Select Committee on Appropriation 7 November 2014 Objective

Select Committee on Appropriation 7 November 2014

Objective Reflect on how: 1. The 2014 MTBPS proposed infrastructure allocations will provide a space for the Bank to increase its support to municipalities 2. 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

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) o Policy seeks to reshape urban landscape, renewing investment in affordable housing in partnership with the private sector o Government will roll out a new approach to local government infrastructure financing o Government will also work with private investors and development finance institutions to expand debt financing for municipal infrastructure • Funding local government (MTBPS pg 39) o A call for municipalities to get back to basics in delivering services and funding infrastructure o The baseline allocation for local government conditional grants will be reduced by R 920. 6 million in 2015/16 and R 1. 4 billion in 2016/17 |3

Presentation outline 1. GROUP OVERVIEW • Strategy • Outlook 2. 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

GROUP OVERVIEW |5

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 South African Government National Department National Treasury Economic Development 100% Major DFIs 100% Industrial Development Corporation DBSA Housing Trade and Industry 100% National Housing Finance Corporation National Empowerment Fund 100% Land Bank • • • 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 |6

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

Infrastructure development plays an important role in the achievement of the National Development Plan objectives Outcome DBSA’s role Example Create an economy that will create more jobs • IDD: ASIDI and Eastern Cape Rural Housing Investing in economic infrastructure • Funding of various energy, transport and ICT projects Environmentally sustainable and resilient: Transition to a low carbon-economy • Preparation and funding of IPPs An inclusive and integrated rural economy • Funding of bulk water supply • Eastern Cape Rural Housing Programme South Africa in the region and the world • Funding of projects in SADC • North-South corridor Transforming Human Settlements • Eastern Cape Rural Housing Programme • Housing Impact Fund Improving the quality of education, training and innovation • IDD: ASIDI programme • Funding of student accommodation Quality health care for all • IDD: refurbishment of health clinics and construction of doctors’ rooms Social protection Building safer communities Building a capable and developmental state Provision of technical support in the planning and implementation of projects Fighting corruption IDD: management of procurement processes in appointing service providers Transforming society and uniting the country Supporting development impact through investment in social and economic infrastructure Direct Indirect Not applicable |8

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

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 Balance Sheet Capacity High Performance Culture Partnerships Business Intelligence Operational Excellence Innovation Values Shared Vision High Performance Service Orientation 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 R 500 M revenue 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 | 10

DBSA primarily plays a key role in the prepare, fund and build phases of the infrastructure development value chain DBSA’s primary focus 1 2 Client / markets Services Plan • Under-resourced municipalities Plan 3 Prepare 4 Finance Prepare 5 Build • • • 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 • • Municipalities Public-private partnerships Public-public partnerships Regional integration • National and provincial South Africa government departments • Municipalities • State–Owned Enterprises • Municipalities • Public-Private Partnerships • Public-Public Partnerships • Private sector Maintain / improve • Supporting the maintenance and/or improvement of social infrastructure projects • National and provincial government departments • Municipalities The rest of Africa • State-Owned Enterprises • Public–Private Partnerships • Private sector Integration across the value chain and innovative solutions to drive infrastructure delivery and development impact | 11

Build on our competitive advantages in our core markets Competitive Advantage Integrated infrastructure solutions provider Early stage risk Source of Competitive Advantage The DBSA operates across the infrastructure finance value chain and can therefore offer clients an integrated solution Opportunities for ‘cross selling’ across DBSA divisions 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) | 12

OUTLOOK | 13

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 | 14

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 ASIDI 71 schools Doing more with less to fill the gap in implementation • Full cost recovery • Embracing new build technology National Rural Youth Services Corp Programme Economic opportunities for the rural youth, training Limpopo Public Works Various infrastructure projects across the province Eastern Cape Rural Housing 1 000 units Key deliverables Health 50 consulting rooms (new) and 38 clinics (repairs) | 15

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

SUPPORT TO MUNICIPALITIES 17 | 17

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 | 18

Segmentation: Secondary (M 2) / under-resourced (M 3) Municipal Sector 270 municipalities Market 2: Total 90 municipalities Secondary Cities : 19 § Largest budgets after metros § Direct National Treasury budget oversight § Aspirant metros Economic base: § Strong economies; substantial revenue base § Low grant dependency § Ability to borrow to raise capital Large Towns: 27 § Large towns with urbanized areas at the periphery Economic base: § Moderate economies § Highly variable revenue base § Fair degree of grant dependency § Some ability to borrow to raise capital § Limited institutional capacity Market 3: Total 180 municipalies Districts 44 § Not providing water services: 23 § Providing water services: 21 and responsible for: o Regional bulk services o Capacity building support o Disaster management 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 § Tend to attract little interest from the commercial banks § Require support in the planning and identification and preparation of projects Small Towns and Rural 180 § Small towns with rural periphery and scattered settlements: 111 § Rural municipalities with scattered settlements and deep rural areas: 69 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 § 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 19 support through fiscal transfers 19 | 19

Segmentation: Metropolitan Municipalities CAPACITATED METRO’S UNDER RESOURCED METRO’S Consists of 5 Metropolitan municipalities: Consists of 3 Metropolitan municipalities: • • • Ekurhuleni City of Johannesburg City of Tshwane e. Thekwini City of Cape Town • • • 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 | 20

Historical Capex Trends: M 1, M 2 & M 3 Actual municipal capital expenditure vs. budget from 2010/11 to 2012/13 M 2 M 3 R’billion M 1 Actual Historic Spending Trends (based on 3 year data) § 82% CAPEX expenditure § 83% expenditure of planned borrowing § 78% expenditure of grant funding Actual Historic Spending Trends (based on 3 year data) § 64% CAPEX expenditure § 56% expenditure of planned borrowing § 67% expenditure of grant funding Source: National Treasury: Local Government Revenue and Expenditure: Fourth Quarter Local Government Section 71 Report (2010/11 to 2013/14) Actual Historic Spending Trends (based on 3 year data) § 63% CAPEX expenditure § 34% expenditure of planned borrowing § 67% expenditure of grant funding 21 | 21

DBSA market share DBSA 30 % of metro debt R 44 bn DBSA significant role player in: • M 3: 84% • M 2: 73% • M 1: 30% R 18. 1 bn DBSA 73% of secondary municipal debt DBSA 84% of under resourced municipal debt DBSA municipal book (R 18. 1 bn): • M 1: 66% • M 2: 28% • M 3: 6% 22 | 22

Planned capital expenditure 2014/15 to 2015/16 § Increased infrastructure funding needs (R 149 bn over 2 years): • M 1: R 67 bn • M 2: R 40 bn • M 3: R 42 bn § Increased funding gap (R 33. 2 bn over 2 years): • M 1: R 4. 7 bn • M 2: R 3. 9 bn • M 3: R 24. 6 bn Total CAPEX (2 yrs) (R'bn) M 1 M 2 M 3 Total 62. 6 36. 1 17. 5 116. 2 Source: National Treasury database: Municipal Budgets 2013/14 World Bank: The South African Urban Agenda Report 2009 CAPEX Grants/Subsidies (R'bn) 28. 8 25. 6 13. 6 68. 0 Own Revenue (R'bn) Borrowings (R'bn) 15. 2 8. 0 3. 5 26. 7 18. 6 2. 5 0. 4 21. 5 23 23 | 23

Metro’s: Potential capital projects CLIENT Buffalo City Metro Mangaung Metro Nelson Mandela Metro City of Tshwane PROJECT EST. VALUE 1. Bulk water treatment plants R 2 bn 2. Revenue enhancement linked to water demand management & water losses R 1. 6 bn 1. Bulk water upgrades R 3 bn 2. Water conservation demand management & automated metering R 600 m 3. Airport Nodal development R 450 m 1. Nooitgedacht bulk water augmentation scheme R 1 bn 2. Water demand, stormwater & augmentation scheme R 540 m 3. Coega IDZ Nodal waste water scheme R 500 m 1. Wonderboom Airport nodal upgrade R 2 bn 2. West Capital Project (mix use economic development R 3. 2 bn CLIENT Ekurhuleni Metro e. Thekwini Metro City of Johannesburg City of Cape Town PROJECT EST. VALUE 1. Nodal development at OR Tambo airport R 450 m 2. Water conservation demand management R 3 bn 1. Bulk water infrastructure linked Dube Trade Port R 1 bn 2. Dube Trade Port nodal development R 1. 5 bn 1. Greening projects waste to energy R 2 bn 2. Inner city economic Precinct R 3 bn 1. Bulk infrastructure expansion R 4 bn 2. ICT broadband fibre optic network R 1. 3 bn Source: Metro Budgets MTEF 2014/15 to 2016/17 IDP 2014/15 24 | 24

Municipal Strategic initiatives: New business development STRATEGIC INITIATIVE DESCRIPTION POTENTIAL APPLICATION 1 Districts municipalities as vehicles for reaching M 2/M 3 communities § Planning Support § Bridge Finance Support prioritised District municipalities (Water Service Authorities) complete their 3 -5 year infrastructure plans §Increase their claim to MIG, MWIG & RBIG §Use their balance sheet to raise funding §Partner with DM’s and the Department of Water and Sanitation to build the regional bulk infrastructure for water § DM borrowings at 75% of allocated grants as per MFMA Circular 51 § DBSA target 30% of the allocated grants § R 100 m per annum borrowed on balance sheet § National Treasury on-time approval of the municipal applications for pledging grants 2 Cities Support Programme for 10 Secondary cities § Infrastructure plan Fund part of the infrastructure plan: §Balance sheet §Off balance sheet §Conditional grant pledging § Secondary Cities borrowings at 75% of allocated grants as per MFMA Circular 51 § DBSA target 30% of the allocated grants § Secondary cities borrowing at 56% of budgeted borrowings § R 500 million per annum off balance sheet lending 3 Maintain price competitiveness: § Efficiencies § Budget Subsidy support Participating in bidding processes and bilateral offers to provide direct lending to municipalities § Municipal borrowings (R 5. 5 bn) § Trend of 56% of planned borrowings take-up to improve to 60% § 75% DBSA success rate on planned borrowings by municipalities (bids & bilateral offers) § The planned borrowings from municipalities continue to grow at current rate of 5% per annum 4 Public-Public Partnerships Structures that involve stronger public entities engaging weaker ones through structured contractual agreements to deliver infrastructure. Bulk water infrastructure requires capex over and above current budgets Water Board partnering to assist several small municipalities to deliver a bulk regional water project 25 | 25

Municipal Strategic initiatives: New business development STRATEGIC INITIATIVE DESCRIPTION POTENTIAL APPLICATION 5 Private Developer Financing Private developers (e. g. Property) provides infrastructure finance in exchange for certain concessions Opportunities to enter into Long Term arrangements with private sector risk taking. Urban infrastructure development in high demand areas (Metro’s) as identified through mega projects 6 Public Sector Contract (Concession model) The development (investment) and operation of an infrastructure project under a concession agreement Opportunity to structure Student Accommodation via an SPV management company with retained ownership but PSC managed. Water turnkey projects required due to bulk needs in high density industrial and residential areas 7 Build-Lease-Transfer (BLT) Private Company gets contracted by Government to build a project, and then lease it to Government over a period. Eventually transferring ownership to Government Potential application in mass roll-out of higher education accommodation, health facilities, public schools, etc 8 Project Preparation Assistance Provide both expertise and early stage risk capital to originate projects At scale projects generated through own pipeline and/or national departments’ partnerships 26 | 26

Municipal growth prospects: 2015/16 to 2017/18 Corporate Plan Current: 4. 5 Planned: 6. 0 20 % Growth Planned: 6. 3 Planned: 7. 6 Growth Scenario (3 yrs to 2017/18): R 19. 9 bn § M 1: R 12. 8 bn § M 2/M 3: R 7. 1 bn 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 | 27

POTENTIAL SCOPE FOR DBSA TO INCREASE SUPPORT TO LARGE CITIES 28 | 28

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: o Accelerate reduction in backlogs o Bring implementation forward from 36 months to between 9 and 12 months o Take advantage of additional subsidised support for programme planning and implementation o 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 o Sole provider of bridging finance for infrastructure o Significant provider of subsidised project preparation, planning and implementation support to under resourced municipalities Pledging programme could be extended to large urban cities | 29

Additional capital injection can help create additional funding capacity in large urban centres • • Inject, say R 5 billion into DBSA (R 2. 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 R 17. 5 billion to support growth-enabling infrastructure that expands the income generation base of municipalities by supporting the funding of economic infrastructure Total R 17. 5 bn 30 | 30

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. o Loans to urban cities could be amalgamated, packaged and sold-off to attract and crowd-in private sector capital. o Strong appetite from both the commercial bank market and the debt capital markets for exposures to Cities and Large Urban centres. o 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. o 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. | 31

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: o Infrastructure bonds. o Municipal bond underwriting. o Project finance / Off-balance sheet limited recourse structures. o Public/municipal service contracting models. o Revenue enhancement financing models. | 32

THANK YOU 33 | 33