Development finance can be defined as the provision of finance to projects or sectors of the economy that are not sufficiently serviced by the traditional financial system (Gumede, et al., 2011).

With this in mind, it is important to make a distinction between development finance and public finance. Public finance may invest funds in non-revenue generating projects for the public good, where development finance focuses on projects that are financially sustainable and will have acceptable financial returns. Moreover, the projects in which development finance institutions (DFI’s) invest, should seek to address financial market failures to ensure the development of the economy.

According to a paper by the Development Bank of Southern Africa, DFI’s play a crucial role in addressing financial market failures such as:

• The correct appraisal of economic and social impacts of investing in projects that require financing;
• Assisting entrepreneurs who may not qualify for funding through traditional channels, such as banks, with the provision of long-term financing as well as business support;
• Identifying sectors that are crucial for stimulating economic growth and providing them with technical assistance;
• Facilitating the financing of projects, thereby attracting further investment; and
• Providing liquidity during economic downturns and cyclical slumps by offering financing to projects in order to assist in mitigating the negative economic effects of the above.

DFI’s use the same appraisal models that would be used in any normal business environment, facing an investment decision. The appraisal models use a systematic approach, to ensure consistent application of financial and economic principals.

The aim of this paper is to briefly outline the financial and economic appraisal models used internationally to evaluate the investment decision of projects that are funded by DFI’s and how it can be implemented in the South African development finance sector.

For more information please contact:

Friedel Rutkowski
Financial Services Audit
friedel.rutkowski@kpmg.co.za
(+27) 72 767 8910

Andre Coetzee
Financial Services Audit
andre.coetzee2@kpmg.co.za 
(+27) 82 576 2909