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

DBSAIDC

Land BankNEF

NHFCNURCHA

RHLFSEFA

ECDCECRDA

FDCGEPIthalaLEDAMEGANWDC

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 AgencyDepartment 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 of 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 DepartmentPFMA

Listing

Eastern Cape Development Corporation

Eastern Cape

Department of Economic Development, Environmental Affairs and

Tourism3D

Eastern Cape Rural Development Agency Department of Rural Development and Agrarian Reform 3C

Free State Development Corporation Free StateDepartment of Economic Development, Tourism and Environmental

Affairs3D

Gauteng Enterprise Propeller Gauteng Department of Economic Development 3C

Ithala Development Finance Corporation

Limited

KwaZulu-

Natal

Department of Economic Development, Tourism and Environmental

Affairs3D

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 WestDepartment of Economic Development, Environment, Conservation and

Tourism3D

Total Assets held by DFIs

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

%2.3NHFC

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

%0.6PDFIs

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

ND

FIs

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

PD

FIs

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

9

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

13

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 andemployment: 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 in2015/16);

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

operational costEconomic Efficiency

Economic cost of supporting a DFI with public funds

relative to the opportunity cost of

government’s capital

Main findings from the DFI Review

• Mandates are generally broad. Legislation is generally enabling ratherthan operational.

• Clear overlaps in the provision of finance between DFI’s at national andprovincial levels. Therefore the need for improving coordination (to useexisting resources better).

• To strike the right balance between i) economic efficiency, ii)development effectiveness and iii) financial sustainability.o Therefore, the need for a consistent and standardised framework

to assess performance.

• The weak ability to assess the effectiveness of DFIs

o Due to a historical ad hoc approach to monitoring and evaluation andoverall performance monitoring systems.

Striking the Right Balance in Regulation

and Supervision of DFIs

• Establishment of a DFS Council Structure

o To Co-ordinate DFI activities

o Monitor financial performance

o Evaluate DFI shareholder Compacts

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Cabinet

Ministerial committeechaired 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 of 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

o Governance (detail next slide)

o Risk management

�compliance with internal policies and procedures

o Development effectiveness

�an integrated framework for “impact” monitoring

o Mandates

�understand how mandate fits into strategic direction of the department

o 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:

o Eliminate, in most instances, section 21 structures (subsidiaries) and replace with public company structures;

o Shareholder Compacts and Strategic Plans must include financial performance targets (determined by the DFS Council)

o Allign process of Board and Executive management appointments to the Public Finance Management Act (PFMA)

o DFI Boards, in close consultation with the Executive Authority and the DFS Council, to lead the CEO recruitment process

o Each Board must have a Development Effectiveness committee.

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THANK YOU

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