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

2 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

4 Role of a DFI Market Failure - DFIs occupy an intermediary space between public and 1 private investment to facilitate capital flows Org. failure - DFIs’ can serve to mitigate risk where the private sector is 2 unwilling to operate alone, as well as create viable opportunities to expand the investor base Risk - DFIs have a higher risk tolerance than private sector actors 3 Return - DFIs have a longer investment horizon (10-15yrs) while private 4 sector has a short term pay-back (5- 7yrs) Institutional failure – DFIs create an enabling environment and overcome 5 information asymmetry between the role players in development

2 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 organizations’ mandate as part of their developmental role • Credit Enhancement is the generic term consisting of a number of funding instruments including: o Extended tenors which commercial banks can no longer provide - Basle III o First loss or sub-ordinated tranches within the overall funding structure o Guarantees which may cover FX and/or availability and convertibility currency risk particularly relevant in countries outside of South Africa

2 Structured products Municipal financing via debt capital markets (1/2) Current reality Total Commercial Municipal Category Number Outstanding DCM DFIs Banks Debt Metros 8 56.2 Bn 4 out of 8 Yes No Possibly with the Secondary Cities 19 4 Bn Yes but limited Yes right structures 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.

2 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

Structured products 2 Water Conservation & Water Demand Management & Cost Recovery Programme (1/2) Programme status and key numbers Description ▪ Status: IIPSA has approved R61 m to implement the Water conservation and water demand management and pilot project in Tshwane Metro cost recovery programme Initiative Municipal water services turn around strategy focussing on: ▪ Reducing Losses ▪ Reducing Over Consumption Target clients: All municipalities Description ▪ Improving Cost Recovery Pilot / potential pilot: Tshwane Metro (IIPSA funding) Scoping completed in Nelson Mandela Bay ▪ Reduction in physical losses ▪ Reducing excessive water consumption (over consumption) ▪ Enhancing and improving cost recovery Potential ▪ A holistic WCWDM programme will defer for a developmental considerable period investment(s) in water supply bulk impact infrastructure and new water resource(s) requirements ▪ Dept. of Water and Sanitation ▪ COGTA and MISA Partners ▪ National Treasury

Structured products 2 Water Conservation & Water Demand Management & Cost Recovery Programme (2/2) 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 1.1 1.1 Project Scoping 1.1 1.1 Project Scoping Project Scoping Project Scoping 1.2a) 1.2a) Feasibility 1.2a) 1.2a) Feasibility Feasibility Feasibility 2.1) Phased 2.1) 2.1) 2.1) Phased Phased Phased 2.2) 2.2) 2.2) 2.2) Ongoing Ongoing Ongoing Ongoing Study for the Study for the Implementation of Sub Implementation of Sub- - Review & Review & • Project ID for Study for the Study for the Implementation Implementation of Sub of Sub - - Review & Review & entire entire Municipality entire entire Municipality Municipality Municipality Projects Projects Projects Projects Verification of Verification of Verification of Verification of distribution area Benefits Benefits Benefits Benefits • Priority supply zone project 1.2b) Pilot Project 1.2b) Pilot Project 1.2b) Pilot Project 1.2b) Pilot Project Implementation Implementation Implementation Implementation Product summary Hybrid between balance sheet and traditional project finance: • Balance sheet finance with a view on future cash flows o Integrated approach Phased financing approach on a supply zone basis o Monitoring and reporting ability – it is not about just o Municipal water services turn around strategy focussing on: • replacing pipes! Reducing Losses o Reducing Over Consumption (demand management) o Improving Cost Recovery o Benchmarking of best practice Operation and Maintenance • • Designed to expedite the municipal WCWDM Programme

2 Structured products Vumela (1/2) Programme status and key numbers Description ▪ Status: Concept presented to some Metros. Next step A Mechanism for the Funding and Implementation of to conduct a scoping investigation on actual projects in Municipal Bulk Infrastructure to Unlock Large Scale Initiative 3-4 municipalities Catalytic Property Developments ▪ Metros and secondary cities are often unable to provide the bulk infrastructure necessary to unlock large scale catalytic property developments (integrated Motivation housing projects) Target clients: Metros and secondary cities ▪ Project Vumela is both a financing and implementation Example projects: Cornubia in eThekwini, Tambo solution intended to address this gap Springs in Ekurhuleni, Bellville Urban Regeneration in Cape Town, Dunkeld in Joburg ▪ Catalytic investments ▪ Will unlock major development ▪ Trigger significant job creation Funding opportunities Key benefits & ▪ Trigger significant LED opportunities potential ▪ Enhance lives of a significant number of communities The mechanism can unlock developmental through housing, services and amenities an investment potential in R5 bn impact ▪ Unlock private sector investments excess of R5 billion ▪ Support both greenfield and brownfield developments 3 rd party to be determined. ▪ Metropolitan Municipalities Significant multiplier and ▪ TBD Secondary Cities Partners catalytic opportunity (refer ▪ World Bank to Waterfall example) ▪ National Treasury

2 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

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