Why the deafening silence from DFIs with every financial crisis?
JOHANNESBURG – Much praise has been given to the resilience of our financial systems and the response of the SA Reserve Bank (SARB) and the role of the National Treasury in minimising the impacts of disasters, the volatility of the rand and global recessions. In all these praises, very little to none has been said about the role of the Development Finance Institutions (DFIs) who also form a critical part of the economic system of our country.
It’s curious that every financial crisis in the last decade or so, the DFIs have had a defeating silence. And this begs us to question whether we have DFIs that are responsive and have the foresight to drive our national developmental agenda. DFIs are established to take a risk in the financial market to facilitate economic growth and development. By virtue of their mandate, they provide finance in the market segments that commercial financiers will not enter.
The silence by our DFIs in this current state of crisis suggests that there’s a glaring possibility to halt project development funding due to the lockdown and if this is the case, then the institutions created to be the backbone of our economic resilience lack the foresight and proactiveness required to effectively execute on their mandate.
This kind of thinking has made our DFIs be largely ineffective in achieving development on the continent and driving our economic growth. This is in part due to inability to identify bankable projects, lack of mandate clarity vs shareholder demands, institutional weaknesses, financial models and lack of capacity.
Many good projects will get shelved because the DFIs lack individuals who can look beyond a speed bump, find ways to get projects through without flouting processes and governance measures. What is lacking is the relevant professional capacity in development finance, individuals skilled enough to ideate, innovate and work in the sector and improve the functioning of the DFIs.
I would like to believe that the DFI machinery is in discussions behind closed doors, with their counterparts to develop new tools and mechanisms to deliver greater development impact, whether through blended finance, higher risk tolerance, or development impact bonds. The reality is that some donors will be putting their money into DFIs as a means to support recovery plans and our institutions will need to have clear strategies to leverage on the opportunities posed by donor funding.
There’s a possibility that increased risk imposed by the current pandemic might be a deterrent to investment appetite. By design, DFIs are created to mobilise financial resources for developmental purposes through investing in markets deemed too risky for the private sector to enter alone, but which are essential for the growth of the broader economy.
In addition, Jarvis (2013) suggests that DFIs are a form of government intervention in the financial system, with the aim of addressing market failures in the provision of finance, therefore, a failure risk is inherent. There has never been a riskier time than right now nor has there been a time for money to be put in as a necessity for growth than right now. We will need DFIs to be agile, flexible in their processes to cast the net further than they have. In our current state, private finance will be crucial to delivering on our country’s recovery plans and I believe the DFIs should be the catalysts.
Maybe the perceived unwillingness by the DFIs to accelerate investment, might be that their financial models are not well suited for the purpose of crisis response? We expect DFIs to offer finance on terms not available from the private sector yet, at the same time, we want DFIs credit decisions and finance terms to be “commercial” or “market-based.” This ambiguity is crippling because the effectiveness of the DFIs lies in their ability to close the funding gaps in the market, yet their wings to do so are clipped.
However, if the DFIs do not stop planning, approving, providing funding, or implementing projects where possible, then there’s hope for us. If they could view this crisis as a means to resolve some of their constraints and be opportunistic about what can be improved, planned and actioned, then we will realise a greater impact in future.
The reality is that our country still needs an accelerated industrial development and economic plan if we are to turn around our growth path and now as a recovery measure from the crippling economic impact of the Covid-19 pandemic.
Just yesterday we were still hampering on our need to compete with other emerging markets while catching up with the established industrial powers of the West. Our story today is for our DFIs to get out of their comfort zones, understand that they are crucial in our economic recovery plans and they should drive the development of those plans, right now.
Behind closed doors DFIs should be amassing those project pipelines, funding projects at the development stage, giving investor confidence by underwriting the risk that commercial banks would shun and facilitating the institutional and capacity support for public-private partnerships, providing guarantees, identifying and negotiating offtake agreements as capacity building measures to accelerate deal-making of identified projects.
DFIs are given funds to take us into the future. They cannot sit and be reactionary like us. They should not be allowed to fear the drop in the rand or decline in the economy. They should see this as an opportunity to position themselves, show leadership and their relevance in our country and economy. They are after all the backbone of our economic resilience.
They should be proactively laying the groundwork to boost our resilience to future outbreaks and disasters. It is essential that the DFIs should establish their own response, linking with other development partners, including the multilateral development banks and bilateral aid agencies, to identify potential investment areas and harness expertise that are currently lying dormant in the country.
DFIs can play a meaningful role in helping the private sector scale up manufacturing capacity. Although there’s a huge focus on health products, we must not lose sight of our long-term developmental goals. Much funding is still needed in key sectors such as agro-processing, mining, manufacturing of other goods for water treatment processes, energy generation and transportation. The pandemic has highlighted that we have invested very little in our ICT sector and the need for this sector to ramp up has become increasingly crucial.
Post-lockdown, it will not be business as usual, therefore DFIs can support existing manufacturing businesses and new ones by financing production scale-up – there will be a significant increase in the need for working capital to support production. Small-to-medium-sized manufacturers and suppliers in all sectors facing a cash crunch will require working capital to quickly fulfil orders and ramp up production.
To cover gaps in the production and supply of much-needed health equipment and products, DFIs could provide fixed capital to manufacturers in their existing portfolios who are able to reconfigure their production to meet the demand for items that are in scarce supply.
There is an opportunity for the DFIs to ease the barriers to entry and expansion for the manufacturing, transport and logistics and supply services industries by facilitating processes for suppliers to have quick and efficient access to potential customers. Access to supply chain opportunities will be critical and should not be limited to in-country but have a view of the continent at large. They should really think about what are the critical bottlenecks that need to be removed so private enterprises can thrive and be effective.
A 2007 ANC and 2008 National Treasury reports, respectively cited that South African DFIs have yet to realize their full development potential and I’m afraid that this will remain the case unless there is a change in attitude and manner in which they approach a developmental state. If they do not act promptly, they will fail to contribute as catalysts in the economic recovery plans of this country.
Kurisani Maswanganyi is chief cheerleader of Kulani EC, entrepreneur and activist for social justice – Pretoria, SA.