Select Committee on Appropriation 7 November 2014

1. Select Committee on Appropriation7 November 2014

2. Objective • Reflect on how: • The 2014 MTBPS proposed infrastructure allocations will provide a space for the Bank to increase its support to municipalities • The Bank should indicate any shortfalls to current infrastructure investment needs and any proposed alternative funding. As per letter dated 21 October 2014 re: “Public Hearings on Division of Revenue Amendment Bill and proposed division of revenue and conditional grant allocations to provinces and local government” • 2 • 2

3. Our understanding of the key changes to the proposed infrastructure allocation as reflected in the MTBPS – Extracts from the MTBPS • Reviving investment in cities (MTBPS pg 4) • Policy seeks to reshape urban landscape, renewing investment in affordable housing in partnership with the private sector • Government will roll out a new approach to local government infrastructure financing • Government will also work with private investors and development finance institutions to expand debt financing for municipal infrastructure • Funding local government (MTBPS pg 39) • A call for municipalities to get back to basics in delivering services and funding infrastructure • The baseline allocation for local government conditional grants will be reduced by R920.6 million in 2015/16 and R1.4 billion in 2016/17

4. Presentation outline • GROUP OVERVIEW • Strategy • Outlook • SUPPORT TO MUNICIPALITIES • Overview of the municipal market • CAPEX trends • Current planned support to municipalities • Potential scope to increase support to large cities • Crowding-in the private sector • Product innovation is a key enabler • 4 • 4

5. GROUP OVERVIEW

6. Mandate and regulatory framework Mandate (per DBSA Act) The main objectives of the Bank are the promotion of economic development and growth, human resources development, institutional capacity building, and the support of development projects and programmes on the African continent National Department 100% 100% 100% 100% Major DFIs 100% • DBSA 100% owned by the SA Government • Oversight by the National Treasury (Finance Ministry) and ultimately Parliament • Incorporated as a development finance institution (DFI) under the DBSA Act (no 13 of 1997) • Regulated by the Public Finance Management Act • Not regulated by the SA Reserve Bank or Bank Act

7. Governance framework Ministry of Finance (sole shareholder) Minister Nhlanhla Nene DBSA Board Chairman: Jabu Moleketi Audit and Risk Committee Board Credit and Investment Committee Human Resources, Nomination, Social and Ethics Committee Infrastructure Delivery and Knowledge Committee Board Sub-Committees DBSA Executive Management Committee Chairman: Patrick Dlamini Finance and Treasury Committee Investment Committee Corporate Services Committee Infrastructure Delivery & Knowledge Management Committee Management Sub-Committees

8. Infrastructure development plays an important role in the achievement of the National Development Plan objectives Direct Indirect Not applicable

9. The Strategic Integrated Projects (SIPs) direct our work… Social Infrastructure programmes Description Involvement of DBSA Unlocking the northern mineral belt with Waterberg as the catalyst SIP 1   SIP 2 Durban – Free State – Gauteng logistics and industrial corridor  South – Eastern node and corridor development SIP 3 SIP 4 Unlocking the economic opportunities in North West Province   Saldanha – Northern Cape development corridor SIP 5  Integrated municipal infrastructure project SIP 6 Integrated urban space and public transport programme  SIP 7  Green energy in support of the South Africa economy SIP 8  Electricity generation to support socio economic development SIP 9  Electricity transmission and distribution for all SIP 10  Agri-logistics and rural infrastructure SIP 11 Revitalisation of public hospitals and other health facilities  SIP 12 National school build programme  SIP 13 Higher education infrastructure  SIP 14 Expanding access to communication technology  SIP 15 SIP 16 SKA & Meerkat  SIP 17 Regional integration for African cooperation and development  SIP 18 Water and sanitation infrastructure 

10. DBSA strategic framework is aligned to the government’s economic policy and programs National imperatives National Development Plan Presidential Infrastructure Coordinating Commission Vision A prosperous and integrated region, progressively free of poverty and dependence Mission To advance the development impact in the region by expanding access to development finance and effectively integrating and implementing sustainable development solution Improve the quality of life of people through the development of social infrastructure Support Economic Growth through investment in economic infrastructure Support Regional Integration Strategy Objectives Sustained growth in development impact Integrated infrastructure solutions provider Financial Sustainability Strategic Enablers High Performance Culture Balance Sheet Capacity Partnerships Business Intelligence Operational Excellence Innovation Values Shared Vision High Performance Service Orientation Innovation Integrity Competitive Advantages Integrated infrastructure solutions provider (“cross-sell”) Early stage risk (project prep) Trusted partner Access to infra. decision-makers (esp. public sector) Basel III – ability to provide longer tenor debt Performance Measures Growth in disbursements: 20%+ CAGR Cost to income ratio: 35% long term Return on equity: 5-6% in long term Equity Growth: Inflation linked IDD Growth: Full cost recovery and R500M revenue

11. DBSA primarily plays a key role in the prepare, fund and build phases of the infrastructure development value chain DBSA’s primary focus Plan Prepare 1 2 3 4 5 Build Maintain / improve Plan Prepare Finance • Supporting the maintenance and/or improvement of social infrastructure projects • Project identification • Feasibility assessments • Technical assistance • Financial structuring • Project Preparation funds • Lead arranger • Provide vanilla and boutique financing opportunities • Debt • Mezzanine Finance • Limited non–recourse lending • MLA • Managing the design and construction of key projects in the education, health and housing sectors • Project Management support, including to the Jobs and Green funds Services • Municipalities • Public-private partnerships • Public-public partnerships • Regional integration • South Africa • Municipalities • State–Owned Enterprises • Public-Private Partnerships • Public-Public Partnerships • Private sector • The rest of Africa • State-Owned Enterprises • Public–Private Partnerships • Private sector • National and provincial government departments • Municipalities • National and provincial government departments • Municipalities • Under-resourced municipalities Client / markets Integration across the value chain and innovative solutions to drive infrastructure delivery and development impact

12. Build on our competitive advantages in our core markets Competitive Advantage Source of Competitive Advantage Integrated infrastructure solutions provider The DBSA operates across the infrastructure finance value chain and can therefore offer clients an integrated solution Opportunities for ‘cross selling’ across DBSA divisions Early stage risk As a DFI, the DBSA is positioned to take on early-stage risk where commercial banks are reluctant to take on this risk Use project preparation services as a ‘deal pipeline” DBSA a trusted partner The DBSA is positioned to leverage its role as a trusted partner between the government and the private sector Private sector banks not ‘threatened’ by DBSA Exclusive access to deal flow DBSA able to leverage preferential access to RSA government to access opportunities in South Africa (SOEs, municipalities) and countries in Africa with strong relations w RSA Arbitrage Basel III capital requirements As a DFI, the DBSA does not have to comply with Basel III capital requirements Allows DBSA to take longer tenor on debt (vs. commercial banks)

13. OUTLOOK

14. Infrastructure financing • Targeting 20% annual growth rate for next three years: • ~ 70% in South Africa, remaining 30% in the rest of Africa • More than doubling our disbursements to under-resourced municipalities CAGR: Rest of Africa: 18% South Africa: 25% We aim to be at the heart of infrastructure development on the continent Our growth ambitions will enable DBSA to become a leading infrastructure financier in Africa, meaningfully contributing to economic growth and regional integration

15. Infrastructure delivery support – providing implementation agent, programme management and coordination services • Continue to support in key sectors of education, health and housing – partnering with the communities to succeed • Doing more with less to fill the gap in implementation • Full cost recovery • Embracing new build technology

16. Our ongoing success is dependent on… Project Preparation • Unlocking projects through project preparation Partnerships • Development of partnerships as the demand for infrastructure development exceed what we can provide Full value chain offering • Optimising our service offering in terms of the value chain Employer of choice • Attracting, retaining and developing talent – key skills in the area of project management, engineering and finance skills Innovative infrastructure solutions • Developing innovative solutions to infrastructure challenges – planning, financing, construction and maintenance

17. SUPPORT TO MUNICIPALITIES • 17

18. DBSA role and approach in the municipal sector • Strengthen the capacity of under-resourced municipalities in areas such as project planning, preparation and packaging • Increase focus on areas with the biggest unfunded gap through project origination initiatives • Providing affordable funding through development subsidies to secondary municipalities and under resourced municipalities • Integrate financing and non-financing support activities to achieve over-all development impact • Provide support to municipalities to improve the level of expenditure of conditional transfers by providing implementation support

19. Segmentation: Secondary (M2) / under-resourced (M3) Municipal Sector 270 municipalities Market 2: Total 90 municipalities Market 3: Total 180 municipalies Small Towns and Rural 180 Secondary Cities : 19 Large Towns: 27 Districts 44 • Large towns with urbanized areas at the periphery • Not providing water services: 23 • Providing water services: 21 and responsible for: • Regional bulk services • Capacity building support • Disaster management • Largest budgets after metros • Direct National Treasury budget oversight • Aspirant metros • Small towns with rural periphery and scattered settlements: 111 • Rural municipalities with scattered settlements and deep rural areas: 69 • Economic base: • Moderate economies • Highly variable revenue base • Fair degree of grant dependency • Some ability to borrow to raise capital • Limited institutional capacity • Economic base: • Very weak economies base weak institutional capacity • Total reliance on national government transfers for both capita; and operating expenditure • Limited to no ability to borrow to raise capital • Economic base: • Not applicable (various local municipalities constitute the areas of jurisdiction of the DMs) • High degree of grant dependency to render services • Variable ability to borrow to raise capital • Economic base: • Strong economies; substantial revenue base • Low grant dependency • Ability to borrow to raise capital • Require extensive support in all aspects of infrastructure delivery and management • Support required include their ability to plan, prepare and implement projects, and to utilise support through fiscal transfers • Tend to attract little interest from the commercial banks • Require support in the planning and identification and preparation of projects • 19 • 19

20. Segmentation: Metropolitan Municipalities • CAPACITATED METRO’S • Consists of 5Metropolitan municipalities: • Ekurhuleni • City of Johannesburg • City of Tshwane • eThekwini • City of Cape Town • UNDER RESOURCED METRO’S • Consists of 3 Metropolitan municipalities: • Buffalo City • Nelson Mandela Bay • Mangaung • STRATEGIC ISSUES/DEVELOPMENT CHALLENGES • Rapid urbanization • Aging infrastructure leading to water and electricity losses • Growing indigent populations • Economic growth constraints by infrastructure • Conservative fiscal policy (reference for low borrowing) • 20

21. Historical Capex Trends: M1, M2 & M3 Actual municipal capital expenditure vs. budget from 2010/11 to 2012/13 M2 M3 M1 R’billion • Actual Historic Spending Trends (based on 3 year data) • 64% CAPEX expenditure • 56% expenditure of planned borrowing • 67% expenditure of grant funding • Actual Historic Spending Trends (based on 3 year data) • 63% CAPEX expenditure • 34% expenditure of planned borrowing • 67% expenditure of grant funding • Actual Historic Spending Trends (based on 3 year data) • 82% CAPEX expenditure • 83% expenditure of planned borrowing • 78% expenditure of grant funding • 21 Source: National Treasury: Local Government Revenue and Expenditure: Fourth Quarter Local Government Section 71 Report (2010/11 to 2013/14)

22. DBSA market share DBSA 30 % of metro debt R44bn • DBSA significant role player in: • M3: 84% • M2: 73% • M1: 30% • DBSA municipal book (R18.1bn): • M1: 66% • M2: 28% • M3: 6% R18.1bn DBSA 84% of under resourced municipal debt DBSA 73% of secondary municipal debt • 22

23. Planned capital expenditure 2014/15 to 2015/16 • Increased infrastructure funding needs (R149bn over 2 years): • M1: R67bn • M2: R40bn • M3: R42bn • Increased funding gap • (R33.2bn over 2 years): • M1: R4.7bn • M2: R3.9bn • M3: R24.6bn Source: National Treasury database: Municipal Budgets 2013/14 World Bank: The South African Urban Agenda Report 2009 • 23 • 23

24. Metro’s: Potential capital projects Source: Metro Budgets MTEF 2014/15 to 2016/17 IDP 2014/15 • 24

25. Municipal Strategic initiatives: New business development • 25

26. Municipal Strategic initiatives: New business development • 26

27. Municipal growth prospects: 2015/16 to 2017/18 Corporate Plan 20 % Growth Current: 4.5 Planned: 6.0 Planned: 6.3 Planned: 7.6 • Growth Scenario (3yrs to 2017/18): R19.9bn • M1: R12.8bn • M2/M3: R7.1bn Note: Targeted loan disbursements subject to demand for infrastructure debt funding, debt absorption capacity and creditworthiness of the respective municipalities as well as the ability of the DBSA to provide competitive funding rates • 27

28. POTENTIAL SCOPE FOR DBSA TO INCREASE SUPPORT TO LARGE CITIES • 28

29. Infrastructure grant pledging has been a key to support the acceleration of infrastructure delivery in under-resources municipalities • Conditional grant pledging provides an opportunity for municipalities to obtain short term bridging finance to accelerate investment spending on capital projects to: • Accelerate reduction in backlogs • Bring implementation forward from 36 months to between 9 and 12 months • Take advantage of additional subsidised support for programme planning and implementation • Improve socio-economic development and quality of life of residents • DBSA is currently the biggest contributor and strongly positioned to provide infrastructure support to under resourced municipalities • Sole provider of bridging finance for infrastructure • Significant provider of subsidised project preparation, planning and implementation support to under resourced municipalities Pledging programme could be extended to large urban cities

30. Additional capital injection can help create additional funding capacity in large urban centres • Inject, say R5 billion into DBSA (R2.5 billion per annum) • Use its existing balance sheet and leverage additional capital by two-and-a-half times (2.5 times) Increase funding support to R17.5 billion to support growth-enabling infrastructure that expands the income generation base of municipalities by supporting the funding of economic infrastructure Total R17.5bn • 30

31. Crowding-in the private sector investment is essential to increasing the funds available to large urban centres • Participation by the private sector capital markets in the development of the debt market remains an important focus area for the DBSA. • DBSA is currently testing various securitisation options of its existing loan book. • Loans to urban cities could be amalgamated, packaged and sold-off to attract and crowd-in private sector capital. • Strong appetite from both the commercial bank market and the debt capital markets for exposures to Cities and Large Urban centres. • The DBSA could fund the longer-end of the loan which is the typical role of development finance institution, in other, for periods from ten to 20 years. • Period shorter than ten years would be funded by the private / commercial bank market. • Crowding in the private sector will enable the DBSA to free up capital for reinvestment into infrastructure projects.

32. Product innovation is a key enabler • The DBSA’s continues to explore options to catalyse private sector participation in the municipal sector and thereby accelerate the provision of economic infrastructure including: • Infrastructure bonds. • Municipal bond underwriting. • Project finance / Off-balance sheet limited recourse structures. • Public/municipal service contracting models. • Revenue enhancement financing models.

33. THANK YOU • 33