DPWI, DBSA & National Treasury working relationship & MoU to manage Infrastructure Fund; with Minister

Meeting report

The Chairperson opened the meeting and welcomed all present.

Ms Mahlatse Molokomme from Infrastructure South Africa (ISA) led the presentation on the Infrastructure Fund.

The Infrastructure Fund was announced by the President in 2018, a R100 billion capital contribution over ten years to blended finance public infrastructure projects and programmes was announced.

Infrastructure South Africa was enabled in 2021 to build a credible project pipeline and coordinate stakeholders to alleviate the South African fiscal pressure.

This vision was operationalised through a Memorandum of Understanding around the Infrastructure Fund (IF) between the Minister of Public Works and Infrastructure (MoPWI) and the Chairperson of the Development Bank of South Africa (DBSA).

The Infrastructure Fund Memorandum of Agreement was signed in August 2020, facilitated by Infrastructure SA, DBSA and National Treasury. The IF Executive was appointed, and has since built a team of professionals with private/public sector skills.

Projects that are potentially suited for blended financing solutions, are appraised according to ISA methodology and channelled to the IF through the Infrastructure Investment Review Committee (IIRC).

Blended finance solutions structured per project, are reviewed and approved by the Infrastructure Investment Committee (IIC) chaired by MoPWI.

The purpose of the agreement is to record the parties’ commitment to the establishment and management of the Infrastructure Fund. Effective from 17 August 2020, for a period of ten years, unless terminated earlier in writing with nine months' notice, or unless extended by agreement.

In the event of early termination, DBSA shall provide a report on the status of ongoing projects and a detailed financial report concerning the IF Funds Costs associated with termination or transfer of the Infrastructure Fund shall be recovered by DBSA from the IF Funds (subject to verification).

Terms and Conditions may be reviewed on an annual basis. Any changes only become effective once captured in writing and signed by all parties effective from 17 August 2020, for a period of ten years, unless terminated earlier in writing with nine months' notice, or unless extended by agreement.

The Infrastructure Fund undertakes all activities necessary to develop blended financing solutions for the projects, and identifies and develops appropriate funding structures (such as grants, capital contribution, user pay, interest rate guarantees, financial models, financial delivery mechanisms and incentives for the projects). Where appropriate (depending on the project), arrange, coordinate, structure and engage with financial markets to develop financial instruments that will enable investments in the projects by investors, prepare reports for approval of projects by DBSA governance processes in accordance with the eligibility criteria in the business plan.

The IF will encourage collaboration between public and private role-players to unlock successful blended financing solutions for projects to reach financial close, and actively support project owners in the development of the financial mechanisms for blended finance projects which conform to the criteria of the Infrastructure Fund. They will monitor, and, where possible, drive the process of moving the projects through the planning stage until financial closure.

The IF will provide estimated annual and multi-year budgets for the projects managed. Where required, they will develop a procurement plan for the projects, provide procurement support to project owners, monitor the implementation of blended financing mechanisms for identified projects, and raise legislative and regulatory issues to be addressed by the relevant authorities with ISA.

Infrastructure South Africa will coordinate the development, assessment, management, project preparation and monitoring of the comprehensive infrastructure pipeline and related investment for South Africa. They will develop the eligibility criteria for infrastructure projects, in accordance with the IDA. Further, in consultation with National Treasury, develop criteria for financial bankability.

They will approve the business plan for the Infrastructure Fund, submit projects to the Infrastructure Investment Committee for consideration, categorisation and investment channelling and facilitate statutory reform where necessary to create an enabling environment to implement projects. They will be responsible for monitoring, evaluation, insight and intelligence of the entire infrastructure project value chain and perform any other tasks that may be necessary to give effect to the agreement in accordance with the terms and conditions of the agreement.

The Development Bank of South Africa has been mandated to establish and manage the Infrastructure Fund. For this purpose, the DBSA shall establish the Infrastructure Fund as a ring-fenced division within the DBSA, prepare the business plan, and annual IF budget based on the business plan for consideration through the government budget process and fund 50% of the costs of the Infrastructure Fund, for the first five years of the agreement. They will be responsible for recruiting and allocating resources necessary, including legal, human capital, financial and sectoral specialists, to enable the IF to fulfil its obligations under the agreement, appoint the Head of the IF proactively promote the Infrastructure Fund and effectively and efficiently manage and administer the IF funds for the purposes of the Infrastructure Fund.

They will establish and maintain the IF Account, maintain appropriate internal controls, accounting records and all reporting required for quarterly and annual reporting on the performance of the Infrastructure Fund, ensure that adequate records (electronic and physical) are maintained for verification, auditing and preparation of management accounts, ensure that the IF funds are annually audited and that such audited statements are submitted to the National Treasury within 30 days of it being signed off by the auditors.

They will be responsible for appointing independent auditors to audit the Infrastructure Fund and ensure optimisation of cash balances in the IF account.

The DBSA will appoint the Chairperson of the IFSAC, nominate a representative to serve on IFSAC and act as secretariat for the IFSAC. They will use its own recruitment procedures and policies to recruit the Resources for the Infrastructure fund, utilise its own procurement procedures and policies to procure project advisors once they have been duly appointed, manage them and, where required, provide procurement support for the project on behalf of the project owners; and perform any other tasks that may be necessary to give effect to the agreement in accordance with the terms and conditions of the agreement.

National Treasury, as the custodian of South Africa’s government finances, shall support the Infrastructure Fund by considering the budget submissions from the DBSA, approved by ISA, in line with the defined budget process. They will facilitate the funding recommendations through the MinComBud and Parliament funding 50% of the costs of the Infrastructure Fund from the effective date, for the first five years; annually transfer the NT contribution into the IF Account; put in place budgeting processes for IF blended finance projects; and nominate a representative to the IFSAC.

National Treasury will facilitate statutory reform where necessary to create an enabling environment to implement Projects, promote increased participation of the private sector, and perform any other tasks that may be necessary to effect the agreement in accordance with the terms and conditions of the agreement.

All parties to the agreement shall coordinate with each other to effectively and efficiently implement this agreement. The parties undertake to convene bi-annually to undertake any technical adjustments and/or alignment that would be required. The reporting on any required adjustments and/or alignments shall be reported to the Minister by the acting CEO of ISA on a bi-annual basis.

All parties to the agreement are obliged to comply with all relevant statutory prescripts including the PFMA, the legislative framework and government policies relating to procurement and supply chain management, and other relevant legislation, strategic objectives and policy documents.

(Details available in slide presentation)

The Infrastructure Fund Strategic Advisory Committee (IFSAC) acts as a technical advisory body—ISA, DPWI and National Treasury DDGs serve on this structure as per the MOA. Infrastructure Investment Review Committee (IIRC) assesses alignment of proposed projects with the National Infrastructure Plan (NIP). The Minister of Public Works and Infrastructure chairs the Infrastructure Investment Committee (IIC). Includes the DGs of National Treasury, DTIC, DPME. This committee is responsible for considering, approving and recommending the appropriate financing mechanism for the projects in the infrastructure project portfolios.

Mr B Mshilo, from the National Treasury, informed the Committee that there are currently three advanced projects. National Treasury approved the School Housing Programme at an amount of R305 million approved over two years. The National Development Agency has signed mandate letters, financial agreements are under negotiation, and lenders advisors for technical, legal and financial models are on the verge of completing two projects.

National Treasury approved the upgrade and refurbishment of Olifantspoort and Ebenezer water supply schemes for an amount of R1.4 billion grant facility. Implementation Readiness studies and final agreements are still outstanding.

Re-development of ports of entry is the third project and the IF assists the project sponsor with the BFI submission for land acquisition and bulk infrastructure. Financial close will be determined once National Treasury’s approval has been issued.

Mr Mashilo reported and a number of projects where Budget Facility for Infrastructure has been submitted and the outcome is awaited.

(Details available in slide presentation)

Mr Alan Ridgard, from the Infrastructure Fund, reported on projects awaiting acceptance into the IF Pipeline. The eThekwini Avoca Node Phase 2 and Nelson Mandela Bay N2 Nodal have been submitted to the Infrastructure Investment Committee for approval.

(Details in attached documents)

Discussion

Mr W Thring (ACDP) asked why ISA and IF were established if there are capable officials in IDT; he asked if that is not a duplication of tasks. He wanted to establish if there was coordination of knowledge, if the role of IDT as implementing agent is taken into consideration and what will happen to the DBSA as the implementing agent.

He wanted to know if there was a fixed amount set for private sector investment and what will be project turnaround targets.

He also asked what the plant around the school backlog was especially the schools without laboratories and electricity that are mainly based in townships.

Ms S Graham (DA) found ISA very exciting but is unsure who is doing oversight over who and who reports to which structure. She asked, if DBSA appointed the Head of IF; who is he reporting to? It was reported that DBSA ring-fenced an amount; who will be responsible for monitoring that the correct processes and procedures are followed with this money?

She wanted to understand who will do oversight over ISA and if DBSA is foregoing their implementation role on everything that is in the IF pipeline, how will they generate an income?

Ms Graham asked if the assistance from the different entities like DBSA and National Treasury is supported by legislation. And, will consultants still be needed or will this new structure eliminate that?

She raised a concern around the fact that projects presented only show that half of what is needed has been sources. She therefore wanted to know what happens if the private sector does not contribute the rest.

Mr Philip van Staden (FF+) asked if the idea that the private sector must contribute does not come to realisation, do they have a Plan B? He raised a concern that hospital infrastructure is in dire straits. During a site visit by the Portfolio Committee on Health, they were informed that R1.9 billion is needed just to start building a new hospital. He therefore wanted to know if there are any plans by DPWI to refurbish hospitals and if any estimates are available.

The Chairperson asked why the Umzimvubu dam project was not mentioned in the presentation. She asked if the blended financing will be done in terms of regulation 16 (Treasury regulations) and if all the oversight mentioned in the presentation will have any link or bearing on the parliamentary oversight. She requested that all oversight components must collaborate in the process.

The Chairperson raised her concern around the mention of non-disclosure agreements when government entities are involved, as it smells of collusion and corruption.

Responses
The Minister of Public Works and Infrastructure, Ms Patricia De Lille, indicated that Parliament has oversight over the Executive and everything the Executive and departments do, including entities within the departments. The Department will therefore report on anything requested by the Committee.

She said that IDT is one of three implementing agencies; the other two are Koega Development and DBSA. ISA will only play a coordinating role. She clarified that DBSA would not only serve DPWI. They charge a management fee to many departments, but that fee will only be waived for DPWI.

She indicated that BFI only meets twice a year, but that can be improved.

Ms Molokome indicated that the turnaround time of projects is based on numerous contributing factors. Such factors include the state of readiness, the project, the complexity of the project, and the BFI submission window (if it is close to the meeting times of twice a year).

Mr Mashilo informed the Committee that when the MOA was signed in 2020 and the R100 billion was committed over the 10-year period it was understood that the take-up would start slow and speed up as projects develop.

Concerning the Umzimvubu, government is looking at the development, but this project is large and complex and will take some time.

He indicated that the IF has the option to include Public Private Partnerships (PPP) in projects if they wish to. He acknowledged that there is a possibility that the private sector may not come on board. Part of what the IF is doing is market sounding before a project is structured and the results are taken into consideration. If it happens that the private sector does not come on board, the government will restructure the project.

He explained that outside an institutional level, the IF reports to National Treasury, ISA and the DBSA, which will be in addition to their reporting line to Parliament. He also confirmed that the IF is not replacing Treasury regulation 16.

Ms Flora Marutle-Simelane, IF, confirmed that moneys received for projects are kept in a ring-fenced account and this ring-fenced entity is within DBSA. She also indicated that projects pipelined from ISA lend them to PPP.

She explained the purpose of the NDA; if the IF came up with a financial solution at the inception stage, there are instances where outside counsel was sourced and that information may be confidential, however, the information is needed to put the package deal together. The NDA is therefore used to protect confidential protocols and propriety information.

Committee Minutes

The minutes of the meeting held on 2 November 2022 were adopted.

The minutes of the meeting held on 22 November 2022 were adopted.

The meeting adjourned.