Session 3: Role of State-Owned Financial Institutions
Lewis Musasike
6th Annual Financial Markets and Development Conference
The Role of State-Owned Financial Institutions:
Policy and Practice
April 26-27, 2004
Washington, DC
For more information, see:
http://www.worldbank.org/wbi/banking/finsecpolicy/stateowned2004/
1
The role of Development Finance Institutions:
Lessons from southern Africa of best practices for
their effective management
Lewis Musasike 1 , Ted Stilwell, Moraka Makhura, Barry Jackson & Marie Kirsten2
1. Introduction
In both the economies of developed and developing nations, the State has always played a central
role, although dominance has changed over time in response to globalisation, privatisation and
the perceived efficiencies of the private sector. The establishment of the Bretton Woods
institutions was a landmark in the reshaping of the international finance system and the
development finance system in particular. In subsequent years, regional economic and political
groups established their own development institutions in the 1960s such as the African
Development Bank, the Asian Development Bank and the Inter-American Development Bank.
Sub-regional and national development financial institutions gained prominence with the support
of the Bretton Woods institution; and as more and more nations gained independence and
nationhood from western nations. A number of these institutions were created for political
reasons, but served to address the development challenges related to provision of basic services;
the creation of jobs; the promotion of foreign exchange earnings and building better
infrastructure.
In most developing nations, there was no dividing line between public finance and development
finance with governments often using DFIs as conduits for fiscal transfers; and in reverse using
them as sources of funding budgetary deficits. The result was that over time, DFIs became a drag
on the fiscus of many governments and were finally left to disappear. The demise of many DFIs
at national and even sub-regional level was precipitated by structural reforms of the 1980s and
1990s (as dictated by the Bretton Woods institutions), the privatisation trends which began in the
mid-1980s in developed nations, and mismanagement and corrupt practices. As the role of the
state was reduced, so did the influence of state-owned enterprises, with the exception of those
deemed to be of strategic importance to the well-being of the state.
From an African perspective, the performance of the continent has lagged behind other regional
groupings worldwide. This has led to the re-examination of the real challenges facing African
countries in their quest for development, hence the birth of the New Programme for Africa’s
Development (NEPAD) initiative. Politically, the transformation of the OAU to the African
Union revealed the determination of Africans to promote good governance and tackle civil strife
across the continent. Regional integration is a principle feature of the NEPAD strategy. The
strategy argues that the prevailing economic conditions point to the need for African countries to
pool their resources and enhance regional development and economic integration in order to
improve international competitiveness. NEPAD underscores a break with the past – it emphasises
African ness and African responsibility while recognising the need for constructive support from,
1
. Executive Manager Treasury, Development Bank of Southern Africa
Contact details; DBSA, P O Box 1234, Halfway House, 1685, SOUTH AFRICA.
http://www.dbsa.org
2
Policy Analysts, Policy Business Unit, DBSA.
2
and partnerships with, other regions of the world if sustained and sustainable development are to
be realities for the continent. Recently, the United Nations (UN) General Assembly accepted
NEPAD as the basis for all UN engagements with Africai. This resolution in effect significantly
elevates the standing and credibility of the approach adopted by African leaders. It also implies
that, with regard to their support for Africa, all multi- and bilateral agencies and organisations
will now depart from similar principles and focus on the same overarching vision drawn from
NEPAD. In the same way NEPAD’s agenda for action poses new development challenges for
DFIs in Africa.
This paper sets out a general perspective on development finance and DFIs, with particular
reference to their role and functions in providing focused financial and development support to
bolster human development and economic growth at national and regional level. The case of the
Development Bank of Southern Africa, its scope and nature is reviewed in the next section. Some
of its breakthroughs and challenges are highlighted to draw out lessons of best practice in the
management of DFIs. The final section puts forward a set of policy conclusions.
2. Development Finance Institutions in perspective
Development Finance Institutions (DFIs) are post world war two, post colonial developments,
designed to provide focused financial support to national and regional development efforts and
bolster economic growth (Diamond, 1957).ii. Development finance is that set of financial flows,
largely of a capital nature, that involves investments in development projects or ventures, in
income generating activities, public or private, that operate on the basis of commercial
profitability, and full cost recovery (Hoffmann, 1998)iii.
DFIs address market, political or bureaucratic imperfections and asymmetry arising from
perceived or actual financial risk by delivering a structured package of support to their clients.
The most classical role of DFIs is to fill the gaps in domestic fiscal and term-lending capabilities
of under-developed and developing countries. They seek to address the capital market
inefficiencies where private capital is unwilling or unable to bear the risk of providing capital to
countries, projects or clients that are not considered creditworthy. They further seek to fill the
fiscal gap between capital for pure pubic good provided by the state and commercial projects
where there is cost recovery (Mistry)iv. This particular DFI role in support of development
finance can be depicted as illustrated below:
Fiscal
transfers
and
grants
Cost recovery
3
Cost recovery
Private
sector
capital
DFI
niche
Risk
potential
Risk
Risk
Cost recovery
The model schematically illustrates the "gap"
in the financing system. It implies that by and
large pure public goods and projects that lack
sufficient income generating capability do not
constitute a substantial part of a DFIs loan
portfolio. Special fiscal, grant and
concessionary funding vehicles are required to
meet many basic human needs and social
services, with the DFIs and the private sector
supplementing these efforts with loan funding
on the basis of cost recovery from
beneficiaries. The gap in the graph is
illustrative of the DFI market niche. The
interface areas may vary from sector to sector and client to client depending on the financial
model which the DFI adopts as well as the funding sources and the DFI’s ability to access
resources and concessionary finance from multilateral and bilateral agencies. The above
schematic model further illustrates the potential for co-funding with the private sector and for
various tripartite funding modalities.
The most prominent of a DFIs package of services is thus the extension of loan finance on
beneficial terms to revenue-generating enterprises and projects. This “development banking”
ability of DFIs stems from their capitalisation, usually consisting of public sector equity and
fiscal transfers, often augmented by loan or grant capital from private and donor sources. As
governments face more
budgetary constraints
and development aid
Development Finance is usually applied to investments in revenuegenerating enterprises and projects or ventures – public or private.
declines, DFIs have been
Projects financed may be; commercially profitable; or involve fullforced to become less
cost recovery autonomous to the enterprise; or partial cost recovery,
dependent on central
with an explicit subsidy provided by government. Application is
governments, and have
generally confined to the initial capital outlay (and/or first cycle of
had to use their financial
working capital) (Kritzinger, L, World Bank 2002)
strength to intermediate
between the providers of
capital (financial markets and international funders) and users of capital who otherwise cannot
access this capital directly. By intermediating, DFIs can substantially reduce the cost of capital to
borrowers by the partial transfer of a subsidy through the interest rate or the tenor (maturity and
grace periods), asset and liability matching or by stipulating less onerous collateral requirements.
Further, DFIs have a better understanding of developmental risk, a higher risk appetite, and a
stronger risk rating, all of which they can use to benefit poorer or unrated clients. The inclusion
of more commercially orientated projects in their portfolios also allows them to cross-subsidise
development projects in poor areas.
Recently, Public Private Partnerships (PPP’s) have materialized as important financial
instruments through which DFIs can structure their “development banking” portfolios by
mobilising resources in partnerships with private sector players. These products and services
include equity, quasi-equity instruments, senior debt, subordinated debt and guarantees,
syndication underwriting, and arranging. Through their willingness to take political and general
country risks that private sector investors have less appetite for, non-financial constraints to
private sector investment in what is perceived to be economically depressed areas are mitigated
and market comfort brought to fruition. This leveraging accelerates the pace at which
development backlogs can be addressed.
A second, complementary function of DFIs is their “development assistance” role. This function
is additional, and often non-recoverable, but complements “development banking” by improving
information flow, enhancing borrower capacity and improving the prospects of debt servicing. In
this way, the banking and development assistance functions of a DFI become mutually
reinforcing. DFIs value development per se, but also depend on the servicing of debt. Private
financial institutions are concerned with repayments and enforce more onerous financial
requirements (higher collateral, capacity and tenor) up front. DFIs bundle the “development
banking” and “development assistance” functions together, since the skills required for assessing
potential investment projects are similar to those required for addressing capacity building and
development needs, and preparing borrowers for project lending. This implies the existence of
4
economies of scope in the provision of these two services. Of late, the emphasis on DFIs role as
knowledge-brokers has also increased.
The nature and role of development finance is continuously changing due to recent development
in global capital markets over the last decade, global constraints on public finance, the narrowing
definition and range of public goods and services, and the reduced direct role of the state in the
market e.g. increasing privatisation. The borders between public finance on the one hand and
private commercial finance on the other have become blurred thus shifting the nature, scope and
role of DFIs in a rapidly changing macro-economic environment.
Moreover experience with development finance and DFIs in the past has lead to scepticism of the
efficacy of development finance especially where state owned banks were and are still used for
non-commercial, quasi-fiscal purposes thus posing a risk to macroeconomic and financial sector
stability of economies in transition (Sherif & Borish 2003)v. Development finance cannot
compensate for deficiencies in regional and national policy gaps and institutional capacities,
which make DFIs a weak mechanism for unfunded public sector redistributive mandates.
The central intermediation function of DFIs requires employment of sound banking principles to
ensure that scarce capital is obtained at an affordable cost and allocated efficiently, consistent
with both risk and return (in development and financial terms). Cost-effective intermediation is
key for DFI customers, who generally cannot afford high interest rates, and most often cannot
access commercial bank services.
Where nationally-based DFIs are required to be self sustaining, and must increasingly raise funds
independent of government guarantees, they have to pay special attention to their credit ratings
and adopt prudent risk management policies and practices. The outcome is that DFIs end up
prioritizing their financing activities, and certain high risk segments of the market go unserved.
However, some DFIs try to make up for this by establishing special-purpose grant and soft loan
windows to help reach the unserved in a manner that does not compromise their basic functions
and sustainability (DBSA, 2004)vi.
The fundamental role of DFIs in the market economy is to crowd in private financial flows by
providing a package of services that not only fill the fiscal gap between capital for pure pubic
good finance provided by the state on the one side and pure commercial projects on the other, but
also seek to narrow the gap in the finance system. Therefore national DFIs should not be
permanently enshrined institutional structures; they should work towards successful
transformation of both development financing and funding so that they are no longer needed.
3. The Development Bank of Southern Africa (DBSA):
Background, Nature and Practice
3.1 Governance
The legal aspects and corporate governance
The DBSA is a development finance institution that was established in 1983 under the apartheid
government to channel fiscal transfers from the South African central government to the so called
5
‘homeland’ governments or Bantustans. It is wholly owned by the South African government.
The Bank was created under an Act of Parliament, the DBSA Act, as amended in 1997. It does
not fall under the Banks Act and is therefore not directly supervised by the Reserve Bank. It
however complies with applicable provisions of the Companies Act and the Public Finance
Management Act of 1999.
The DBSA Act of 1997 (Act 13 of 1997)vii Articles 5 to 10 provide for the appointment of a
Board of Directors and the governance of the Bank. The Act allows for the appointment of a
maximum of 15 and a minimum of 10 directors by the shareholder(s). At present the Board of
Directors consists of twelve members from the private sector and one from the public sector.
(Until recently there were two public sector members.) Directors are appointed by the Minister of
Finance and the Act requires that they “shall be appointed on the grounds of their ability and
experience in relation to socio-economic development, development finance, business, finance,
banking and administration.”
All but one of the directors are independent and non-executive, with only the CEO/MD as the
executive director. This majority of directors from the private sector indicates the ‘arms-length’
relationship between the South African
The Public Finance Management Act (PFMA)
government, as shareholder, and the Bank.
lays a basis for a more effective corporate
Article 5 (b) provides that the Board shall
governance framework for the public sector.
control the business of the Bank and shall direct
The PFMA introduced generally recognized
the operations of the Bank. In execution of their
accounting practices; uniform treasury norms
duties the Directors subscribe to the King II
and standards; prescribed measures to ensure
Report on Corporate Governanceviii and the
transparency and expenditure in all spheres of
Code of Corporate Practice and Conduct of the
government; and set the operational
procedures for borrowing, guarantees and
Institute of Directors in Southern Africa
procurement of services. The Bank reports on
(IDOSA 2002)ix, and the Public Finance
quarterly basis to the National Treasury in
Management Act, No. 1 of 1999 (SA
terms of the 1999)
PFMAx.requirements.
Unlike
Government
The Board is
assisted in its strategic oversight by a number of functionally
commercial
banks,
the DBSA is not
subjectthe
to Audit and Finance committee, the Credit Committee,
focused
Board
sub-committees,
namely:
supervision by the Reserve Bank under the
the Knowledge Strategy Committee and the Remuneration Committee. Although the DBSA does
Banks Act, 1990, but provides specific
not
legally report
the Reserve
information
to thetoSARB
related toBank,
its it nonetheless provides it with regular information
regarding
theand
Bank’s
funding
and assetpolicies
and liability management practices.
borrowings
currency
management
on a quarterly basis, or as and when required.
Vision, Mission and Mandate
The Vision of the Bank is “to be a leading change agent for socio-economic development in
southern Africa”. The mission of the Bank, accordingly, has been “to contribute to development
by providing finance and expertise to improve the quality of life of the people of southern Africa,
mainly through the provision of infrastructure”
The main objects and mandate of the Bank are provided for in the DBSA Act. Article 3 (1) notes
that “the main objects of the Bank shall be the promotion of economic development and growth,
human resources development, institutional capacity building (by mobilizing financial and other
resources from the national or international private and public sectors) and the support of
(sustainable) development projects and programmes in the region”.
Prior to 1994, the Bank funded projects in all sectors which included agriculture, industrial
development and small and medium enterprises. In the period between 1994 and 1996, the
6
Government streamlined the entire development funding system which resulted in the refocusing
of the five national DFIs that narrowly constitute the development finance system: the DBSA on
infrastructure; the Landbank on Agriculture; the Industrial Development Corporation on industry;
Khula Enterprise on small and medium scale lending and the National Housing Finance
Corporation on housing.
Three further points from the Bank’s history are worth noting. During its first ten years, as a
publicly funded body, it stressed its role of encouraging private sector lending by describing itself
as a “lender of last resort.” Since 1994 the newly-elected ANC government supported the
continuation and transformation of the DBSA with the intention that public sector borrowers,
such as local authorities, must be subject to the discipline of the market. In 1995 Government
ceased fiscal transfers to the DBSA and required it to be financially self-sustaining.
For the DBSA, infrastructure is broadly defined to comprise economic, institutional and social
infrastructure. Examples of economic infrastructure include water, sanitation, roads, drainage,
telecommunications and energy. Like many of its peers, the Bank is mandated to accelerate the
delivery of basic services and economic growth while maintaining financial sustainability as a
means to achieving that goal. Consequently the Bank operates on sound banking principles and
is required to manage any natural tension that may arise between these underlying principles. In
order to galvanise the efforts of its interventions, the Bank has adopted further guiding principles,
namely: partnerships (with government, private sector and civic society); innovation; risk taking
and risk management; knowledge management; rewarding performance; and focus on mandate as
agreed with the shareholder.
3.2 Products and Services
The Bank offers a package of development banking and development assistance products and
services, consisting of lending/investment; guarantees; grants and technical assistance; advisory
services; research and policy. The Bank is predominantly a debt provider, but invests in equity
instruments as guided by its risk management policies. In recent times, the DBSA has widened
its scope of funding instruments to include investment banking products such as arranging
syndication and underwriting roles. These represent powerful tools to crowd in the private sector
and the wide network of bilateral and multi-lateral development partners.
Within the key provision of the broad operational framework of the DBSA’s mandate the DBSA
plays a triple role of financier (lender/investor), partner, and advisor to its clients. The figure
below shows the relationship and complementarity of the roles.
As a financier the DBSA thus fulfils its ‘development banking’ role on the one side, and as advisor
its ‘development assistance’ role on the other. Recent developments in PPPs provide the scope for
partnership with public and private institutions as either financier or advisor or both when
transacting with the beneficiaries of development finance. The modalities by which DBSA executes
its triple role are represented in the table below.
Financier
Partner
7
Advisor






Fund mobiliser
Grant-maker
Lender
Investor
Under-writer
Arranger




Catalyst
Leverage
Agent
Development
Facilitation





Policy analysis
Advocacy
Capacity building &
training
Research & Evaluation
Development
Information
In fulfilling its developmental role in the region DBSA has achieved significant impact beyond its
limited resources. It is not the intention of this paper to reflect on all these achievements in great
details but to highlight lessons of best practice in the management of the key modes by which the
Bank executes its development finance role.
3.2.1 Finance
Lending and Investment Activities
The Bank’s lending and investment instruments consist of fixed and floating rate loans on Rands
as well as US dollar and Euros. In broader terms, the lending modalities are similar to those of
other DFIs.
The lending and investment operations of the DBSA are focused on infrastructure as previously
noted. The guiding principles are that the projects and and programmes must be sustainable from
a development impact and financial perspective. In arriving at a lending or investment decision,
the appraisal process looks at a number of modules, namely: the economic, financial, technical,
social, institutional and environmental. These modules are similar to those applied in multi-lateral
development institutions. Risk management tools and practices are vigorously applied and
weighted accordingly. As part of its development assistance, the Bank offers technical assistance
targeted at addressing constraints at project or client level that may negatively affect the success
of projects and programmes.
Infrastructure projects are by nature long term, and cash flows are not always positive at the
outset. The Bank plays a developmental role by offering long term loans that match the lives of
the projects or underlying assets, while at the time structuring the project to crowd-in the private
sector who might not be in a position to assume certain risks without the involvement of a DFI. In
this regard, the DBSA regularly applies project finance and syndication techniques to encourage
the participation of private sector.
The Bank’s lending and investment operations extent to other SADC countries, but with an
overall limit of one third of total portfolio. In the rest of the SADC region, the Bank finances not
only projects of an infrastructure nature, but also economic growth sectors that are drivers of
economic development plans of these countries. In addition, projects and programmes that
promote the development of local capital markets are encouraged, and so is support to financial
institutions through lines of credit. For South African based activities, the major clients are local
authorities (municipalities) and utilities. Since 1996 the Bank established its private sector
business as a means to partner with private sector in development projects. From a zero base, it
has grown to a portfolio of diverse projects amounting to US$690,000, and represents one of the
fastest growing parts of the Bank’s business. The spread of sector and country portfolios are
8
contained in its annual reports, but the following tables provide selected information in this
regard.
Banking principles
Like most DFIs, the Bank has to balance sustainable development impact and financial
sustainability, and therefore applies sound banking principles. The development finance (banker)
role of the DBSA is the nexus of its long term sustainability and independence from periodic
government recapitalisation of capital. Sound and prudent financial management has allowed the
DBSA considerable leeway to cross-subsidise its advisory role and in some cases its knowledge
partnership role.
The rating agencies Fitch, Moody’s Investors Service, and
Standard and Poor’s reaffirmed or upgraded the Bank’s
investment grade ratings. Fitch reaffirmed the AAA domestic
ratings, while the international ratings were upgraded by
Moody’s in May 2002 from Baa3 to Baa2 with a positive
outlook and from BBB- to BBB with a stable outlook by
Standard and Poor’s. These ratings reflect, among other factors,
strong shareholder support from the South African government,
a solid financial position, and prudent risk management policies.
The DBSA’s sources of
funding are domestic and
international financial and
capital markets;
international DFIs and
partners; internal cash
generation and callable
capital of $700 millionxi.
Among other factors,
investment grade credit ratings put the Bank in a position to mobilise funds efficiently and costeffectively. As the Bank looks forward to raising its profile in international capital markets, these
credit ratings underpin its borrowing strategy. The Bank’s regulations stipulate a maximum DebtEquity ratio for the Bank, of 250%.
Capitalisation and funding
The DBSA was initially capitalised by its shareholder and received fiscal transfers up until 1994
when these ceased to be the main funding tool. During the transformation of the national
development finance system, certain of the Bank’s loan portfolios to the then “homeland
governments” were taken over by National Government in exchange for liquid Government
bonds but at a higher coupon rate. This effectively added another capitalisation layer.
Furthermore in 1997 the Government committed itself to callable capital of R4.8billion to
support the expansion of DBSA’s borrowing to fund its lending operations. The Bank has further
strengthened its capital base through the net surpluses it has earned since inception. The Bank’s
capital base now stands at around R11 billion (US$1.75 billion).
Loan portfolio management
The Bank maintains a portfolio balance to mitigate risk in terms of:
 Country spread.
 Sector spread.
 Single obligor limits.
9
Country limits are reviewed on an annual basis and presented to the Board of Directors for
approval. The Banks policy is that the total exposure to SADC countries (excluding South Africa)
should not exceed 33% of the
Bank’s portfolio. As at 31
Multi-State
December 2003 the
Botswana
cumulative loan and equity
Malawi
approval by country are
reflected in the table below.
Lesotho
Mozambique
South Africa
Namibia
Swaziland
The Bank’s exposure to
countries outside South
Africa was 26% and within
the limits set by the directors.
Zimbabwe
As at 31 December 2003 the
Bank’s cumulative loan and
Zambia
equity approval sectoral spread of projects is reflected in the table below
Sector
Commercial
Communications
Transportation
Education
Energy
Residential Facilities
Roads & Drainage
Sanitation
Social Infrastructure
Water
TOTAL
ZAR ‘000
4,828
1,535
13
1,632
6,270
349
5,056
2,171
821
6,609
29,284
US $ ‘000
690
219
2
233
896
50
722
310
117
944
4,183
Commercial
Communications
Transportation
Education
Energy
Residential Facilities
Roads & Drainage
Sanitation
Social Infrastructure
Water
10
16.50%
5.20%
0.00%
5.60%
21.40%
1.20%
17.30%
7.40%
2.80%
22.60%
Msunduzi Urban Development Programme
The DBSA policy thus
ensures a portfolio
As part of its drive to extend municipal services to the previously
spread between various
disadvantaged areas, the Msunduzi Municipality (formerly
sectors and countries. In
Pietermaritzburg TLC) designed an infrastructure renewal programme,
the rest of the SADC
called the Msunduzi Urban Development Programme. The programme
region, the Bank’s
was divided into phases, and involves the development and extension of
lending and investment
infrastructure in three key sectors – roads, electricity, water and
programmes are limited
sanitation.
to a third of the Bank’s
maximum possible
For a start, the municipality used its own capital budget, but had to
borrow because of the magnitude of the programme. The DBSA was
exposure. Unlike multiapproached towards the end of 1997, and gave approval for the first loan
laterals such as the
in 1998. Phases I and II were completed in 1999 and 2000 respectively.
IBRD and the AfDB,
By December 2002, the Bank’s financial contribution to the whole
the Bank’s operations in
programme was R154.3 million. Meanwhile, work continued on the
SADC are not all
remaining phases of the programme.
guaranteed by the
respective governments, nor does the Bank enjoy preferred creditor status. It operates through
memoranda of understanding, and within the context of treaties and other bi-lateral agreements
between South Africa and these countries.
The third portfolio management policy that has been approved by the Directors is not to expose
the Bank unduly to single obligators. The single obligor limit is 10% of shareholders interest
including the R4.8 billion callable capital for South Africa. The public sector single obligor limit
for clients situated outside South Africa’s borders is 10% of shareholder’s interest excluding
callable capital. Lastly, no more than 10% of shareholders interest may be invested in equity /
quasi-equity in aggregate.
Interest rate policies
Interest rate policies are a contentious issue, however interest rate subsidies to clients tends to
distort financial markets and crowd out local and foreign direct investment. Client subsidies are
better applied through the development assistance functions of DFIs, such as the DBSA’s
advisory (capacity building) and partnership roles. The DBSA policy is thus to charge market
related interest rates and rather create comfort for private capital through its higher risk appetite
and prepare borrowers to take up project loan financing. The interest rates applied to DBSA
project finance are determined in accordance with the Bank’s interest rate policy, approved from
time to time by the Board of Directors, and are implemented by executive management. This
policy determines, inter alia, that lending rates are based on the cost of funding plus a margin for
risk, and an internal overhead charge
Risk management
The Bank’s pursuit of best practices in risk management has stood it in good stead. In the
development of its risk management policies and methodologies it has consistently endeavoured
to benchmarkxii against best practice in the development finance industry as well as others in the
banking industry. Additionally, the Bank engaged consultants to benchmark its risk management
11
practices against international best practice. This was done using grant financing provided by the
World Bank.
The results of these efforts include:
 Maintenance of the quality of the loan book;
 The low rate of defaults experienced by the Bank;
 Efficient and effective workout procedures when defaults have occurred;
 The contribution made by risk management to the credit rating agencies’ assigning
premier ratings to the Bank;
 The Bank’s low cost of funding.
3.2.2 Partnerships
Smart Partnerships
In its engagement with NEPAD, Africa south of the Sahara, and more specifically SADC a
strategic thrust of the DBSA is to establish smart partnerships with multi-lateral and bi- lateral
development finance agenciesxiii on the one hand and knowledge partners as part of its advisory
role on the other side. In line with this thrust, the Bank continues to act as a catalyst and
facilitator to draw in and complement the involvement of as many relevant development partners
as possible. The DBSA is well placed to play the wider role of a trusted regional development
partner and advisor in strategic support of various developmental processes. Its partnerships role
helps reduce transaction costs and risks through better knowledge management and capacity
building, and enables the realisation of synergies and positive externalities, thus achieving
developmental leverage beyond its own means. This is consistent with present efforts by leading
development agencies and further enhances the role of non-traditional partners in development,
such as the private sector, regulators and civil society.
As a catalyst for regional integration and development the DBSA as a smart partner has
achieved leverage beyond its limited means (DBSA 2003).
The Mozal aluminium smelter near Maputo is the biggest industrial development project ever undertaken
in Mozambique. The total cost of Mozal I and II is estimated at $2,2 billion, and the DBSA has provided
financing to the value of $103 million. The smelter will produce 2 per cent of the world’s annual
consumption. The Bank became involved in order to support the Maputo Development Corridor and the
economic development programmes of Mozambique and the region. This decision has been justified by the
performance of Mozal I, which has made a major contribution to the regeneration of the Mozambican
economy. Investor confidence in the country has risen significantly, and the prospects for further
investment are strong, with a number of substantial projects in the pipeline. Mozal I has contributed
around $160 million per annum to the country’s GDP, generated export earnings of $430 million per
annum (an increase of more than 150%), and added about $4 million per annum to tax revenue. The
Mozambican government’s shareholding in the first phase has generated dividend income of $5 million
per annum. The economy has also benefited from the establishment of related infrastructure, including
improved roads and bridges, telecommunications networks, water and sewage systems, upgraded harbour
facilities and electricity supply. Mozal has initiated an innovative social development programme,
implemented through the Mozal Community Development Trust, to provide support for communities
within a ten kilometre radius of the smelter. The company funds the Trust to the tune of $2 million per
annum. The Trust focuses on small business development, agriculture, education and training, health and
the environment, culture and sports, and community infrastructure. Various projects are already being
implemented and others are under consideration. (NEPAD / DBSA 2003 b)xiv
12
Agency Services
As the Bank has become known for its institutional capacity, there have been more and more
requests for it to play an agency role implementing projects on behalf of others. These requests
come from institutions such as governments, donors and other development stakeholders, who
lack the specific local and regional capacity to implement programmes. The Bank, in turn, has
increasingly recognised that it needs to play a more enabling role in development. The idea of
providing agency services has therefore developed over time, and is now included in the Bank’s
range of standard products. Agency activities allow the Bank to enhance development in South
Africa and the rest of the continent by negotiating new partnerships and strengthening existing
ones with other development stakeholders.
Currently, the Bank has 22 agency projects on its books, with a funding value of some
$7million in financial year 2002/03. These projects are diverse in nature and include joint
ventures, independent contractor assignments and management contracts. Some of the
important agency functions are the African Connection project, the Carbon Finance
Intermediary Agreement (with the World Bank), the International Development Research
Council (sponsored by the Canadian Research Centre), the Environmental Capacity Building
Unit (with the South African government), the Job Creation Trust, the Timbuktu Manuscript
and Infrastructure Restoration Project (with the governments of Mali and South Africa), and
the Low Cost Housing Infrastructure Fund (funded by Kreditanstalt für Wiederaufbau).
3.2.3 Advisor
As an advisor the DBSA performs an important role of providing development assistance to its
clients to address shortcomings in borrower institutional capacity. The DBSA strengthens the
capacity of its clients to take up loan finance from the DBSA. By capacity building is meant
institutional capacity to manage projects in terms of good governance, the systems in place, both
organisational procedures and management information hardware and software, and individuals’
knowledge and skills development to support sound project investment and achieve significant
impact. To achieve this the DBSA places much emphasis on sharing lessons learned, through
knowledge management, hands-on capacity building and other forms of technical assistance.
Knowledge management
As an advisor the DBSA is focusing on positioning itself as a knowledge institution and centre of
excellence in Africa south of the Sahara. A knowledge organisation, as defined by the DBSA, is:
an organisation that values, generates and shares knowledge; applies and internalises knowledge
in business processes and client-focused products and services; pursues focussed knowledge
outreach to stakeholders; and has the architecture and infrastructure which capacitates the
organisation for learning and leveraging skills and information. The DBSA has therefore
established an organisational structure which gives equal importance and standing to its
knowledge cluster as its other functional clusters, e.g. operations, private sector investment,
treasury and special projects.
13
Development banking has always been a knowledge-based business, but this has been largely
implicit in the past since the skills required for assessing potential investment projects are similar
to those required for addressing capacity building and development needs, and preparing
borrowers for project lending. As a regional organisation DBSA is uniquely endowed with a
developmental track record of 20 years. With the recent development of frameworks for
knowledge management, and the more explicit recognition that the Bank has a huge pool of
development finance knowledge, a concerted effort is being made to recognize and characterize
the knowledge that the Bank possesses, and put structures and processes in place to enable its
widespread exploitation. This is especially important as the DBSA’s own triple role of financier,
partner and advisor has matured. The approach has been to build solid foundations for the
sustained delivery of knowledge, by firstly improving internal capabilities to deliver on the
knowledge vision and then to deploy the extensive, domain-specific knowledge that the Bank has
built up, as widely as possible through its marketplace.
The DBSA Knowledge Strategy
… conceptualising, nurturing and driving four dynamics …
1
Initiation and
Embedding of
“Learning
Organisation”
Culture and
Dynamics
2
3
Development of
“Knowledge”
Products and
Services and
Embedding
knowledge in
Internal
Systems and
Processes
Establishment of
Organisational
Architecture to
Develop Internal
Synergy and
Leverage Skills
and Knowledge
for the
Organisation
4
Establishment of
Resources,
Infrastructure,
Systems and
Processes to
Support Learning
Organisation
Dynamics and
Information Flows
Via Formal Programmes in Five Strategy “Pillars”
The Bank has developed formal knowledge programmes in five key strategic areas or “pillars”:





Propagating and entrenching a knowledge culture in the organisation.
Becoming a learning organisation.
Exchanging and sharing knowledge in communities of practice and stakeholders.
Knowledge accounting through evaluation and assessment of effective deployment of
knowledge.
Building smart institutional partnerships for knowledge building and brokering.
The DBSA thus continues to invest in knowledge networks and communities of practice within
and outside the organization. It is currently setting up and operationalising a specialized training
academy, and working closely with various partners such as universities and multilateral and
bilateral development agencies to tackle key social, financial and technological challenges of
development and knowledge economies. The DBSA further seeks to supplement its own efforts
and comparative advantages with the complementary strengths of various other role-players,
leveraging collective resources, experiences and expertise.
14
The DBSA Development Fund
A further intervention by the Bank to assist its clients is the establishment of the DBSA
Development Fund. This is a non-profit company incorporated in December 2001 to address
sustainable capacity-building in South Africa at municipal level, and to support municipalities in
enhancing service delivery and local economic development.
The core business of the Development Fund is to maximise the impact of development finance by
mobilising and providing grant funding to address human, institutional and financial constraints
on rural and urban development, thereby promoting effective service delivery and local economic
development. This is done through a mix of products and services, including:
 Funds: Supporting capacity building funding through grants, development credits and
other financial instruments.
 Expertise: Consulting and advisory services for institutional and human capacity building
to ensure that basic services are delivered to disadvantaged communities.
 Development facilitation: Ongoing technical support and sharing of knowledge to ensure
that clients gain the necessary experience to manage the functions and processes of
service delivery.
With the Fund operational in all nine provinces of South Africa, progress has been made in
helping local government institutions to build capacity and formulate integrated development
plans.
The Fund approved technical support grants to 134 municipalities and provincial departments
totalling $1,1 million in its first year of operation and has now been capitalised with the transfer
of US$50 million from DBSA operational surpluses.
Technical assistance
Through its Operational units the DBSA frequently provides Technical Assistance to its clients
for project preparation to the point where a bankable project proposal is submitted to the Bank for
consideration for development finance.
3.3 Development Impact
Through its sound governance, fiscal and outreach policies the DBSA has achieved considerable
impact in the region. The table below contains the standard set of indicators that DBSA uses in its
Annual Report. This table specifically illustrates DBSA’s contribution, over the last ten years, to
employment creation and the impact of investments on low income households. The table
illustrates how the Bank looks beyond its financial performance and evaluates its development
impact in South Africa and the region, as required by its shareholder and directors.
Project Funding ($ million)
Contribution to GDP ($ million)
Employment creation (numbers)
Skilled (numbers)
Semi-skilled (numbers)
Unskilled (numbers)
Impact on low income households ($mill.)
Total approvals
including co-funders
$10,889
$7,940
527,874
51,250
227,027
249,597
$968
15
Total DBSA loans
approved
$3,723
$2,176
143,904
15,355
63,100
65,449
$328
The DBSA leverages or crowds in third party funding into the development process. This
partnership approach over the past ten years, led to a $1 to $3.4 participation ratio with the DBSA
approving projects to the value of $3,723 million and co-funders $7,166 million. Furthermore,
projects supported by DBSA have contributed $7,940 million to the region’s GDP over the last
ten years.
Unemployment in the region is a concern and through its funding DBSA has contributed to parttime and permanent employment in the region. The table indicates the impact of disbursements
on the income of low income households. The impact is considerably smaller than the impact on
GDP because of the capital intensive nature of most infrastructure projects.
In the final analysis the table once more indicates the leverage DBSA achieves in mobilising
other sources of finance through structuring its package of financial services to crowd in foreign
and domestic direct investments.
4. Ongoing challenges: balancing priorities
The environment in which the DBSA operates creates certain tensions between the triple roles of
financier, partner and advisor giving rise to a number of challenges in the wise management of
the DBSA by its directors and executive in balancing priorities.
Where nationally-based DFIs are required to be self sustaining, and must increasingly raise funds
independent of government guarantees, they have to pay special attention to their credit ratings
and establish risk management policies and practices to secure these. The intermediation function
of the DBSA as a development banker requires employment of sound banking principles to
ensure that scarce capital is obtained at an affordable cost and allocated efficiently, consistent
with both risk and return (both developmental and financial returns).
While the objectives and mandate of the DBSA are clearly developmental, tensions arise on the
one hand with the need for the Bank to retain its favourable credit ratings, and on the other to
deliver developmental outcomes such as uplifting neglected areas, combating poverty, creating
employment etc. A careful balance must be struck between investments with high returns and less
secure or attractive investments in pursuit of Government’s development agenda. Balancing costeffective intermediation, risk management and outreach through continuous strategic analysis,
careful financial modelling, review of key performance areas, and value engineering have
become crucial management functions of the organization and its executive.
There is also a tension in the imperative to crowd in private sector lenders. Ideally a DFI should
not compete with the private sector where the private sector is willing to invest. However the
need for the DFI to have some good quality loans in its book means that this needs to be managed
carefully in order to avoid discouraging private sector investments.
When a DFI has a number of financial products such as special-purpose grants and soft loan
windows, such as the DBSA Development Fund, it needs clear policies on when to use each in
order to reach the unserved in a manner that does not compromise the basic functions and
sustainability of the DFI. In the same vein, a DFI can use these products (in appropriate amounts)
16
and its knowledge role to build capacity among hitherto non-bankable potential clients and so
“graduate” them to a position where they can take up loans from the DBSAxv, thus increasing the
Bank’s loan book and scope of its development finance operations.
5. Policy conclusions
An overview of the development finance system and the background, nature and practice of the
DBSA in addressing development challenges leads to a number of guiding principles for the
successful management of DFIs. These include:








Governments must provide an environment that is conducive to the development of financial
markets, e.g. in Africa the NEPAD emphasises transparency and good governance as crucial
for Africa’s recovery.
DFIs need autonomy of governance to maintain an arms-length from both governments and
their clients. Prescriptions on who to fund, and on what financial terms and conditions lead to
ineffectiveness, weakening of the DFIs ability to raise private capital, and crowding out
private capital.
DFIs should have the flexibility to focus on regional and local circumstances as development
partners with multilateral and bilateral agencies, as the former have a better understanding of
local and regional developmental risk and are able to match their risk appetite accordingly.
DFIs can achieve enormous leverage beyond their capitalisation by establishing smart
partnerships with multilateral and bilateral agencies, private capital, knowledge institutions
and NGOs.
Prudent management of systemic risk requires that DFIs manage diversified portfolios. The
sustainability of DFIs depends on them spreading risk across different types of clients and
sectors.
Interest rates and tenor should be market-related to avoid crowding out private capital. Client
subsidies are better applied through the development assistance functions of DFIs, such as
advisory services and capacity building.
DFIs should be subject to strict commercial norms and practice. Systemic risk as related to
funding structure (as reflected in balance sheet ratios) should be minimised by applying
commercial risk principles.
Public subsidy-dependent key performance areas and sectors, e.g. basic social services in the
DFI portfolio should generally be pursued as an off-balance-sheet ‘agency’ arrangement
entered into with the relevant government ministries or multilateral and bilateral donors.
For DFIs to succeed within the rapidly changing global and regional environment they must meet
a number of challenges for their effective management. This requires sound governance and
financial management, flexibility, and an ability to balance cost-effective intermediation and risk
management with outreach through smart partnerships, capacity building and knowledge
management.
17
Endnotes
i
World body endorses NEPAD: UN negotiations bring agreement to back African initiative. Africa Recovery,
Vol.16#4 (February 2003), page 6.
ii
Diamond, W.1957. Development Banks, John Hopkins Press, Baltimore.
iii
Hoffmann, S L. 1998. The Law and Business of International Project Finance. London: Kluwer Law International.
iv
Mistry, P, Realigning the development finance system in South (and Southern) Africa: Issues and options, Undated
Mimeo, Development Bank of Southern Africa, Midrand, South Africa.
v
Sherif, K & Borish, M, 2003. State - Owned Banks in the Transition: Origins, Evolution and Policy Responses by
Alexandra Gross , World Bank 2003.
vi
DBSA, 2004, Ten year review. Work in progress draft, Development Bank of Southern Africa, Midrand, South
Africa.
vii
DBSA Act of 1997 Act no. 13 of 1997.
viii
King Report on Corporate Governance for South Africa 2002 (King II Report). Institute of Directors in Southern
Africa, Johannesburg, South Africa http://www.idosa.co.za
ix
Reviews of the effectiveness of the Board were conducted during the 2003/04 financial year in line with the King
II recommendations and the Board Charter.
x
South African Public Finance Management Act. 1999. http://www.gov.za/acts/1999/a1-99.pdf
xi
2004 prices.
xii
The International Finance Corporation (IFC) and the African Development Bank (AfDB) loan pricing spread
resemble that of DBSA. The IFC currently applies lending spreads for projects at a range from a low of 125 basis
points to a maximum of 500 basis points. The AfDB aggregates its risk pricing also to a maximum of 500 basis
points for unsecured private sector loans in high risk countries.
xiii
e.g. AfDB, EIB, KFW, CfD and World Bank projects and Agencies.
xiv
NEPAD/DBSA, 2003. Financing Africa’s Development: Enhancing the role of private finance. Development
Report 2003. DBSA, Midrand, South Africa.
xv
E.g. borrowers do not have the capacity to absorb development finance, so DBSA established the Vulindlela
Academy and Knowledge Portal, but this still needs to be rolled out to SADC and NEPAD.
18