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STRIKING THE RIGHT BALANCE IN REGULATION AND SUPERVISION OF DEVELOPMENT FINANCE INSTITUTIONS

The South African Experience Global Symposium on Development Finance Institutions

Presenter: Anthony Julies, DDG: Asset and Liability Management | 19 September 2017

DEVELOPMENT FINANCE SYSTEM IN SOUTH AFRICA

DFIs and other agencies

DBSA IDC Land Bank NEF NHFC NURCHA RHLF SEFA ECDC ECRDA FDC GEP Ithala LEDA MEGA NWDC NDFIs PDFIs

DEVELOPMENT FINANCE SYSTEM

IDT, NYDA, SEDA, PDFIs, Government Incentives, etc.

GRANT-BASED AND NON-FINANCIAL SUPPORT

Development Finance System in South Africa- National DFIs

National DFI’s National Shareholder Department PFMA Listing Development Bank of Southern Africa National Treasury Schedule 2 Major public entity Industrial Development Corporation Economic Development Department Schedule 2 Major public entity Land Bank National Treasury Schedule 2 Major public entity National Empowerment Fund Department of Trade and Industry Schedule 3A National public entity National Housing Finance Corporation Department of Human Settlements Schedule 3A National public entity National Urban Reconstruction and Housing Agency Department of Human Settlements Schedule 3A National public entity Rural Housing Loan Fund Department of Human Settlements Schedule 3A National public entity Small Enterprise Finance Agency Subsidiary

• f

Industrial Development Corporation, but under executive authority of Department of Small Business Development Schedule 2 Major public entity*

Development Finance System in South Africa- Provincial DFIs

Provincial DFI’s Province Provincial Shareholder Department PFMA Listing

Eastern Cape Development Corporation

Eastern Cape Department of Economic Development, Environmental Affairs and Tourism 3D

Eastern Cape Rural Development Agency

Department of Rural Development and Agrarian Reform 3C

Free State Development Corporation

Free State Department of Economic Development, Tourism and Environmental Affairs 3D

Gauteng Enterprise Propeller

Gauteng Department of Economic Development 3C

Ithala Development Finance Corporation Limited

KwaZulu- Natal Department of Economic Development, Tourism and Environmental Affairs 3D

Limpopo Economic Development Agency

Limpopo Department of Economic Development, Environment and Tourism 3C*

Mpumalanga Economic Growth Agency

Mpumalanga Department of Economic Development, Environment and Tourism 3D

North West Development Corporation

North West Department of Economic Development, Environment, Conservation and Tourism 3D

Total Assets held by DFIs

• R260 billion Assets held by DFIs (%of total assets), 2014/15South Africa

currently has 16 DFI’s (8 are NDFIs and 8 PDFIs).

• These DFI’s hold approximately R260 billion (US$20 billion) in assets.
• Approximately 90% of assets are held by 3 national DFI’s.

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DBSA % 27.7 IDC 46.9 % Land Bank 15.9 % NEF % 2.3 NHFC 1.3 % NURCHA 0.2 % RHLF 0.2 % SEFA % 0.9 ECDC % 0.6 FDC 0.3 % Ithala 1.8 % MEGA 0.6 % NWDC % 0.5 ECRDA 0.1 % GEP % 0.03 LEDA % 0.6 PDFIs 4.5 %

FINANCING ACTIVITIES BY DFI’s

TYPE OF FINANCING SECTORAL FOCUS LOAN FINANCE EQUITY FINANCE

• AGRI. AND FISHERIES*

HOUSING BRIDGING OR PROCUREMENT FINANCE INFRASTRUCTURE

NDFIs DBSA Yes Yes X IDC Yes Yes X X Land Bank Yes Yes X NEF Yes Yes X NHFC Yes No X NURCHA Yes No X X RHLF Yes No X SEFA Yes Yes* X PDFIs ECDC Yes Yes X X ECRDA Yes No X X FDC Yes Yes X GEP Yes No X IDFC Yes Yes X X X LEDA Yes Yes X X X MEGA Yes Yes X X X NWDC Yes Yes X

Investment and financing assets held by DFIs

• Roughly R160 billion of DFI assets were allocated to investment and

financing activities in 2014/15

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DBSA, 28.6% IDC, 40.0% Land Bank, 24.2% NEF, 2.7% NHFC, 1.6% NURCHA, 0.2% RHLF, 0.2% SEFA, 1.3% PDFIs, 1.3% Other, 4.6%

Type of Assets by NDFIs

• At the time of the review, only 50% of NDFI assets were dedicated to

developmental lending

• Type of Assets by NDFI, 2014/15

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Type of Assets by PDFIs

• Type of Assets by PDFIs, 2014/15

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Size of provincial economy by sector

• % of provincial GDP (2014)

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Provincial contribution to sector

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• % of provincial GDP (2014)

DFI financing assets by Province

• DFI financing by Province, 2014/15

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Provincial distribution of financing assets by DFIs

• Provincial distribution of financing assets by DFIs, 2014/15

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0 % % 10 20 % % 30 % 40 % 50 % 60 % 70 80 % % 90 % 100 DBSA / IDC / NEF Land Bank Housing NDFIs SEFA PDFIs Eastern Cape Free State Gauteng KwaZulu-Natal Limpopo Mpumalanga Northern Cape North West Western Cape

The role of DFIs for execution of the National Development Plan (NDP)

• DFIs in the following sectors are identified by the NDP as key for growth and

employment: i) Industrial; ii) Infrastructure; iii) Agriculture and iv) Housing

• DFI balance sheets must therefore be sound for execution;
• Greater clarity of respective roles required (niche areas identified for each

DFI);

• Better co-ordination required between DFIs;
• National Treasury embarked on a review of the DFIs system (first review of

NDFIs occurred in 2007/08 and second review of PDFIs occurred in 2015/16);

• Findings of both reviews have been consolidated and proposals have been

made to address the most critical issues identified in the DFS,

Key Defining Characteristics of a DFI

Development Effectiveness

Extent to which DFIs have brought about targeted change. Financial

Sustainability

DFIs ability to generate sufficient revenues from its lending activities to continue operating without government support

Operational Efficiency

DFIs ability to minimise its

• perational costEconomic

Efficiency

Economic cost of supporting a DFI with public funds relative to the

• pportunity cost of

government’s capital

Main findings from the DFI Review

• Mandates are generally broad. Legislation is generally enabling rather

than operational.

• Clear overlaps in the provision of finance between DFI’s at national and

provincial levels. Therefore the need for improving coordination (to use existing resources better).

• To

strike the right balance between i) economic efficiency, ii) development effectiveness and iii) financial sustainability.

• Therefore, the need for a consistent and standardised framework

to assess performance.

• The weak ability to assess the effectiveness of DFIs
• Due to a historical ad hoc approach to monitoring and evaluation and
• verall performance monitoring systems.

Striking the Right Balance in Regulation and Supervision of DFIs

• Establishment of a DFS Council Structure
• To Co-ordinate DFI activities
• Monitor financial performance
• Evaluate DFI shareholder Compacts

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Cabinet Ministerial committee

chaired by the Minister of Finance and ( consists of all line ministers)

Steering committee

(government officials)

Secretariat Panel of experts

(development finance experts)

Striking the Right Balance in Regulation and Supervision of DFIs

• Restructuring the Development Finance System (DFS)

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Sector/Industry Institution type DFIs Responsible department Infrastructure Infrastructure Development Bank DBSA National Treasury Medium and large enterprises Industrial Development Bank IDC, NEF‘s corporate finance division Department of Trade and Industry Agriculture Agricultural Development Bank Land Bank, MAFISA Department of Agriculture, Forestry and Fisheries* Housing Housing Development Bank NHFC, NURCHA, RHLF Department of Housing Small and medium enterprises SME Development Bank Khula, NEF‘s iMbewu fund, UYF‘s enterprise division Department of Trade and Industry Microenterprises Microfinance Development Bank SAMAF, MAFISA, UYF‘s microfinance activities Department of Trade and Industry

* While the original intention was for the Department of Agriculture, Forestry and Fisheries to act as the executive authority for the Land Bank, this authority has subsequently transferred to the National Treasury.

Striking the Right Balance in Regulation and Supervision of DFIs

• Sectoral focus of NDFIs currently

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Main sectoral focus NDFI National shareholder department Infrastructure Development Bank of Southern Africa National Treasury Medium and large enterprises Industrial Development Corporation Economic Development Department Agriculture Land Bank National Treasury SMMEs Small Enterprise Finance Agency Subsidiary of the IDC, but under executive authority of Department

• f Small Business Development

Housing National Housing Finance Corporation Department of Human Settlements National Urban Reconstruction and Housing Agency Department of Human Settlements Rural Housing Loan Fund Department of Human Settlements Other (empowerment) NEF Department of Trade and Industry

Source: Based on Annual Reports and National Treasury information.

Striking the Right Balance in Regulation and Supervision of DFIs

• Creating a Standardised Regulatory framework for DFIs
• Governance (detail next slide)
• Risk management

compliance with internal policies and procedures

• Development effectiveness

an integrated framework for “impact” monitoring

• Mandates

understand how mandate fits into strategic direction of the department

• Financial sustainability

the core business must be sustainable

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Striking the Right Balance in Regulation and Supervision of DFIs

• Recommendations to improve internal performance, with specific

reference to better governance:

• Eliminate, in most instances, section 21 structures (subsidiaries) and

replace with public company structures;

• Shareholder Compacts and Strategic Plans must include financial

performance targets (determined by the DFS Council)

• Allign process of Board and Executive management appointments to

the Public Finance Management Act (PFMA)

• DFI Boards, in close consultation with the Executive Authority and the

DFS Council, to lead the CEO recruitment process

• Each Board must have a Development Effectiveness committee.

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THANK YOU

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