Can the DBSA assist in SA’s infrastructure-led recovery?

 

The Development Bank of South Africa (DBSA) has published its annual report for the year ended March 31, 2020, and unlike many SOE's received a clean audit report from the Auditor-General (AG).

Is the DBSA in a position to assist in South Africa’s intended infrastructure-led recovery without taking on more debt?Unfortunately, through no fault of the DBSA, funding given to certain state-owned entities (SOEs) has not achieved the intended objective, and billions have been wasted.

Moody’s credit opinion at April 2

Moody’s has downgraded DBSA to Ba1, with a negative outlook, on the assumption of a “high probability of support” from the government. Moody’s does however acknowledge the “weakening in the government’s capacity to extend support in the case of need”.

Factors that could lead to a downgrade include:

• A weakening of the government’s credit profile, or willingness to support DBSA;
• A weakening in DBSA’s baseline credit assessment; and
• An increase in leverage through secured borrowings, which would reduce the recovery rate for senior unsecured debt classes.

Governance

The DBSA stands apart from most other SOEs:

• Expenses totalling R47 million were classified as irregular, unauthorised, fruitless and wasteful expenditure; however, this expenditure was mainly due to contracts that continued post expiry date; and
• There were no findings of unethical behaviour by any staff member during the year.

Auditor-General’s report

The AG issued a clean audit report.

Key audit issues:

• Expected credit losses on the development loans: IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an expected credit loss (ECL) model, which requires a high degree of estimation and management judgement.
• Valuation of complex financial instruments: Significant judgement is required in determining the appropriate valuation techniques to apply, as well as the assumptions. The AG found management’s valuation of complex financial instruments and assumptions to be reasonable and consistent with his expectations.
• Valuation of equity investments held at fair value through profit or loss: The portfolio of equity investments held does not have an active market. This, in my view, indicates that there are no equity investments in listed companies. The AG found management’s valuation of equity investments and assumptions to be reasonable and consistent with his expectations.

Development loans – sectoral analysis

The entities that have received development loans are not disclosed. However, 80.6% of the development loans are invested in sectors that are fairly risky. The amount invested in Eskom, which has been severely impacted by state capture and corruption, is not disclosed.

With the mounting cost of Covid-19, the paralysis of the South African Revenue Service (Sars), rampant corruption, failing and flailing municipalities, South Africa’s soaring debt-to-GDP rate, cash-eating zombie SOEs, and the unknown quantity of government guarantees issued on an ad hoc basis to those entities, the DBSA in my view is being pushed towards the precipice.

Is DBSA in a position to assist in South Africa’s intended infrastructure-led recovery without taking on more debt?

Without the DBSA disclosing its investees, we will have to wait and see.

In this struggle to escape the tentacles of state capture and corruption, and the mounting government debt, are we, the citizens including taxpayers, not entitled to know where the DBSA has ‘invested’ its (our) money?

This article was written for Moneyweb by Barbara Curson CA(SA) with post graduate qualifications in tax and international tax.