ANNUAL REPORTS

Operations overview - South Africa Operations continued
afford services, while the DBSA’s funding costs continued
to increase and unemployment levels escalated after the
international financial crisis. Other issues that emerged
throughout the year were concerns over water quality and
the poor state of education and health services. The Division
responded by exploring various innovative approaches to
leveraging Municipal Infrastructure Grants (MIGs), thereby
fast-tracking the delivery of MIG-linked infrastructure.
A critical issue that emerged in this period is the inadequate
maintenance of established infrastructure. As shown in the
diagram on the previous page, maintenance requirements
are growing, and a significant part of the current discourse
on service delivery is concerned with the deterioration of the
established asset base.
Another concern was poor governance in some municipalities,
as reflected in qualified audits, and a lack of decisive
action by many in the run-up to the 2011 municipal elections.
This negatively affected a number of investment initiatives.
The ability to mobilise resources at a municipal level varies,
with larger, better-endowed municipalities finding it easier to
attract both skills and funding. Commercial banks entered
2010 with excessive liquidity, following conservative lending
practices during the global financial crisis. This resulted in
significant competition to fund the top 40 municipalities,
which have good credit ratings. The remainder, especially
under-resourced and rural municipalities, struggled to raise
capital because of their less attractive risk profiles.
Divisional approach to development support
It is evident from the above that the operating environment
posed various challenges to the Division as it worked to
support infrastructure service delivery. After the record
results achieved in 2009/10, the market contracted. While
needs increased, price-based competition at the higher
end of the municipal market left many poorer municipalities
unsupported. Recognising the institutional constraints faced
by these municipalities, the pressures on service delivery
and the problems of uncoordinated development initiatives,
the Division found innovative ways of extending support.
Whereas the Division used to focus on additionality, only
intervening in cases of market or institutional failure and
adopting a demand-led stance, a new, more proactive
approach is now required to accelerate the delivery of
sustainable solutions at scale.
The Division’s approach during 2010/11 evolved around four
main pillars:
• Innovative, high-impact development interventions to
an expanded client base of intermediaries
In the context of market failure and institutional weaknesses,
a focused, high-impact approach with innovative support
packages across the full value chain was required.
The Division continued to work in close coordination
with the DBSA Development Fund and the Development
Planning Division to provide clients with integrated and
comprehensive development solutions. The Division also
drew in other role players from the public and private sectors
to enhance project development and implementation.
• Strengthened portfolio management
To counteract the effects of financial failure and institutional
weaknesses in intermediaries, the Division intensified
the management of its asset and client base. All clients
with potential problems were identified and monitored,
and specific turnaround interventions were implemented.
This required close cooperation with national government
departments, the Development Fund, the Group
Risk Assurance Division and the Bank’s Workout and
Recovery Unit.
These interventions yielded positive results, as the value of
defaulting clients decreased to 3,8% of the book against
a target of 4,5%. Write-offs were limited to R45 million
(0,2% of the book). In total, provisions for impairments of
R120 million were made, in line with the Bank’s provisioning
principles. The Division also improved its internal
processes to enable the conversion of commitments of
R3,7 billion to disbursements of R3,1 billion. This reflects
a conversion ratio of 75%, which exceeded the historical
norm of 60% by 15 percentage points.
• Prudent financial management
Given the rising cost pressures and lower income levels,
the Division focused on optimising operational expenditure
and achieved a budget saving of 12%. The cost-to-income
ratio was within 5% of the budget, despite disbursement
levels being 15% lower. To counteract the impact of the
price sensitivity in the market, new deals were managed at
margins that could result in conversions and disbursements.
The establishment of the Pricing Committee within the
DBSA created more flexibility in terms of the Bank’s ability
to manage pricing issues in a specific deal.
• Focus on priority sectors with interventions across
the full value chain
The traditional business approaches of client engagement,
bilateral arrangements and open tender for business
remained central to divisional activities. However, given
the price sensitivity in the market and the increasingly
apparent weaknesses revealed by clients in identifying,
packaging and implementing development interventions,
the Division, in collaboration with the DBSA Development
Fund and the Development Planning Division, explored
additional ways to evolve the value offering. This is
illustrated in the diagram on the opposite page.
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DBSA | ANNUAL REPORT 2010/11