Workshop: BEPPs from the perspective of Financial Closure on - - PowerPoint PPT Presentation

Workshop: BEPPs from the perspective of Financial Closure on Investment Programmes DBSA Innovation and Structured Products

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Contents

1. Role of a DFI 2. Some thoughts on credit enhancement 3. Products relevant to Metros Municipal financing via debt capital markets Water conservation and water demand management programme Vumela

Role of a DFI

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Market Failure - DFIs occupy an intermediary space between public and private investment to facilitate capital flows

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Risk - DFIs have a higher risk tolerance than private sector actors

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Return - DFIs have a longer investment horizon (10-15yrs) while private sector has a short term pay-back (5- 7yrs)

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• Org. failure - DFIs’ can serve to mitigate risk where the private sector is

unwilling to operate alone, as well as create viable opportunities to expand the investor base Institutional failure – DFIs create an enabling environment and overcome information asymmetry between the role players in development

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Some thoughts on credit enhancement

• Credit Enhancement is not intended to deal with “market failure”
• The intention of credit enhancement is to catalyse or “crowd in” commercial

bank and institutional investor funding which is the most significant pool of liquidity to finance infrastructure related projects. For example funds under management in South Africa is close to ZAR 3 trillion.

• Credit enhancement should be part of the DFIs and multi-lateral
• rganizations’ mandate as part of their developmental role
• Credit Enhancement is the generic term consisting of a number of funding

instruments including:

• Extended tenors which commercial banks can no longer provide - Basle

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• First loss or sub-ordinated tranches within the overall funding structure
• Guarantees which may cover FX and/or availability and convertibility

currency risk particularly relevant in countries outside of South Africa

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Structured products

Municipal financing via debt capital markets (1/2)

Municipal Category Number Total Outstanding Debt DCM Commercial Banks DFIs Metros

8 56.2 Bn 4 out of 8 Yes No

Secondary Cities

19 4 Bn Possibly with the right structures Yes but limited Yes

M3s

180 2.6 Bn Impossible Very Limited Yes

District Municipalities

27 715 m Impossible Impossible Yes

Some Facts

• 95% of Metro Debt has been raised by EKU, JHB, TSH, ETH and CPT all of whom can raise debt via the DCM.
• ZAR 33 Bn or 52% has been raised for capital expenditure however the relative % of new borrowings for capital

expenditure has fallen from 23% in 2008/9 to 13% in 2016/2017.

• Of the total debt outstanding for the Metros ZAR 16.5 Bn or 29% was raised via the DCM.
• Of the secondary cities ZAR 1.2 Bn was raised between April 2015 and December 2016 of which ZAR 780 million

came from the DBSA.

• The DBSA provided the majority of funding for the M3s.

Current reality

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Structured products

Municipal financing via debt capital markets (2/2)

How can we change this situation to catalyze more funding for municipalities from the commercial bank and DCM (institutional investors) – NED

Changes to Municipal Finance Policy and the Regulatory Environment

Why is this needed

• There are budgetary pressures on the grant funding to the municipalities as the sources of fiscal revenue decreases

based on lower tax receipts (minimal economic growth rates) and increased borrowing costs (non-investment grade status)

• Grant money is fungible as reflected in the “irregular” and wasteful expenditure reported by the Auditor General

A Considered Solution

• Is it time to re-look at the regulations around the pledging of grants on a longer term basis to provide long term funding

from the DCM through a geared structure?

• The greater use of Credit Enhancement as articulated in the previous presentation

A vastly improved approach to formulating Business Plans for Infrastructure Projects in the Municipal Areas

• The Budget Office of the NT will propose to Cabinet the allocation of ring fenced funding for sustainable infrastructure

projects that are financially viable and result in demonstrated socio-economic benefits

• The role of the private sector and technical assistance facilities from the DFIs is crucial to support this.

Municipal Portfolio Diversification

• Possible within the Secondary Cities that are financially sound and politically stable – at this stage approximately 10

Cities qualify provided there is “proper use of proceeds” for infrastructure related projects

• Requires a rating and listing process supported by credit enhancement from the DFIs
• Could include the weaker Metros being BUF, NMB and MAN

Political Will and Stability

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Structured products

Water Conservation & Water Demand Management & Cost Recovery Programme (1/2)

Initiative Description Partners Potential developmental impact Description ▪ Water conservation and water demand management and cost recovery programme Municipal water services turn around strategy focussing on: ▪ Reducing Losses ▪ Reducing Over Consumption ▪ Improving Cost Recovery ▪

• Dept. of Water and Sanitation

▪ COGTA and MISA ▪ National Treasury ▪ Reduction in physical losses ▪ Reducing excessive water consumption (over consumption) ▪ Enhancing and improving cost recovery ▪ A holistic WCWDM programme will defer for a considerable period investment(s) in water supply bulk infrastructure and new water resource(s) requirements Programme status and key numbers Status: IIPSA has approved R61 m to implement the pilot project in Tshwane Metro

Target clients: All municipalities

Pilot / potential pilot: Tshwane Metro (IIPSA funding) Scoping completed in Nelson Mandela Bay

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Structured products

Water Conservation & Water Demand Management & Cost Recovery Programme (2/2)

1.1 1.1 1.1 1.1 Project Scoping Project Scoping Project Scoping Project Scoping

• Project ID for

distribution area

• Priority supply

zone project 1.2a) 1.2a) 1.2a) 1.2a) Feasibility Feasibility Feasibility Feasibility Study for the Study for the Study for the Study for the entire entire entire entire Municipality Municipality Municipality Municipality 2.1) 2.1) 2.1) 2.1) Phased Phased Phased Phased Implementation Implementation Implementation Implementation of Sub

• f Sub
• f Sub
• f Sub-
• Projects

Projects Projects Projects 1.2b) Pilot Project 1.2b) Pilot Project 1.2b) Pilot Project 1.2b) Pilot Project Implementation Implementation Implementation Implementation 2.2) 2.2) 2.2) 2.2) Ongoing Ongoing Ongoing Ongoing Review & Review & Review & Review & Verification of Verification of Verification of Verification of Benefits Benefits Benefits Benefits WCWDM PROGRAMME : PHASE 1 WCWDM PROGRAMME : PHASE 1 WCWDM PROGRAMME : PHASE 1 WCWDM PROGRAMME : PHASE 1 WCWDM PROGRAMME : PHASE 2 WCWDM PROGRAMME : PHASE 2 WCWDM PROGRAMME : PHASE 2 WCWDM PROGRAMME : PHASE 2 Product summary

• Hybrid between balance sheet and traditional project finance:
• Balance sheet finance with a view on future cash flows
• Phased financing approach on a supply zone basis
• Monitoring and reporting ability
• Municipal water services turn around strategy focussing on:
• Reducing Losses
• Reducing Over Consumption (demand management)
• Improving Cost Recovery
• Benchmarking of best practice Operation and Maintenance
• Designed to expedite the municipal WCWDM Programme

Integrated approach – it is not about just replacing pipes!

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Structured products

Vumela (1/2)

Initiative Motivation Partners Key benefits & potential developmental impact Description ▪ A Mechanism for the Funding and Implementation of Municipal Bulk Infrastructure to Unlock Large Scale Catalytic Property Developments ▪ Metros and secondary cities are often unable to provide the bulk infrastructure necessary to unlock large scale catalytic property developments (integrated housing projects) ▪ Project Vumela is both a financing and implementation solution intended to address this gap ▪ Metropolitan Municipalities ▪ Secondary Cities ▪ World Bank ▪ National Treasury ▪ Catalytic investments ▪ Will unlock major development ▪ Trigger significant job creation ▪ Trigger significant LED opportunities ▪ Enhance lives of a significant number of communities through housing, services and amenities ▪ Unlock private sector investments ▪ Support both greenfield and brownfield developments Programme status and key numbers Status: Concept presented to some Metros. Next step to conduct a scoping investigation on actual projects in 3-4 municipalities

R5 bn

The mechanism can unlock an investment potential in excess of R5 billion Funding opportunities 3rd party to be determined. Significant multiplier and catalytic opportunity (refer to Waterfall example)

TBD

Target clients: Metros and secondary cities Example projects: Cornubia in eThekwini, Tambo Springs in Ekurhuleni, Bellville Urban Regeneration in Cape Town, Dunkeld in Joburg

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Structured products

Vumela (2/2)

Project Vumela provides both an implementation and financing option for the provision of municipal bulk infrastructure Land based financing options available to finance the provision of bulk infrastructure:

• Development Charges
• Tax Increment Financing

(“TIF”)

• Special Assessment District
• Sale of Development Rights
• Leveraging Municipal Real

Estate

Project Vumela has the potential to unlock large scale private sector investment in Metros and Secondary Cities

Thank you