FINANCE

THE DBSA:

DEVELOPING DEVELOPMENT

Gordon Brown, GreenEconomy.Media, caught up with Lungile Tom, DBSA, to discuss the Bank’s competitive edge, an edge with compounding success that is built from building the success of others.

GB: What role has Development Bank of South Africa (DBSA) played in support of the DMRE’s procurement programmes?

LT: DBSA was instrumental in supporting the IPP office (the agency designated with implementing and rolling out procurement programmes on behalf of the DMRE) at inception. We provided the seed capital for the establishment of the IPP office. Since then, DBSA has continued to support the initiatives of the IPP office.

DBSA has supported several projects that bid in the early and subsequent rounds of the procurement programmes, by providing senior and mezzanine debt, and most importantly for the Bank, in focussing on funding the BEE component.

The DMRE programmes seek to address multiple economic development imperatives through the various bidding rounds, and these align perfectly with the mandate and objectives of DBSA.

We assist many black equity partners, including black women-owned entities, with BEE funding, which enables them to take stakes in the IPP projects. This support extends to local community trusts in the form of equity funding.

While this is a high-risk category, we have managed the risk and achieved success with these categories of funding from as early as Bid Window One (BW1) through to BW4, as well as round five and in the risk mitigation programme.

DBSA was very pleased that several bidders we supported in the RMIPPPP were successful in being named preferred bidders.

Our objective is to see projects become more bankable, fully-financed and to reach financial close.

Let’s unpack this word “support”. As a development finance institute (DFI), I assume your support speaks to a more favourable set of lending terms than what may be available from commercial banks? For example, aspiring black energy entrepreneurs who would not necessarily be able to raise an equity portion off their own balance sheets can apply to DBSA for funding, and would qualify for assistance?

Absolutely. From a BEE perspective, the pricing of that debt is very competitive when compared to what certain other institutions charge. We provide finance to BEEs on a limited recourse basis. We can offer these because we are comfortable with the revenues being generated in the underlying project.

The strength of the underlying project allows us to take a position and provide debt financing to that BEE entrepreneur, at a competitive level, compared to other BEE funding instruments, such as preference shares, which are more costly to the BEE entrepreneur. This is DBSA’s competitive edge.

Recourse versus limited recourse versus non-recourse funding. What are the points of relaxation between these different categories of funding?

In this space, the funding that you find is “limited recourse” financing. We rely solely on the value of the underlying project and not on the lender’s balance sheets. These are the key principles of project finance, and BEE is financed on a project finance basis.

In the context of the REIPPPP and of the renewable energy sector generally; what role does DBSA play within the broader value chain?

This speaks to the activities of the DBSA and how we are structured as an organisation. We have divisions, with some units that work solely on providing planning services and assistance to various state organs, such as municipalities and other institutions.

In this context, we move on from planning to project preparation, where we become greatly involved, and indeed instrumental, in supporting projects to reach bankable feasibility stage. At this stage, we can open the project to other funders. We carry a project through to the stage where other funders come in. And we provide this project support within South Africa as well as to the rest of the continent.

Key criteria within projects are seldom aligned. They are quite specific to country and sector, requiring specialised project preparation work.

Our space primarily deals with project finance, and these are bankable projects ready to be financed, but as indicated we do have a division focused on project preparation.

We also fund municipalities and state-owned companies, so the nature of the finance depends on the structuring of that project or financial need. Once projects are funded, we continue to oversee the operations, maintenance, and support the monitoring of outcomes of whatever infrastructure project it would be.

The municipalities form the biggest chunk of our business, as the DFI. We already provide capacity and bulk infrastructure support. Adding another layer of EGIP funding shows how involved we have become in the entire municipal value chain.

Specific to the REIP, and even more specific to wind energy projects, how would you define DBSA’s role? What percentage of your portfolio is allocated to renewable energy and/or wind?

Subject to correction, of our energy portfolio, renewable energy is approximately 42%. I would say wind projects account for 10% of the 42%. We see growth in the renewable energy sector in South Africa aligned with the integrated resource plan (IRP). As DBSA’s mandate is to facilitate the IRP, we see our portfolio of renewable energy projects projected to grow to approximately 50% of our total portfolio, with wind projects likely to account for 15 to 20%. This is a projection, and it will ultimately be driven by the market and availability of projects under development in South Africa and Africa.

DBSA is accredited by international organisations like the Green Climate Fund (GCF) and the Global Environment Facility (GEF). How does this enable the Bank to fulfil its mandate in the region?

Our accreditation allows us to be more proactive in responding to market failures or gaps in the market that need to be addressed. This occurs when the private sector is unable or unwilling to provide funding for a particular investment type deemed developmentally advantageous.

We worked with GEF in the small IPP programme where we developed a solution to assist black entrepreneurs to have access to adequate competitive financing into their project. Likewise, with GCF, in support of embedded generation because we saw a need for a higher level of first-class or credit enhancement in those projects. We worked with the GCF to come up with something concessional to support the bankability of those projects and to offer more affordable funding.

Let’s talk about DBSA’s support of the small embedded generation projects under the Embedded Generation Investment Programme (EGIP). I understand that the initial book is closed. Please outline the details of the programme.

The EGIP was designed to support projects in the embedded generation space. These are projects that have private off-takers in the commercial and industrial space as well as municipalities. We saw a growth in this sector and identified a need for a first-class credit enhancement in the capital structure of those projects.

We rely solely on the value of the underlying project and not on the lender’s balance sheets.

We provided the credit enhancement in the form of a subordinated debt, with a higher, more competitive rate than would be offered to REIPPPP projects, improving the affordability of these projects to endusers. A facility of this nature is second ranking to senior debt, but also comes in at a cost that is concessional to the project.

Our objective is to see projects become more bankable, fully-financed and to reach financial close. We want to see this space grow.

As we saw in BW5, the subscription level was five times the capacity bid. Nevertheless, there are many projects developed on sites with available resources and all that’s needed is an off taker. It then becomes about trying to grow that market, which in turn may allow energy users to secure their energy supply and trigger further development.

Lungile Tom speaking at Windaba 2021.

CAREER HISTORY

Lungile L Tom is a senior investment officer at DBSA, specifically focused on project-financed projects across various infrastructure sectors in South Africa and the rest of the Africa. Tom is a chartered accountant (CA (SA)) and a 2020/2021 Harvard South Africa Fellow. Her educational background includes Master of Philosophy (MPhil) in Development Finance.

DBSA WINS 2021 IJ GLOBAL ESG AWARD

The judges identified DBSA as the winner of the Sub-Saharan Africa category, recognising the DFI for its issuance of its first ever €200-million green bond to target climate mitigation, adaptation or indeed both. The green bond was issued through a private placement with French DFI Agence Française de Développement (AFD) and structured in alignment with DBSA’s Green Bond Framework, which reiterates the lender’s commitment to playing a role in the transition to a low-carbon economy. The framework is aligned with the International Capital Market Association (ICMA) Green Bond Principles.

One judge pointed to “lots of firsts in this transaction”, adding that it was “difficult not to applaud the channelling of such extensive investment into affordable and clean energy in South Africa”. Another judge added: “It is right and proper that development banks take the lead in ESG and set an example for others to follow.”

“The bonds have been structured in alignment with the DBSA’s recently released Green Bond Framework, which reiterates the DBSA’s commitment to playing a role in the just transition to a low-carbon economy; this is the first green bond issuance by DBSA and the first time a South African issuer issues bonds in Euroclear France.”