The economic activity powered during the life of the project outweighs the need to own the asset, which is in and of itself inconsequential.
Why does the Development Bank of Southern Africa (DBSA) fund movable assets? Maybe the question should be: why not?
The transformation of the constitutional and economic dispensation of SA in terms of the interim constitution of 1993 necessitated the conversion of the DBSA’s role and function in 1997. It was consequently reconstituted to promote, facilitate and mobilise the socioeconomic development in the Southern African region. In the 2014 amendment of the DBSA Act, “region” was broadened to “African continent and its oceanic islands” — within an integrated financial development system. So the DBSA has a continental operational mandate.
Its main purpose is the promotion of economic development and growth, human resources development, institutional capacity building and the support of development projects and programmes in Africa. But because this purpose is broad it might cause interpretational challenges. Thus, the DBSA together with its shareholder agreed to position it, through a shareholder’s mandate statement and in terms of national policy direction, as a development finance institution that is a critical component of the national infrastructure system.
In other words, its financing has to focus on infrastructure development — which practically means capital formation. There is no restriction in terms of whether financing is to the public or private sector because both contribute to economic development. It is important to remember that economic development is simply the upliftment of the standard of living of citizens.
As can be seen from the DBSA’s main purpose, capital formation includes produced and non-produced assets, as defined in the UN’s System of National Accounts. Produced assets are items such as buildings, machinery, equipment and plantations. Non-produced assets include items such as land, oil, water and mineral reserves, as well as intangible assets such as purchased goodwill, patented entities, leases and other transferable contracts. This means capital formation emanates from both tangible and intangible assets, as well as from both fixed and movable assets, which both contribute to economic development.
It is now common cause that the International Financial Reporting System’s treatment of leases (IFRS 16) requires the lessee to recognise in its financial statements, all leases with a term greater than one year as “rights of use” assets. Previously, only financial leases were recorded on the lessee’s balance sheet. The acquisition of assets through financial leasing, acquisitions of houseboats, mobile homes, breeding stock and improvements to existing fixed assets beyond ordinary maintenance are good examples of the difficult definitional challenges for capital formation.
DBSA financing of movable assets
In pursuit of its mandate, the DBSA finances both fixed and movable assess, though traditionally at a much lower frequency for the latter. In the transport sector, for example, the DBSA has in recent times funded the Gautrain, including rolling stock, for more than R3.6bn, the Tshwane Bus Rapid Transit for over R393m and, in the energy sector, the Ghana powership project, for about R1,2bn.
Credit extension at the DBSA is decided on commercial and developmental merits. Deal appraisals must prove that transactions are financially sustainable — as the DBSA does not get fiscal allocations, it raises its own capital from the markets — and that there is clear economic development envisaged. This is true for fixed and movable assets, as well as funding in the private and public sectors. All assets have a finite lifespan and so the economic development they provide to society throughout their life is much more important than the actual ownership of the asset.
For example, in the case of powerships the key reason often given for providing floating power is to mitigate power supply risk or provide emergency power to close electricity supply gaps or provide power relief. So, even though they do not contribute permanently to the stock of infrastructure, powerships enable economic activity by ensuring that the required energy supply is in place. The economic activity powered during the life of the project outweighs the need to own the asset, which is in and of itself inconsequential.
The DBSA has a keen interest in influencing national policy in the sectors within which it operates, namely, transport, energy, ICT, water & sanitation, education, health and human settlement, but is not a policymaking entity. That means infrastructure development finance takes place within existing national policy and in line with its mandate. So, the DBSA funds large movable assets because they fall within its mandate.
by Zeph Nhleko, DBSA Chief Economist