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 DEVELOPMENT FINANCE SYSTEM NDFIs PDFIs DBSA ECDC IDC ECRDA Land Bank FDC NEF GEP NHFC Ithala NURCHA LEDA RHLF MEGA SEFA NWDC 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 Department of Human Settlements Schedule 3A National public entity Housing Agency Rural Housing Loan Fund Department of Human Settlements Schedule 3A National public entity Subsidiary of Industrial Development Small Enterprise Finance Agency Corporation, but under executive authority of Schedule 2 Major public entity* Department of Small Business Development
Development Finance System in South Africa- Provincial DFIs PFMA Provincial DFI’s Province Provincial Shareholder Department Listing Department of Economic Development, Environmental Affairs and 3D Eastern Cape Development Corporation Tourism Eastern Cape Department of Rural Development and Agrarian Reform 3C Eastern Cape Rural Development Agency Department of Economic Development, Tourism and Environmental Free State 3D Free State Development Corporation Affairs Gauteng Department of Economic Development 3C Gauteng Enterprise Propeller KwaZulu- Department of Economic Development, Tourism and Environmental Ithala Development Finance Corporation 3D Limited Natal Affairs Limpopo Department of Economic Development, Environment and Tourism 3C* Limpopo Economic Development Agency Mpumalanga Department of Economic Development, Environment and Tourism 3D Mpumalanga Economic Growth Agency Department of Economic Development, Environment, Conservation and North West 3D North West Development Corporation Tourism
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. NEF NHFC 2.3 % 1.3 % NURCHA ECRDA 0.2 % 0.1 % RHLF Land Bank MEGA GEP 0.2 % NWDC 15.9 % 0.6 % 0.03 % 0.5 % SEFA 0.9 % IDC 46.9 % LEDA 0.6 % PDFIs 4.5 % Ithala ECDC 1.8 % 0.6 % FDC 0.3 % DBSA 27.7 % 5
FINANCING ACTIVITIES BY DFI’s TYPE OF FINANCING SECTORAL FOCUS BRIDGING OR LOAN FINANCE EQUITY FINANCE AGRI. AND FISHERIES* HOUSING PROCUREMENT INFRASTRUCTURE FINANCE DBSA Yes Yes X IDC Yes Yes X X Land Bank Yes Yes X NEF Yes Yes X NDFIs NHFC Yes No X NURCHA Yes No X X RHLF Yes No X SEFA Yes Yes* X ECDC Yes Yes X X ECRDA Yes No X X FDC Yes Yes X GEP Yes No X PDFIs 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 Land Bank, 24.2% NEF, 2.7% PDFIs, 1.3% SEFA, 1.3% IDC, 40.0% Other, 4.6% NHFC, 1.6% DBSA, 28.6% RHLF, 0.2% NURCHA, 0.2% 7
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 8
Type of Assets by PDFIs • Type of Assets by PDFIs, 2014/15 9
Size of provincial economy by sector • % of provincial GDP (2014) 10
Provincial contribution to sector • % of provincial GDP (2014) 11
DFI financing assets by Province • DFI financing by Province, 2014/15 12
Provincial distribution of financing assets by DFIs • Provincial distribution of financing assets by DFIs, 2014/15 100 % 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % DBSA / IDC / NEF Land Bank Housing NDFIs SEFA PDFIs Eastern Cape Free State Gauteng KwaZulu-Natal Limpopo Mpumalanga Northern Cape North West Western Cape 13
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 Operational Effectiveness Efficiency Extent to which DFIs DFIs ability to have brought about minimise its targeted change. Financial operational cost Economic Sustainability Efficiency Economic cost of DFIs ability to supporting a DFI generate sufficient with public funds revenues from its relative to the lending activities to opportunity cost of continue operating government’s without government capital support
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. 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 and overall 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 Cabinet Ministerial committee ( chaired by the Minister of Finance and consists of all line ministers) Panel of experts (development finance experts) Steering committee (government officials) Secretariat 17
Striking the Right Balance in Regulation and Supervision of DFIs • Restructuring the Development Finance System (DFS) Sector/Industry Institution type DFIs Responsible department Infrastructure DBSA National Treasury Infrastructure Development Bank Medium and IDC, NEF‘s corporate Department of Trade and large enterprises Industrial Development Bank finance division Industry Department of Agriculture, Agriculture Agricultural Development Bank Land Bank, MAFISA Forestry and Fisheries* Housing Housing Development Bank NHFC, NURCHA, RHLF Department of Housing Small and Khula, NEF‘s iMbewu fund, Department of Trade and medium SME Development Bank UYF‘s enterprise division Industry enterprises SAMAF, MAFISA, UYF‘s Microfinance Development Department of Trade and Microenterprises microfinance activities Bank 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. 18
Striking the Right Balance in Regulation and Supervision of DFIs • Sectoral focus of NDFIs currently Main sectoral focus NDFI National shareholder department Infrastructure Development Bank of Southern Africa National Treasury Industrial Development Corporation Medium and large Economic Development enterprises Department Agriculture Land Bank National Treasury Subsidiary of the IDC, but under SMMEs Small Enterprise Finance Agency executive authority of Department of Small Business Development National Housing Finance Corporation Department of Human Settlements National Urban Reconstruction and Department of Human Housing Housing Agency 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. 19
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 20
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