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 DBSA IDC Land Bank NEF NHFC NURCHA RHLF SEFA ECDC ECRDA FDC GEP Ithala LEDA MEGA NWDC PDFIs 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 of Industrial Development Corporation, but under executive authority of Schedule 2 Major public entity* Department of Small Business Development
Development Finance System in South Africa- Provincial DFIs Provincial DFI s Province Provincial Shareholder Department Eastern Cape Development Corporation Eastern Cape Department of Economic Development, Environmental Affairs and Tourism Eastern Cape Rural Development Agency Department of Rural Development and Agrarian Reform 3C PFMA Listing 3D 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 currentlyhas16dfi s (8areNDFIsand8PDFIs). These DFI s hold approximately R260 billion (US$20 billion) in assets. Approximately90%ofassetsareheldby3nationalDFI s. IDC 46.9 % Land Bank 15.9 % NEF 2.3 % PDFIs 4.5 % NHFC 1.3 % NURCHA 0.2 % SEFA 0.9 % RHLF 0.2 % MEGA 0.6 % NWDC 0.5 % LEDA 0.6 % ECRDA 0.1 % GEP 0.03 % Ithala 1.8 % ECDC 0.6 % DBSA 27.7 % FDC 0.3 % 5
FINANCING ACTIVITIES BY DFI s TYPE OF FINANCING SECTORAL FOCUS LOAN FINANCE EQUITY FINANCE AGRI. AND FISHERIES* HOUSING BRIDGING OR PROCUREMENT FINANCE INFRASTRUCTURE DBSA Yes Yes X IDC Yes Yes X X Land Bank Yes Yes X NDFIs PDFIs NEF Yes Yes X 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 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% IDC, 40.0% Other, 4.6% SEFA, 1.3% 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 NDPas 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 Operational Efficiency Extent to which DFIs have brought about targeted change. Financial Sustainability DFIs ability to minimise its operational cost Economic Efficiency DFIs ability to generate sufficient revenues from its lending activities to continue operating without government support 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 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 weakabilitytoassesstheeffectivenessofdfis 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 Infrastructure Bank Medium and large enterprises Development DBSA Industrial Development Bank IDC, NEF s corporate finance division National Treasury 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 Bank Development 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. 18
Striking the Right Balance in Regulation and Supervision of DFIs Sectoralfocus of NDFIs currently Main sectoral focus NDFI National shareholder department Infrastructure Medium and large enterprises Development Bank of Southern Africa National Treasury 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 Other (empowerment) NEF National Housing Finance Corporation Department of Human Settlements National Urban Reconstruction and Housing Agency Rural Housing Loan Fund Source: Based on Annual Reports and National Treasury information. Department of Human Settlements Department of Human Settlements Department of Trade and Industry 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
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. 21
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