviews also pointed to coordination weaknesses, unclear and hard to measure
development outcomes and impacts and the general absence of an objective monitoring
and evaluation system, outside of the DFIs own systems, this presents a challenge for the
State to assess performance.
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3.2 Provincial Overview OF DFIs and DA’s
Provincial DFIs and DA’s have a significant geographical representation, as a collective they have
relative capacity and resources for investments. According to 2008/09 balance sheet figures,
provincial DFIs -Ithala, NWDC, Limdev, and ECDC reported a combined total asset value of R7.9billion
which could be considered substantial but not significant because this value can be represented with
one of the largest national DFIs, the IDC which posted R73 billion for the same period.
A national framework and policy on the rational and governance of these provincial structures has
increased the challenge in the developmental finance landscape, resulting in a lack of co-ordination
and collaboration within the State’s portfolio.
“There is no prescribed legal form for establishing DFIs”. There are clear indications in relevant
policy documents, such as the Review of Public Entities undertaken by National Treasury and
Department of Public Service Administration, that trusts and Section 21 companies are no longer
acceptable corporate forms for public entities. There are, however, no time lines stipulated for this
transition and this creates uncertainty.
“When funds are placed with a section 21 company or a trust, it is very difficult for those funds to be
repaid to government. This stems from provisions of Section 21 of the Companies Act (1973), which
states that funds may only be transferred or donated to companies with similar objects. There are
also issues related to tax exemption covered under the Income Tax Act (1962)”
This refers to governance challenges that the State faces with development agencies and growth
fund structures at the Provincial and Municipal levels, and this is despite the regulatory framework
and guidelines issued by National Treasury on the subject.
The Provincial DFIs and DA’s are also established to advance economic development aligned to the
relevant provincial development strategies which are underpinned by the National priorities.
Although most of them state that their activities are aligned with the relevant provincial
development strategies, their effectiveness in advancing the goals of the developmental state
through investments in strategic sectors can be considered as miniscule given their resource base
and the challenge of skills, as reiterated by all the surveys under taken. This would suggest that the
DFIs and DA’s in the Province need to find and champion a new strategy to address their short
coming, and to make an impact in their contribution to the developmental state.
The most common functions of the Provincial DFIs and DA’s are: support and financing of SMMEs
and BEE, the facilitation of development projects (identify, plan, finance, implement, monitor)
:investment promotion and marketing, and the promotion of various developmental activities such
as human resource development. The functions selected often have a direct impact on the potential
financial sustainability of a development agency. There is viability in providing a mix of the functions,
because it is a natural hedging of the higher risk functions which result in a bad loan
book/uncollectable, which is prevalent in the Provincial DFIs, as reported by the AG on high values of
bad debt ‘write off’ annually. One example of these scenarios, is where loans have been given for
development on tribal land, in the case of a default there are a number of technicalities for the
recovery against such arrangements. There is also a perception that arises, especially where the mix
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of functions is operated, where clients of the development agency confuse the products being
provided, where an entity has grant funding and loan funding, the public find it difficult to
understand why the two products have different requirements but are from the same source.
Some of the Provincial structures are more capable and ambitious, in their endeavour to participate
in the economy. The surveys have indicated that the leadership of the entity plays a major role in the
interpretation of the mandate and therefore the strategy that is ultimately pursued by the DFI or DA.
The functions that they may engage in are:





Leveraging resources beyond the public sector
Project development and facilitation
Investment in strategic projects and programmes (mostly industrial and property
development, mining projects)
Project identification, and incubation programmes
Foster collaboration, nationally, regionally and internationally.
Conclusion:
In summary, the developmental finance system in the South African economy faces strategic
challenges of delivering the mandate and objectives of the State, in and through all the spheres
of government. This we believe has been exacerbated by the lack of a shared vision for all, and
the limitations of the broad economic framework. And this is not limited to the ideology held in
the provincial and municipal spheres because, the table of the National DFI’s clearly shows the
geographical extension of each of the major DFI’s into Provincial and local government zones of
operation. The question that remains to be asked, is the rational for the National DFI’s to extend
their footprint and the relevance therefore of the Provincial and local government structures
which operate similar functions perhaps not in scale and scope. This exercise of discussing the
State’s portfolio did not extend to the rational and measurements of effectiveness and
efficiencies of operating DFI and DA business models. However, as a general comment there are
possible areas of overlap and duplication in the National development finance systems, even if
we only focus on transversal operating systems the shared knowledge and skills base including
the investment in setting up systems would be a saving.
4. REVIEW OF THE DEVELOPMENTAL FINANCE SYSTEMS
Background
At the request of Cabinet, the National Treasury undertook a review of the development finance
institutions (DFIs) in the country. The review, which ran from February 2007 to March 2008, was
conducted in consultation with the national departments responsible for these institutions: the
Departments of Trade and Industry, Public Works, Labour, Housing, and Agriculture and Land Affairs.
The DFIs were created to promote social and economic development. They do so by providing
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27
finance that supports job creation, provision of low-cost housing, agricultural development, small
business development, industrial development and infrastructure development. Individual DFIs have
specialised areas of operation. Taken as a whole, the DFIs form South Africa’s development finance
system.
The DFIs in operation today were developed in an ad hoc manner by different arms of government,
and there has been a notable increase in the number, role and scope of operations and importance
of these institutions since their initial establishment. In addition, there have been substantial
changes in South Africa’s financial environment in recent years. A clear picture emerges from the
review that, taken as a whole, these institutions are not living up to their development potential.
The National Treasury review established that, DFIs have total assets of R120 billion, yet only 50 per
cent of these assets are dedicated to developmental lending or investment. The DFIs generally have
limited impacts in their mandate areas, while unnecessary overlap and duplication of funding
activities have grown. The lack of coordination of the DFI system contributes to these problems and
the misalignment of DFI activities with government policy. It is now appropriate to take stock of
experience and consider the benefits of a coordinated policy and governance system for DFIs,
informed by a central policy, taking into account government’s development policy objectives.
This review focused on 12 institutions, including the four major DFIs: the Development Bank of
Southern Africa (DBSA), the Industrial Development Corporation (IDC), the Land and Agricultural
Bank, and the National Housing Finance Corporation (NHFC). In addition, the review covered Khula
Enterprise Finance, the National Empowerment Fund (NEF), the Independent Development Trust
(IDT), Umsobomvu Youth Fund (UYF), the National Urban Reconstruction and Housing Agency
(NURCHA), the Rural Housing Loan Fund (RHLF), the Micro Agricultural Finance Institutions of South
Africa (MAFISA) and the South African Micro Finance Apex Fund (SAMAF).
The review had three main objectives:
•
•
•
To ensure that the mandates of DFIs are coordinated and effective in support of South
Africa’s social and economic policy objectives.
To ensure the efficient allocation and use of government resources, and that DFIs operate in
a manner consistent with their underlying principles.
To develop a coordinating policy and governance system for DFIs.
This review was undertaken in three phases:
•
•
•
Phase 1 reviewed the mandates, enabling legislation, operations, governance structure, risk
management and financing of each DFI.
Phase 2 reviewed the development finance system as a whole, concentrating on
effectiveness and service delivery, and identifying areas of overlap or duplication.
Phase 3 concentrated on a development finance policy to guide the activities of DFIs and
provide a mechanism for coordination and government oversight.
Phase 1 generated a diagnosis of each DFI reviewed. On the basis of this phase, reports and
recommendations specific to the individual institutions were produced and presented to the
project’s steering committee, line departments and the executive management of each DFI. In
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28
addition, a consolidated report that contains the key findings and recommendations on the DBSA,
IDC, NHFC and Land Bank has been forwarded to the Minister of Finance.
This summary presents a synopsis of the key conclusions of the second and third phases of the
review, focusing on the development finance system and a development finance policy. It begins
with an overall look at the development finance system, and proceeds through key focus areas,
where findings and recommendations are discussed. The summary concludes with a series of policy
proposals. These matters are discussed comprehensively in the full report on the Review of
Development Finance Institutions.
In this paper we analyse the depth of the DFI review and identify the gaps which the State needs to
address to strengthen the capacity to deliver with the development finance system, which is an
anchor for creating an enabling environment for a developmental state. International experience
has shown that there are various policy approaches and instruments that can be used to
simultaneously mobilise private and public sector financial resources in support of strategic
developmental investments. The obvious examples being East Asia, Japan and Brazil development
bank – BNDES which uses an assortment of social capital funds and dedicated funds to mobilise
public and private finance in the aim of development.
The development finance system
The DFI review assessed the development finance system (DFS), concentrating on the effectiveness
and efficiency of the system in financing government’s broader developmental goals. The study
assessed coordination of the DFS, effectiveness in terms of development and mandates, corporate
governance arrangements, financial sustainability and risk management.
The review also identified areas of overlap and duplication. DFI financing activities should not
overlap; rather, they should complement one another and help to crowd in private-sector lending.
To this end, the review examined options for restructuring the institutions that make up the DFS.
Defining features of a DFI
• Development effectiveness reflects the extent to which an institution or intervention has brought
about targeted change. Development effectiveness is measured using approaches such as the logical
framework, impact evaluation, and cost-benefit and cost-effectiveness analyses.
• Financial sustainability refers to a DFI’s ability to generate sufficient revenues from its lending and
investment activities to be able to continue operating at a stable or growing scale without the need
for government financial support. Financial sustainability is measured by the traditional accounting
profitability measures such as return on assets or return on equity.
• Operational efficiency refers to the DFI’s ability to minimise its operational costs, and is measured
by the ratio of the organisation’s operational costs to the average value of its outstanding portfolio.
• Economic efficiency as measured by the subsidy dependence index (SDI) reflects the true
economic cost of supporting a DFI with public funds relative to the opportunity cost of government’s
capital. This index measures the real effective level of subsidy in each DFI, providing insight into
whether state funds invested in the DFI are performing better, worse or the same as alternative uses
of government capital.
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29
The “credit–plus” element and the definition of the target market distinguish DFIs from commercial
financial institutions.
Coordination of the DFS
Key findings
The review’s key findings on coordination of the DFS are as follows:
• DFIs are not well coordinated at central government level, over and above coordination
efforts by responsible line departments.
• The lack of an overarching strategic direction and policy for the DFS has led individual DFIs
to follow different legislation or various directions of executive authorities, chief executive
officers and boards, resulting in the pursuit of markets and/or mandates that either overlap
substantially.
• Overlaps in the mandates and/or duplication of developmental interventions are largely
caused by the lack of a coordinating structure for DFI activities.
The key recommendations on coordination of the DFS are:



Establishment of a DFS Council to coordinate and guide DFI activities. This recommendation
is not new, it has been supported by the Commission into the Provision of Rural Financial
Services (Strauss Commission) and other studies.
The National Treasury should be responsible for establishing the DFS Council as a matter of
urgency to implement the recommendations of this review as accepted or modified by
Cabinet.
The DFS Council should supplement and complement existing governance structures and
functions, focusing most of its attention on systemic performance.
Development Effectiveness
DFIs, in common with other public institutions, are required by government to continuously
demonstrate in concrete and measurable terms the results of their financed activities. The
requirement is part of government’s effort to ensure improved service delivery and accountability.
The general instruction for DFIs is to focus on results and demonstrate development effectiveness –
the extent to which development intervention objectives are achieved, or are expected to be
achieved.
Key findings
The key findings on development effectiveness are:
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30
• There are many DFI intervention goals, and these are often unclear and hard to measure.
Coupled with a lack of verifiable data and missing data sets, DFIs are unable to measure the
development outcome and impact of their interventions.
• There is lack of clarity in goals, objectives and performance indicators. Monitoring and
evaluation frameworks and plans are weak or absent. In some instances, this has resulted
in mission creep and drift, and difficulties in measuring and evaluating performance.
• DFIs employ various approaches to measure the impact of development interventions.
These approaches include the use of balanced scorecards, cost-benefit analyses, social
matrixes and logical frameworks. The associated calculations are often complex, subject
to differences of opinion and highly sensitive to assumptions.
• There is a need to establish an objective monitoring and evaluation system. The monitoring
and evaluation framework needs to move from the premise that government is the sole
owner of most DFIs, all of which have a triple bottom line:
o ensuring financial sustainability,
o delivering improved access to financial services and products to priority sectors
o optimising the use of government funds.
• DFI governance structures are modelled on private-sector institutions, with too much
emphasis on financial and operational issues and not enough emphasis on monitoring and
reporting of true developmental impact.
The key recommendations
The key recommendations on development effectiveness are:
•
•
DFIs should work to develop public private partnerships. South Africa’s growing
development needs and government’s limited resources necessitate more participation of
the private sector in development financing. Each DFI, where appropriate, should formulate
measures to attract private-sector participation.
The monitoring and evaluation framework should be phased in, with all DFIs reporting and
being analysed according to this framework within three years.
o Both the IDC and DBSA are involved in agriculture projects similar to those of the
Land Bank.
The key recommendations
The key recommendations concerning mandates are:
Governance
Corporate governance arrangements specify the responsibility, authority and accountability of
owners, boards of directors and executive managers in their direction of a company. Such
arrangements also spell out the rules and procedures for making decisions on corporate affairs.
The key findings
The key findings on governance are:
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31
o
o
o
o
There is no uniform statutory approach to establishing DFIs. Some institutions do not have
specific enabling legislation, while others are established as trusts, Section 21 companies or
trading accounts within a department. The enactments also differ in their extent of detail on
operational issues and matters of emphasis.
Enabling legislation is not a prerequisite for creation of a DFI. Drafting legislation takes time
and may create unintended limitations that eventually require amendment. However,
legislation provides certainty about the object, powers and functions of an entity, and helps
to avoid ill-considered mandate changes.
There is no prescribed legal form for establishing DFIs. There are clear indications in relevant
policy documents, such as the Review of Public Entities undertaken by National Treasury and
Department of Public Service Administration, that trusts and Section 21 companies are no
longer acceptable corporate forms for public entities. There are, however, no time lines
stipulated for this transition. This creates uncertainty.
When funds are placed with a section 21 company or a trust, it is very difficult for those
funds to be repaid to government. This stems from provisions of Section 21 of the
Companies Act (1973), which states that funds may only be transferred or donated to
companies with similar objects. There are also issues related to tax exemption covered
under the Income Tax Act (1962).
The key recommendations
The key recommendations on governance are:
o
o
o
The elimination, in most instances, of Section 21 and trusts as appropriate legal forms for DFI,
and their replacement with public company structures.
There is a broad framework in terms of which the financial performance of a public entity is
evaluated. The basis for a more scientific evaluation of the performance to achieve the required
developmental impact is, however, lacking. Shareholder compacts and strategic plans could
accommodate such targets as determined by the DFS Council.
The process by which boards and executives are appointed should be aligned to the Public
Finance Management Act (PFMA) (1999), which covers governance of state-owned institutions.
Financial Sustainability
Financial sustainability refers to a DFI’s ability to generate sufficient revenues from its lending and
investment activities, allowing it to continue operating at a stable or growing rate without the need
for regular financial support from government.
The key findings
The key findings on financial sustainability are:


The three largest DFIs (the IDC, DBSA and the Land Bank) together account for more
than 90 per cent of the development finance sector.
Only 50 per cent of DFI assets are dedicated to developmental lending and/or
investment. The remainder is held principally as financial investments, the income of this
is used to cover operating expenses.
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
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The capital structures of the three largest DFIs vary significantly. The DBSA leverages its
capital base with an approximately equal amount of external borrowings, while the IDC
makes limited use of external funding. By contrast, the Land Bank appears to be
excessively geared, particularly given its poor asset quality and weak profitability. The
smaller DFIs are effectively funded only by capital endowments or similar arrangements,
with very limited use of additional external borrowings.
A detailed profitability comparison is difficult because of differences in presentation of
results, varied accounting policies and once-off items that distort results. A number of
case-by-case adjustments were made to try to arrive at somewhat comparable figures.
In general, the profitability of DFIs is poor to very poor. Only the DBSA appeared to show
reasonable financial sustainability, with a return on equity of about 9 per cent. The Land
Bank is by far the weakest DFI, with long-term historical losses and extreme uncertainty
in the quality of financial information at the time of the review. The IDC, though it has a
strong capital base and good reported profitability, actually appears to be running at a
loss when the results of its five large listed holdings (Sasol, Kumba, BHP Billiton, Mittal
and Sappi) are stripped out (and these investments are no longer really developmental).
The smaller DFIs have varying results; however, all would appear to be eroding their
capital base with a return on equity averaging less than 1 per cent, and with a number of
them being loss-making.
A standard practice to finance some developmental interventions is to cross-subsidise
these activities with profits from commercial business. The dilemma is that crosssubsidisation creates incentives for managements and boards to expand the commercial
business, with the justification that this will enable them to engage in more
developmental interventions. The effect is often to under-price commercial business, to
crowd out the private sector in commercial financial
Financial Sustainability Policy Proposal
Financial productivity
There needs to be an emphasis on financial productivity, not just profitability.

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Rand spent per rand lent or invested.
Rand spent per loan or investment made.
Total cost to total income directly related to the mandate.
Operating costs as a percentage of total outstanding loan or equity portfolio.
Cost per client.
Balancing financial viability and development impact Government in general, and the National
Treasury in particular, should communicate a clearer and more balanced message about financial
sustainability, juxtaposed to development effectiveness. The aims and objectives of the PFMA ought
to be restated as primarily focusing on financial control, accountability and prudence, not
profitability. Annual and other business, strategic and financial plans should be drawn up in such a
way to recognise that government may have to subsidise the activities of some DFIs for longer
periods of time at higher levels to achieve developmental goals.
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Capitalisation of DFIs
Capitalisation of DFIs should be decided following thorough analysis of past and projected
performance in all four key areas: development effectiveness, economic efficiency, financial
sustainability and operational efficiency. Such decisions should include reasonable estimates of the
subsidy needed to cover short- to medium-term shortfalls between income generated from core
activities and the realistic costs of extending services to the target market. Government should
incorporate triggers that would act to release or halt further funding, based upon objective
measures of performance, relative to mutually agreed targets set in cooperation with the DFIs.
Conclusions on the Findings of the review by National Treasury
The findings emerging out of the review of the DFS clearly indicates that the DFIs still grapple with
the attributes of a developmental State, especially the notion of “A shared vision of developmental
programmes of national importance” evidence to this is the percentage of spending by DFI’s in non
developmental endeavours when their primary goal and mandate is to support the State in by
providing developmental funding. This also implies that there are weaknesses in the translation of
the mandates to the strategic delivery of the Institutions, which suggests that the state should have
to provide developmental leadership and promote cohesion, to deal with the issue of mandates that
are subjected to interpretation and distortion, or where they are simply too broad to adequately
guide the delivery and expectations.
In the findings, it is clear that the review focused on corporate governance and institutional
arrangements and not so much on the strategic alignment of the DFI to the objectives of the State,
as well as the deployment of resources in strategic sectors of the economy, such as labour absorbing
industries and championing new sectors, and the impact thereof. There is no detail on the
background of the resourcing decisions taken by the DFI’s, which would be a study that borders on
operational efficiency and alignment to mandates. As a result there is a limited level of certainty of
the capacity to deliver on some of the objectives of the developmental mandate, and the question
remains as to the nature of the incapacity, being from access or availability of resources, strategic
direction or other challenges which have not been explored at this point.
In this respect, further work that would enhance the Development Finance system in South Africa, is
still required including a strategy for the DFI environment on how best to crowd-in both skills and
financial resources to advance developmental investments.
5. “AS IS” Analysis
Background
The PwC report provides a high level view of the SOE’s sampled for the survey, and for the purpose
of the discussion on DFI’s we will focus on the findings relating to Schedule 2 public entities. The four
major DFI’s are in the category of Schedule 2 of the PFMA.
Schedule 2 entities are referred to as the major public entities and are intended to generate profits
and declare dividends. These entities have the most autonomy of all the public entities, as they
operate in a competitive market place and are run in accordance with general business principles.
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In terms of section 66(3) (a) of the PFMA, Schedule 2 public entities may also borrow money through
the accounting authority of that entity, which implies that they also have extensive borrowing
powers.
The results outlined below reflect the SOEs’ understanding of their present and future position
within their operating environment. This includes an understanding of the relevant strategies that
are in place and expected developments in this regard. The results also depict progress made by
SOEs in achieving the objectives of the Developmental State and the New Growth Path.
In this paper we consolidate the high level findings that have an impact in the portfolio of
investments by the State in Strategic businesses and sectors.
Positioning of SOEs
The positioning of SOEs to deliver on the political and economic objectives:

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100% of SOEs indicated that their mandate was well positioned.
65% indicated that their mandate had significantly changed over the past five years.
Some changes were effected due to political, social and economic circumstances that
resulted in the issuing of ministerial directives.
In some instances, service delivery is identified as one of the primary reasons for changes in
their mandate. Change in Governmental policy and directives (e.g., amongst others, the New
Growth Path and the Developmental State objectives) often have a significant impact on
SOEs and the manner in which they execute their mandate.
Advances in technology and an increased focus on research and development, which impact
on their operating model, may bring about changes in the execution of their mandate to a
greater extent.
Changes in all spheres of Government, international, political and economic realities and
shareholder/Board directives may necessitate changes in the strategy of the SOE.
95% indicated that they were aligned to their current mandate and that they served the
purpose of their existence.
85% indicated that they believe that they are relatively successful in achieving their stated
objectives. These findings suggest that 15% of SOEs believe that they are not successful in
achieving their stated strategic objectives.
In the SOEs’ feedback with regard to factors that enable the achievement of their stated strategic
objectives. It can be deduced that Government policies and external institutional design and
governance are less of an enabler to achieving their strategic objectives.
Challenges experienced
The challenges experienced in achieving their stated objectives include the following:
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Changes to the regulatory environment, which impacted on the viability of certain projects;
Governance and financial challenges;
Changes to the Board; and
The global economic crisis and local recession.
There is agreement that SOEs operate in terms of their primary and founding mandate.
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The SOEs’ strategic objectives are mapped directly to their mandate and the mandate and strategy
are regularly reviewed so as to comply with the changing needs and circumstances.
Competitiveness and market performance
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70% of SOEs believe that the market in which they operate in is subject to competition.
69% of the SOEs believe that competition within their sector has significantly increased over
the past five years.
74% of SOEs are in agreement that the market should be contestable to ensure better
economic circumstances and increased fairness. Healthy competition will result in a
reduction of prices.
The need to create a healthy growth environment in which competition and cooperation are
promoted was endorsed by the SOEs and they agreed that it enforced better performance
and cost containment.
There is strong agreement that the SOEs believe that there is adequate guidance which
enables alignment to initiatives and the State agenda, e.g. the SOE board reviews and
approves internal audit and risk management policies, procedures and plans on a regular
basis and that the audit and risk management committees have the appropriate skills to
execute their mandate.
There is agreement amongst SOEs that there is reason for them being ring-fenced and not
incorporated as a departmental function.
Alignment of restructuring initiatives to the agenda of the state and market
The following restructuring initiatives have taken place over the past 10 years:

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Restructuring to align projects and operational activities through a consolidated sharedservices initiative and an increase in depth of managerial capacity;
Development of software which is appropriate for business growth and commercialisation;
Review of organisational structure design, process re-engineering and risk management
processes to enhance the implementation of strategy; and
Establishment of a research and knowledge management unit/portal to ensure information
sharing for future sustainability;
Based on the responses from SOEs there appears to be a distinct lack of drive and initiative to focus
on the principles of the Developmental State Agenda and New Growth Path through restructuring
initiatives.
Investment in programmes that build social cohesion
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15% of SOEs indicated that they do not offer any awareness programmes.
85% indicated that they do offer a number of awareness programmes
A greater focus should be on community development in order to enhance social cohesion
and sustainability of developmental projects.
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Deductions
Responses of Schedule 2 SOEs indicated that mandates were being changed frequently. This
suggests that policies applicable to the sectors in which the SOEs function are probably evolving too
rapidly for traction to be achieved in pursuance of the Developmental State agenda. On a broader
level, this is an indication that no long-term industrial policy is being applied. Although the SOEs
claim that they are well-positioned to deliver on their mandates, questions designed to validate the
responses in this regard reveal certain inconsistencies in the responses, pointing to four primary
barriers to optimal execution of SOEs’ strategic objectives.
These are:
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Quality of Government policies;
External institutional design (including reporting lines and regulation);
Ability of SOEs to secure the required resources, where the most frequently missing
resource is specialised skills, not funding; and
Process and operating models supported by the appropriate technology and systems.
Interestingly, Schedule 2 entities appear not only to recognise that they operate in an increasingly
competitive environment, but they also welcome this change, as it helps them maintain operating
discipline and efficiency. This suggests that any Government interventions not supported by market
conditions (such as synthetic job creation or protection) may be contrary to the aspirations and the
vision of Schedule 2 entities.
The lack of appropriate skills is the most frequently mentioned operating problem for the SOEs. In
direct contrast, however, the SOEs also rank themselves highly in terms of their investment in skills
development. This inconsistency suggests that a review of skills-development programmes may be
required to understand the reasons for this seeming contradiction.
Schedule 2 entities are also consistent in their recognition of the benefits of being separate business
enterprises as opposed to unincorporated Government bodies. This suggests that the corporate
governance model is preferred in terms of maximising quality of outputs. Restructuring initiatives
tend to focus on operating issues rather than achieving better alignment with the State
Developmental objectives.
There is a general recognition by SOEs that their purpose extends beyond the profit motive and that
it is also their responsibility to build social cohesion. The SOEs offer a range of awareness and social
programmes to discharge their obligation in this respect, although these efforts seem to be in the
main internally focused, with very little real effort designed to achieve broader inclusion that will in
turn contribute towards greater social cohesion.
Value creation
Impact on the economy and sectors


65% of SOEs indicated that the current model of the state was consistent and effective as
pertaining to them.
75% of SOEs indicated that state ownership was a key attribute for their long-term survival.
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
65% indicated that their current business model was sustainable.
The results depict the SOEs’ service delivery as aligned to the principles of the Developmental State
Agenda. It can be seen that the major linkage between services delivered and the Developmental
State Agenda is on skills development and procurement reform.
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The results also show that some of the key developmental objectives (mining, agriculture
and agro-processing and tourism) seem to have no champions among the SOEs, suggesting
that there is probably very little scope for achieving these objectives using these SOEs.
This may imply that Government should partner with the private sector for this purpose, or
alternatively there is room for creating a new SOE to drive these agenda items.
The services being delivered are directly linked to the principles of the Developmental State as per
the following points
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SOEs agree that value created to enhance long-term competitiveness and growth through
consistently reviewing their relevance and competitiveness as well as ensuring adjustment
of services, pricing and quality is necessary on a regular basis. In addition, they highlighted
the fact that they ensure that goods and services offered are affordable and of a high quality
in order to meet customer expectations.
89% of SOEs indicated that they did provide high quality of services to the end-user.
84% indicated that their services were appropriate and required.
In addition, 50% indicated that their tax base was appropriate and sufficiently utilised.
55% of SOEs stated that funding had been committed in order for them to deliver services.
78% of SOEs stated that past and planned investments had and would support integration of
previously disadvantaged areas, whilst 3% indicated that their past and planned investments
did not support integration of previously disadvantaged areas in their sector,
17% felt that this was not applicable to them.
SOEs agree that the services they deliver are directly linked to the principles of the Developmental
State, with emphasis on the following:

Procurement reform, focus on skills development and reform of BBBEE to support
employment creation and alignment across all economic sectors.
Further agreement indicates that SOEs believe that they do create value to enhance long-term
competitiveness and growth, with emphasis on constant reviews of their relevance and
competitiveness in the market.

31% of SOEs believe that the Government should regulate and not participate in a few
sectors with respect to the SOEs, whereas only 8% indicated that the Government should
participate in, but not regulate, in a few sectors.
The following examples are provided by SOEs relating to the value being created according to the
principles of the New Growth Path:

Education, skills development and technological development which result in the creation of
employment opportunities;
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
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Community development, poverty alleviation and focus on service provision to rural and
marginalised communities;
Increasing networks through the sharing of available capacity, both nationally and
internationally;
The creation of additional value through equity partnerships and the contribution to BBBEE;
Implementation of sectoral strategies focusing on large projects which also contribute
towards job creation, skills development and equity categories; and stimulating economic
developments and investments.
82% of SOEs indicated that they had not experienced any major control breaks in the last
three years, whereas
18% indicated that they had experienced control breaks, but not of a material nature.
100% of SOEs indicated that they did have a risk management framework in place.
84% of the SOEs indicated that they were comfortable with their current control
environment.
The following risks have been identified by SOEs in relation to delivering on their mandate:
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Inability to contain costs and the achievement of optimal return on investments;
Difficulty in accessing capital for new projects;
Challenges with staff attraction, retention and succession planning;
Sustainability (financial) of the business; and
Supply and demand with reference to scarce and critical skills.
85% of SOEs indicated that they completed their procurement and contracting processes
within budget.
80% of SOEs are comfortable with their procurement and contracting methods to protect
the SOE from undue risk and costs.
Creation of jobs and talent management
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85% of SOEs indicated that they did have the appropriate skills and expertise to deliver on
their mandate.
In addition, 95% believe that they did create meaningful job opportunities for school leavers
and graduates entering the job market.
95% of SOEs stated that they were utilising the funds at their disposal for skills development
efficiently and effectively.
SOEs strongly agree that they have a talent management framework/strategy in which the
skills development plans, training and development interventions, coaching and mentoring,
succession planning, attraction and retention for the management of talent are being
addressed.
The SOEs generally perceive that the current model of the state is effective in relation to their
operations and that their operations are sustainable. However, there is a material portion of SOEs
that do not agree with the above assertion. A large majority of SOEs indicated that state ownership
is a key component of long-term survival, which is also an indication of reliance on the state for
resources.
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However, the following SOEs indicated that state ownership was not a key attribute for long-term
survival of the SOE: Airports Company South Africa, Air Traffic and Navigation Services, Industrial
Development Corporation of South Africa, and South African Express Airlines. Broad Band
Infrastructure Company was uncertain. At the same time the SOEs claim that processes are in place
to monitor pricing, quality and competitiveness.
The SOEs believe that they are successful in delivering services that are appropriate and of high
quality; however only half of the SOEs believe that their low-cost base in delivering the services is
adequate. Overall, the SOEs believe that they create value and that they are enhancing their longterm competitiveness.
Return on capital and funding strategy
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74% of SOEs indicated that they were adequately funded.
73% indicated that they would be in a position to meet their future funding requirements.
However, 56% of SOEs stated that they did expect challenges in meeting their future funding
requirements.
65% of SOEs indicated they would not benefit from a State-controlled funding mechanism.
The following SOEs expressed the view that they would benefit from a State-controlled funding
mechanism, namely: Alexkor: Pilansberg International Airport: Central Energy Fund: DENEL: South
African Airways; and South African Broadcasting Corporation.
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63% of SOEs indicated that they did not require subsidies,
16% of SOE’s indicated that subsidies were not applicable to them,
21% indicated that they did require subsidies,
Whilst 5% did not respond to the question.
If subsidies are of an operational nature, 70% of the total sample population of SOEs stated
that 80 - 100% of their operating costs were covered by these subsidies.
77% of SOEs stated that the method used to grant subsidies that facilitate long-term
effective planning did not apply to them
39% of SOEs indicated that they did not depend on Government debt guarantees, whilst
44% indicated that they did and 17% stated that this was not applicable to them as such.
61% of SOEs indicated that they did have outstanding debt and that the outstanding debt
was with funding institutions and development banks,
Whilst 22% indicated they did not have outstanding debts and 17% indicated that the
question was not applicable to them.
Funding strategies are as aligned to their mandate and their degree of agreement or disagreement
with the associated statements below. It can be deduced that an amount of uncertainty is evident,
as SOEs scored mostly 2 and 3, indicating a degree of uncertainty about their funding strategies to
deliver on their mandate
Pertaining to product pricing and quality of service, SOEs are in general unsure whether:

The key strategic partnerships entered into are structured in such a manner that the SOE still
has the controlling vote on capital spend and asset restructuring;
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


The key strategic partnerships entered into provides for access to additional capital
investments; and
The SOE is running close to optimal efficiency when measured on best practice (ROA); and
The pricing of goods and services are competitive in the market.
In general, SOEs believe that alternative methods of funding should be explored in order to address
the current debt burden.
Although most SOEs believe that their current funding conditions are adequate, they also expect
substantial funding challenges in the future. This suggests that the current condition of the SOEs in
terms of funding is not representative of the expected future condition. The SOEs tend to prefer to
have an in-house treasury function and believe that subsidies are generally not required.
Discussion of Summary of findings
SOEs indicated reporting and ownership problems as well as dual reporting as being a key inhibitor
in achieving their strategic objectives. This is a matter that affects the DFI’s and DA’s which manifests
itself in the manner of delivery which has aspects of duplication and mandate creep, which was
evident in the National Treasury review. Cases of this are prevalent in the agri-business which is
funded by Land Bank, the IDC, DBSA and the NEF, including the provincial structures which operate
in the economic development environment. This re-enforces the need for restructuring the
reporting arrangements of the DFIs and the need to align their mandates and build cohesion in their
delivery models.
They also indicated that changes to the regulatory environment forced SOEs to change their
mandate and operating model to comply with the execution of new mandates and objectives. SOEs
also indicated that the complex regulatory environment further inhibited service delivery. Taking
into cognisance that the DFI’s were created by different arms of government, using various policy
instruments to bring them into existence this created a complex environment for DFI operations
especially when the State sought to regulate the financial management through the PFMA, MFMA
and other transversal legislations, on procurement, BBBEE, and sector specific regulations. This
tends to increase the cost of production and impacts on service delivery in various ways. This
problem and its recommendations will be reviewed in detail by “Governance and Ownership”, which
is one of the work streams of the PRC.
Supply and demand and the delivery of high-quality products and services are highlighted as a
challenge. Key performance indicators need to reflect a deeper understanding of the business,
strategic importance and positioning to deliver on the political and economic motives. SOEs have
indicated that a rethink is needed on the funding model as a possible change to their existing
mandate in order to better align to the Developmental State objectives and New Growth Path.
Funding from the State is generally inadequate for enabling SOEs to make a real difference to South
Africa and its citizens, this statement was made by some of the SOE’s. Initiatives are restricted in
scope and scale and therefore impact on the basis of the funding available and pricing strategies
determined to deliver quality goods and services. It is generally felt that future medium- to longterm funding strategies should be reviewed through innovative practices, managing risks and the
efficient and effective deployment of capital in the delivery of quality goods and services. SOEs
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indicated a high degree of uncertainty regarding the funding strategies to deliver on their mandate
and need to align to the New Growth Path and principles embodied in the Developmental State.
Similar sentiments were echoed at one of the Provincial dialogues, which also pointed out to the
limitations presented by the PFMA and the limitation of borrowing powers for provinces. However,
the point that was made about the 50% percent of DFI spending not being towards developmental
initiatives, begins to suggest that the scope, scale and impact of the initiatives has more to do with
where the funds are actually deployed as opposed to the available quantum.
There is consensus from the PRC that in order to make an impact in support of the developmental
state there has to be a focus on the implementation of sectoral strategies, underpinned by
competitive advantage, this has also been highlighted by most of the Schedule 2 entities. SOEs
stressed the need to be focused in specific sectors in the delivery of large projects that also
contribute towards job creation and issues relating to talent management, such as attraction,
retention and succession planning. SOEs further indicated that value was created through research,
technological advancement and skills development to create capacity for delivery. SOEs indicated
that they contributed to the development of scarce and critical skills and equity categories as part of
creating value to employment creation and future sustainability.
SOE’s indicated that commercial advertising was identified as a manner to increase the appetite of
the public to buy goods and services offered by the SOEs. Increasing networks through the sharing of
available capacity, both nationally and internationally, enhances competitiveness and allows for
sustainable partnerships. Although SOEs have indicated that they were struggling to attract and
retain skilled staff, they have put in place appropriate programmes to address this. These initiatives
include the internship programmes, graduate recruiting, training and the enhancement of research
outputs.
6. International Experience
The Chinese government have implemented this strategy very successfully in securing natural
resources and other commodities as well as finding new trading partners. In most of the
economically strong and socially equitable states, DFIs have acted as catalysts for accelerated
industrialisation, economic growth and human resources development, this we see in Western
European democratic states such as Sweden and Germany and in the first generation East Asian
developmental States such as Japan, Singapore and South Korea. In the BRICS partnership, India and
Brazil has led different models of DFI’s successfully, where Brazil has a major centralised operation
through its Brazillian Development Bank – BNDES, whilst India has set up unique structures that play
the key role of partner, financier and advisor through smaller banking entities, they also have with a
specific purpose the Industrial development bank of India, which championed the long term growth
potential of the country’s information technology industry.
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The Korean Development Bank (KDB) and the Industrial Bank of Korea have played significant roles
in identifying new strategic industries, where government play an active role in supporting the
supply chain of the new companies.
The Development Bank of Japan Inc, and the Japan Bank for International Cooperation are examples
of DFIs that have been instrumental in planning and integrating regional projects such as the Delhi Mumbai Industrial Corridor, this project will create seven cities aimed at becoming manufacturing
hubs.
There is a vast amount of experience in the international environment, which proves that the DFI
model can be game changing in the economic growth and integration of infrastructure that extends
the trading zones of the State. There is also an opportunity for DFIs to promote regional integration
and leadership of effective relations between nations, by mobilising resources and sharing effective
technologies.
7. Conclusions
DFI’s are public sector institutions which control and allocate capital, they also contribute directly to
the economic and social objectives of the developmental state, they are expected to facilitate
employment creation, the transfer of resources from the first to the second economy which also
supports the objectives of BEE, and the industrial strategy objectives.
Successful DFIs, should excel in their performance as development finance institutions, and further
play key roles in the broader industrialisation and economic development strategies of the State.
They are expected to be instrumental in crafting the game changing interventions that would alter
the growth trajectory of South Africa.
The development impact of the DFS could be enhanced by re-orienting and refining the role of DFIs
and DA’s within the context of a developmental state and in achieving social and economic
objectives. This suggests that a new DFI policy and a legislative framework that will ensure that DFIs
have focused mandates and defined roles in the DFS. This framework would include the criteria for
the establishment and disestablishment of DFIs and DA’s in all the spheres of government.
It has emerged in the surveys that the governance and institutional fragmentation of the DFS will
have to be streamlined for the sector is operate from a shared vision that is aligned to the
developmental state. There DFS should develop a strategy based on the competitive advantage in
Strategic sectors. There is an urgent need for the State to clarify the strategy and governance
environment of the DFI sector, which will provide for a broader national economic policy alignment,
with a notion of emphasizing the State’s competitive advantage and therefore pursuing investments
in those sectors of the economy. This statement concludes the basic premise of the State that the
changes sought in the economy will not emerge spontaneously from the “invisible hand” of the
market. The public and private sector will have to collectively plan and implement programmes that
will shape economic development with the State playing a pivotal role.
The current portfolio of investments, shows the level of investment by the four major DFI’s in
sanitation as being negligible given the challenges facing the country, this sluggish response by the
private sector is indicative of some kind of capital market failure and signs of a lack of equity
resulting from poor profit margins or returns which is symptomatic of the provision of basic goods
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and services. In the event that the State does not take this matter up and create an enabling
environment, to crowd in the private sector, the challenges may never be addressed.
Having reviewed the challenges of provincial and local spheres of government, in the development
finance systems further work should be carried out to establish better solutions because it is clear
that beyond the duplication of roles and the capacity issues and the lack of resources that plague the
provincial structures, there are still services which they provide which might be viewed as
incongruent to the strategy of the major DFIs and which may require a different set of skills and
operations to deliver. There were a number of views expressed at the consolidation of SMME sector
funding into the IDC, which is understandable given that the core responsibility of the IDC is
predominantly, driving the Industrial development strategy. In light of the statement made in the
‘towards a 15year review’ efforts of integrating the previously marginalised groups should be
seriously considered. “Further more..the challenge is to make the State relevant to people’s lives
and for social groups to feel included not only in political power but also economic power, the state
can facilitate redistribution of wealth. Democracy is empty without the fulfilment of the economic
aspirations of the people while economic growth on its own without redistribution poses problems
of the security of the state and capital as the marginalised groups will not accept their subjugation
for long”. (Economic development: in Africa – Dr. Neo Simutanyim)
The recent newspaper headline news, of sporadic uprisings in various municipalities is a
manifestation of these economic challenges.
“The confirmation that growth does not automatically reduce inequality emphasises the need for
more effective pursuit of economic inclusion. This requires labour-absorbing diversification of the
economy and tapping unexploited potential of primary sectors, especially agriculture. Though small
business support has been expanded and consolidated, the uptake has been limited. There is a need
to fund second-economy programmes with mass impact rather than many small-scale interventions.
This includes approaches which do more to link the marginalised into mainstream value chains. It
also requires more attention to creating the capacity for expanded production and better
productivity in rural areas.” (Towards a 15year review)
The major DFIs are active participants in the regional economy and are indeed best placed to
promote South Africa’s national interest, through strategic investments and partnerships.
8. Recommendations
i.
The State should develop a comprehensive regional strategy and policies for engagement
which will provide direction for DFIs without compromising the State’s security and
international relations.
ii.
The State has to rationalize the DFIs and DA’s in all the spheres of government, presenting a
streamlined service through the DFS.
iii.
The mandates for the DFS, will have to be reviewed in line with the State’s agenda for a
developmental state.
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iv.
The State must have an overall economic development strategy, that is specific and
measureable, for SOE’s to adapt their strategy and contract with the shareholder on those
basis.
v.
The State MUST designate strategic sectors, to facilitate the direction of investments by DFS.
The PRC, recommends that target dates be set for the conversion of developmental agencies,
development funds and growth funds which have been created as Trusts and Section 21 Companies.
These have previously been classified as illegal corporate forms for State owned enterprise or
economic activities. Taking a cue, from the private sector that has cleaned up what used to be
excessive Close Corporations and provided firmer requirements for the corporate formations of
smaller traders.
References
Chang H (2007). State-Owned Enterprise Reform
Chang H et al (2009). How to ‘Do’ a Developmental State
National Treasury Review – Development Finance System and development policy 2008
PwC – State Owned Enterprises : A Subjective review 2011.
Towards a Fifteen Year Review - Joel Netshitenzhe Head: Policy Coordination and Advisory
Services and Frank Chikane - Director-General: The Presidency
Ministry of Public Enterprises (2000). An Accelerated Agenda Towards The Restructuring of
State Owned Enterprises: Policy Framework
The State and Economic Development in Africa; Dr. Neo Simutanyi
Ministry of Public Enterprises (2011). DPE Strategic Plan 2011-2014
Ministry of Trade and Industry (2011). Industrial Industrial Policy Action Plan 2011/122013/2014
Mattlin M (2007) The Chinese Government’s New Approach to Ownership and Financial
Control of Strategic State-Owned Enterprises
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45
Moloto M, Report, (2011). An Unpublished Research Study Commissioned by the PRC on
SOEs
National Treasury (2011). Budget Review
Presidential Review on State-Owned Enterprises (2011). International Benchmarking
Report: European Cluster
Presidential Review on State-Owned Enterprises (2011). History of SOEs Before 1994
Report
The Presidency (2004). Accelerated and Shared Growth Initiative – South Africa (‘ASGISA’)
The Presidency (2009). National Planning Commission Green Paper
The Presidency (2011). National Planning Commission Diagnostic Report
DBSA Annual Report 2010/11
IDC Annual Report 2010/11
NEF Annual Report 2010/11
Land Bank Annual Report 2010/11
CASE STUDY NOTES
12.1 An overview of one of the Provincial structures.
12.1.1 The KZN Growth Fund
KZN Growth Fund managers (PTY) ltd is a wholly owned subsidiary of ithala Development Finance
Corporation limited, which is a public company, wholly owned by the KZN Provincial government
represented by the Department of Economic development and Tourism. The funding mechanism for
the Trust is from the Department to Ithala DFC, which holds the capital contribution and interest on
behalf of the Trust.
The portfolio has targets for the Strategic Sectors that the province is focused in funding and
growing to support the economic. However, it is not clear as to how the Province proactively ensures
that all sectors are addressed. At a glance the telecoms sector seems to have received over the 40%
target limit set for funding in that sector, whilst other sectors have no commitments.
The Province indicates that there is a challenge with their status as a Trust, which the AG has raised
as an issue that affects their status as a going concern.
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The KZN Growth Fund is a debt fund, structured as a unique public private partnership between the
Provincial Government, commercial institutions and development finance institutions. It was
established to finance medium to large scale infrastructure related projects throughout the
KwaZulu-Natal province. The KZN Growth Fund is an innovative initiative aimed at creating
sustainable economic development, job creation and black economic empowerment within the
infrastructure sector. It is housed within the KZN Growth Fund Trust and is managed by KZN Growth
Fund Managers (Pty) Ltd.
KEY FEATURES
Fund Size: R1.1 billion
TARGETED PROJECTS
The Growth Fund targets infrastructure related projects of R30million and above. It focuses on
economic sectors such as: Transport and logistics; tourism; energy; telecommunications;
manufacturing; agro-processing; mineral benefication and mining; and bulk water and waste.
The KZN Growth Fund is also geared to co-fund with commercial banks and development finance
institutions, thus offering infrastructure project sponsors a one-stop shop for accessing debt funding.
FUNDING INSTRUMENTS
The Growth Fund provides project finance structured as either senior or mezzanine debt or a
combination of both instruments over a loan period ranging from five to ten years.
REQUIRED DEVELOPMENT IMPACT
Each project will be required to generate new and sustainable job opportunities, foster black
economic empowerment throughout the KwaZulu-Natal Province, and demonstrate an ability to
repay the debt funding.
OTHER SELECTION CRITERIA
All projects submitted to the Fund need to satisfy the following broad criteria:



A 30% minimum BEE ownership, B-BBEE and gender should also be key considerations. A
significant part of the BEE shareholding must reside within the KZN Province;
A negotiable equity contribution from promoters in line with each project's equity needs;
The project also needs to be at an advanced stage of implementation so as to enable
disbursement within a period not exceeding six months.
The Growth Fund's objectives are aligned with the Provincial Growth and Development Strategy, and
in particular the various sector priorities. It also subscribes to all the prevailing BEE policies as set out
in the Department of Trade and Industry's Codes of Good Practice for B-BBEE, and the BEE Codes
issued by National Treasury's PPP Unit.
The table below gives an overview of the current portfolio spread as at Sept 2011.
(Adapted from submission to PRC Matrix and Questionnaire)
TABLE X
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Sectors
Sector Limit
Tourism
40%
Power
40%
Transport & 40%
logistics
Bulk water & 40%
Waste
Telecoms
40%
Other
TOTAL
25%
Amount
committed
Rm
Company
Name
BEE
Credentials
42.7
S.A. Shipyards
60%
193.1
Dark
fibre 33.6%
Africa
Kassier Road 25.1%
/Hospital
80
315.8
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