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Development Bank of Southern Development Bank of Southern AfricaAfrica

Regional Integration Through Infrastructure Regional Integration Through Infrastructure DevelopmentDevelopment

Piet ViljoenPiet ViljoenPrincipal Programme ManagerPrincipal Programme Manager

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ContentContent

The DBSA as DFIDBSA PortfolioTrends in infrastructure financing through

PPPSChallenges of enhancing investment in

infrastructureTowards a solution: DBSA’s approachExamples of successful investments in

PPPs

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DBSA Classification and ChallengesDBSA Classification and Challenges The UN DESA commissioned report classifies the DBSA as

one of the DFIs where:“..the challenge for these institutions is to combine its development-orientated activities with its need to be a

self- financing and profitable institution”

“This dilemma of profit versus development impact touches nearly every aspect of DBSA’s ventures, including identification of new markets, projects, priorities and geographical distribution of projects”

The DBSA’s view is that the above mentioned tension can be managed effectively:Its approach is to use income streams from investments in commercially viable projects to provide concessionary loans to specified categories of clients

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The DBSAThe DBSA

Development Finance Institution wholly owned by the South African Government

Mandate to pursue economic development through the financing of commercially viable public and private projects/programmes (investments, capacity building and human development)

Geographical mandate extends to the SADC region under a ⅔-⅓ rule

Borrowers are both public and private sector – critical capability of DBSA

Mandate to take risk and can provide funding up to 15 years Investment grade credit ratings equivalent to those of the

Republic of South Africa Financially-sustainable since establishment Baa1 & AAA rating

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DBSA’s MandateDBSA’s Mandate

Originally mandated to extend SA infrastructure Networks into SADC to facilitate regional integration

Advent of NEPAD and its focus on AEU and RECs

Recent SADC Summit: increased focus on integration – Ministerial Task Team

DBSA current mandate in SADC supports all the elements of Regional Integration

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DBSA’s support to Regional IntegrationDBSA’s support to Regional Integration

Regional Integration is promoted through:

Increased and more diversified economic production Infrastructure that both leads to increased production and

supports the distribution of goods and services within and between countries

Integration of markets

The DBSA’s mandate in SADC requires it to play a role in all three the above areas.

This presentation will focus on infrastructure

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I will now focus on the DBSA’s SADC portfolio, experiences, approaches and examples of support to infrastructure PPP projects

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Key Strategic Objectives

Promote greater regional integration through financing infrastructure and productive sectors

Maximise private sector involvement in infrastructure development Facilitate and promote private sector and commercialisation of public sector

initiatives Promote broad-based participation of BEE and indigenous groups in economic

activities Facilitate Capital Markets Development in SADC to support long term

financing and capacitate local institutions. Strengthen the capacity of investee entities and Regional Economic

Communities (RECs) with an appropriate combination of finance and Knowledge Products (TA, Capacity Building, Project Preparation assistance to prepare for bankability, etc.)

Earn a commercial return consistent with risk assumed to enhance the financial sustainability of DBSA

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DBSA SADC Portfolio

Funded 15 feasibility studies for NEPAD regional integration projects, with a capital value of R32 billion of which 2 projects with a capital value of R4.4 billion are in the financing stage

Cumulative approvals of R15.0 billion for 205 projects (including 9 Funds: R0.86 billion)

Cumulative signed agreements (commitments): R11.8 billion

Cumulative disbursements: R9.8 billion Net income for year ended 31 March

2006: R245 million

PSI Approvals - Sector Split (31 August 2006)

31%

0%

19%16%0%0%

15%

4%12%3%

0%

Commercial Education EnergyICT Institution Building Residential FacilitiesRoads And Drainage Sanitation Social InfrastructureTransportation Water

PSI Approvals - Regional Split (31 August 2006)

2% 3%3%

15%

8%5%31%

10%

0%

5%4%

9%1%1%3%

Angola Botswana DRC LesothoMalawi Mauritius Mozambique Multi-RegionalNamibia Seychelles South Africa SwazilandTanzania Uganda Zambia

2,000

4,000

6,000

8,000

FY-2002 FY-2003 FY-2004 FY-2005 FY-2006 FY-2007

PSI portfolio growth(R'million)

Gross Book Approvals

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What Happens to DBSA’s Surpluses?What Happens to DBSA’s Surpluses?

Development Fund: focuses on capacity building of local government in South Africa

Siyenza Manje: Focuses on the provision of expertise to the under-resourced municipalities in South Africa

Technical Assistance grants to build institutional capacities of borrowers and RECs

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Infrastructure in AfricaInfrastructure in Africa

Although Infrastructure is a core component of regional integration, the reality is:

Investment in Infrastructure in Africa is on the decline, and PPPs as investment method is also on the decline

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Infrastructure Investment in Africa South of Infrastructure Investment in Africa South of Sahara (ASS) compared to other regions Sahara (ASS) compared to other regions

Total Investment by Region, 1990-2003

-10,000.000.00

10,000.0020,000.0030,000.0040,000.0050,000.0060,000.0070,000.0080,000.00

US$ millions

East Asia and Pacific

Europe and CentralAsia

Latin America and theCaribbean

Middle East and NorthAfrica

Sub-Saharan Africa

Source: PPI Database, World Bank

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Drop in ODA Financing in InfrastructureDrop in ODA Financing in Infrastructure

0

1,000

2,000

3,000

4,000

5,000

6,000

OD

A fo

r SS

A (U

S$2

002m

)

0%5%10%15%20%25%30%35%40%45%

OD

A fo

r SS

A (%

OD

A to

tal)

Infrastructure (US$2002m) Infrastructure (% ODA total)

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Progress with PPPs in ASSProgress with PPPs in ASSNumber of PPI Projects by Sector, 1990-2003

05

101520253035

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Energy Telecom Transport Water

Number of PPI Projects by Type, 1990-2003

0

5

10

15

20

25

30

35

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Concession Divesture Greenfield Project Management or Lease Contract

Source: PPI Database, World Bank

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Declining PPI Flows to Developing CountriesDeclining PPI Flows to Developing Countries

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What are the specific challenges that lead to declining ODA, PPP projects and overall infrastructure investment?

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The challenges to enhanced spending on The challenges to enhanced spending on infrastructure (DBSA experience)infrastructure (DBSA experience)

1. Weak public sector sponsors / government Governments generally lack the skills required to drive

PPPs. Private sector participation is often resisted by public sector officials, for fear of: Loss of control, Negative implications of reductions in staff numbers Negative public reaction, and Potential risk of failure that will reflect badly on them.

Limited PPP experience countries creates an element of risk and fear of unknown

There is a tendency for greater PPP vision by parastatal and government utility agents than directly from national governments.

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The challenges to enhanced spending on The challenges to enhanced spending on infrastructure (DBSA experience)infrastructure (DBSA experience)

2. Affordability of beneficiaries Affordability of recipient countries for infrastructure is low. Excessive public sector debt (HIPC countries). Affordability of end users is low. Tariffs are likely to increase

where PPPs are implemented and such projects will inevitably require government or donor financial support in the early years. Unlike PPPs in developed countries which often focus on operational improvements, PPPs in require substantial capital investment, as well as operational improvements

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The challenges to enhanced spending on The challenges to enhanced spending on infrastructure (DBSA experience)infrastructure (DBSA experience)

3. Low institutional, managerial capacity and skills levels Institutional Capacity shortages in respect of:

Project initiation, Policy support for active PPP development in each sector, Regulatory and enforcement framework, Weak or ineffective regulatory powers over natural

monopolies, Lack of a private sector and customer focus

Low management capacity and skills result in: Additional project risk

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The challenges to enhanced spending on The challenges to enhanced spending on infrastructure (DBSA experience)infrastructure (DBSA experience)

4. Legal systems Legal and regulatory systems to support complex PPP

ventures are weak and where they may exist are not effectively enforced.

5. Government / Political Interference Interference particularly in respect of tariffs and the

autonomy of PPPs at operational level reduces potential financial success.

Fluctuating budgetary allocations or non-availability of government funds for PPPs which have been initiated, but require government support, can undermine success and increase project risk.

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Towards a solution – DBSA’s approachTowards a solution – DBSA’s approach

Technical assistance Provide technical assistance to prepare regional projects and

package them to a bankable proposition Provide long-term financing (up to 15 years) in Rand, US$,

Euro Equity

Selective equity stakes reduce risk for market participants, ensures a stronger role for the DBSA and potentially improves the Bank’s financial returns

Local capital markets development Focus on support for capital market development and

local currency financing to attract local investment in infrastructure.

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Towards a solution – DBSA’s approachTowards a solution – DBSA’s approach Catalyse private sector investment

The DBSA is well positioned to work at enhanced private sector participation by creating appropriate funding packages

DBSA can provide junior or subordinated debt, guarantees and equity contributions to reduce overall project risk to private sector participants. Equity contributions also potentially increase the Bank’s financial returns

Capacity building Skills – DBSA has taken on a stronger advisory role

providing greater non-investment support to sponsor/governments.

Institution building – DBSA assists the building of institutions directly through technical assistance, partnering with governments, DFI’s and NGO’s and training (Vulindlela Academy)

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Towards a solution – DBSA’s approachTowards a solution – DBSA’s approach

Knowledge sharing The DBSA has a strong knowledge sharing role. This

is provided through an advisory role, technical assistance, joint project appraisal, post-project evaluation and the facilitation of knowledge. Dissemination through reports such as the Development Report and various conferences and workshops

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Question: How has the DBSA fared in supporting regional infrastructure projects through PPPs?

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Examples of DBSA support to Regional Integration through PPP-based Infrastructure Projects:

Project in preparation - East African Submarine Cable System

(EASSy) Project in implementation:

- Maputo Development Corridor N 4 Toll Road Maputo Port Rehabilitation Mozal Aluminum Smelter

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The East Africa Submarine Cable System

EASSy

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EASSy: The ICT ChallengeEASSy: The ICT Challenge Lack of connectivity and prohibitive communications costs

are hampering economic development and growth in East and Southern Africa: international wholesale bandwidth prices are 20 to 40 times

higher than in the US; international and sub-regional telephone call prices are 10 to

20 times that of other developing countries; dial-up Internet monthly access prices range from 1 to 10

times the monthly GNI per capita. Connecting E&S Africa to the Global Economy is Critical:

Reducing isolation of E&S Africa Increasing regional and international trade transactions : a

10% decrease in the price of country to country phone calls can lead to an 8% increase in bilateral trade.

Reducing transaction costs to governments and business Improving competitiveness of E&S African economies and

attracting more investment in services and IT/Business Process Outsourcing

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1. The establishment of a high capacity fibre optic submarine cable system along the East Coast of Africa (EASSy).

2. The establishment of broadband backhaul systems to connect land-locked countries in Southern and East Africa to the EASSy submarine cable system.

3. The rationalisation and co-ordination of terrestrial ICT infrastructure and development projects in Southern and East Africa.

The EASSy Programme

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4. The establishment of broadband backhaul systems to connect land-locked countries (and coastal countries not yet connected) in West and Central Africa to the SAT-3 / WASC submarine cable system.

5. The rationalisation and co-ordination of terrestrial ICT infrastructure and development projects in West and Central Africa.

EASSy: 5 IMPLEMENTATION PHASES

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EASSy: DBSA SupportEASSy: DBSA Support

Support to and participated in a workshop to rationalize and harmonize ICT networks in Eastern and Southern Africa (COMTEL, COM 7, SRII and EASSy), leveraging:

Similar workshops for West and North Africa Supported the feasibility study together with AfD, AfDB

and IFC, this leveraging: EIB support to legal council and KfW support to EIA

DBSA is currently considering investment in implementation being considered

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Maputo Development Corridor

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DEVELOPMENTDEVELOPMENT CORRIDORS CORRIDORS

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Maputo Development CorridorMaputo Development Corridor

N4 Toll Road In 1996 the South Africa and Mozambique governments

signed a 30 year concession for a private consortium Trans African Concessions (TRAC) to build, operate and transfer a R3 billion toll road between Gauteng in South Africa and Maputo in Mozambique

SA banks ABSA, Standard, NEDCOR and First National Bank, together with DBSA provided and pension funds and TRAC provided 20% equity and 80% debt, supported by guarantees by South Africa and Mozambique

Reduced overloading, facilitated growth in tourism and other investments in Maputo Mozal aluminum smelter and the natural gas plants at Pande and Temane

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Maputo Development Corridor (Cont)Maputo Development Corridor (Cont)

Maputo Port After the toll road success, next step was rehabilitating

Maputo Port The Mozambican national ports and rails authority (CFM)

formed a joint venture with a private consortium led by British Mersey Docks and Harbour Company for a 15 year, $70 million concession to finance, rehabilitate, operate and upgrade the Port of Maputo

Port efficiency has increased from 4.3 m tonnes in 2002 to 5.95 m tonnes in 2005

The fresh produce terminal reported a 25% year on year increase in 2004 in citrus exports handled

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Maputo Development Corridor (Cont)Maputo Development Corridor (Cont)

Mozal Phases I and II Aluminum Smelter Total cost US$ 2,2 billion DBSA investment US$103 million Regeneration of Mozambique economy

Mozal I contributed: US$160 million to GDP 9000 construction workers 747 permanent jobs Trained 5000 people

Mozal II contributed: US$170 million to GDP 6000 jobs Tax revenue US$ 4,1 million

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ConclusionConclusion

DBSA is managing to achieve development impact with all its investments and is remaining financially sustainable by cross-subsidizing low-yielding investments with surpluses on high yielding investments

The DBSA has managed to participate in significant PPP based infrastructure projects within a declining investment environment

Reminder: Infrastructure development is but one element of regional and needs attention ion within an integrated framework with the other elements

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I Thank You For Your Attention

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Contact DetailsContact Details

Development Bank of Southern Africa

Registered office Postal Address Telephone

1258 Lever Road

Headway Hill

Halfway House

South Africa

1685

PO Box 1234

Halfway House

Midrand

South Africa

1685

+2711 313 3911

Fax +2711 313 3086

WEBSITE ADDRESS: www.dbsa.org

Piet Viljoen Africa Partnerships Unit

DBSA

pietv@dbsa.org