The Development Bank of South Africa (DBSA) has published its annual report for the year ended March 31, 2020, and received a clean audit report from the Auditor-General (AG).
The DBSA was established in 1983 to perform an economic development function. The scope was widened in 1997 to “promote, facilitate and by funding to mobilise the socioeconomic development” in southern Africa. Unfortunately, through no fault of its own, 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.
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.
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.
Changes to the board
|March 31, 2020||March 31, 2019|
|Enoch Godongwana (chair)||Jabu Moleketi (chair) (1)|
|Prof M Swilling (deputy chair)||Frans Baleni (deputy chair) (1)|
|Gugu Mtetwa (2)|
|1. Terms of office expired on December 31, 2018.
2. Resigned August 30, 2019
Key financial results
|As at March 31||2020||2019|
|R billion||R billion|
|Net interest income||4.42||4.49|
|Cash flow generated from operations||3.61||3.79|
|Cash flow generated from development activities||-9.02||1.22|
|Net development loans at amortised cost (after ECL)||86.24||75.82|
|Equity investments + development bonds + development loans (after ECL)||93.52
|ECL on financial assets at amortised cost for the year (AFS Note 34)||3.63||1.44|
|Total provision for ECL on development loans at the end of the year (AFS Note 14.9)||10.19||6.20|
|Debt funding (FVPL) (2) + debt funding (amortised cost)||60.55||50.98|
|Debt-to-equity ratio excluding callable capital (1)||165%||138%|
|1. Callable capital is authorised shares but not yet issued. One would think that the shares could only be issued to the government.
2. FVPL – fair value through profit or loss
* ECL – expected credit losses
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.
|Executive remuneration (R000)
|CEO and CFO remuneration||17 330||16 535|
|Executive members’ remuneration||45 903||39 410|
|Total executive remuneration||63 233||55 945|
Schedule of directors’ and prescribed officers’ emoluments (R000)
|Fees||Subsistence & travel||Total 2020||Total 2019|
|8 882||61||8 943||9 753|
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?