1. 1 "Reconciliation and Development Bonds: Using Private Finance Markets To Promote Social and Economic Development" Daniel D. Bradlow [1] [1] [1] Professor of Law and Director, International Legal Studies Program, American University Washington College of Law. Contact information: Email: bradlow@american.edu, bradlow@wcl.american.edu, TEL: +1(202)274-4205 (office); +1 (202)486-6867 (cell); FAX: +1(202)274-4116 bradlow@american.edubradlow@wcl.american.edu

2. 2 Purpose of Retail Reconciliation and Development Bonds Project The R&D Bonds Project: An Innovative Debt Financing Mechanism That Will:  Fund Sustainable Creation of Jobs, Services and Opportunities for Disadvantaged Communities and Individuals by funding small projects that are:  “too rich” for grant funding because they are revenue generating projects but  unsuitable for commercial funding either because they are too small or do not generate adequate returns (i.e. projects under R10 million/per project)  Create an Opportunity for Investors, Including the Middle Class and Expatriates, to Help Construct a Future with Dignity and Opportunity for All South Africans

3. 3 Diagram of Project

4. 4 Project Sponsor Special Purpose Entity—Section 21 Company, tax exempt Governance—Board consisting of project sponsors, representatives of holders of subordinated instrument and other stakeholders.

5. 5 Terms of Retail R&D Bonds  Tangible and Intangible Form  Size of Issue==R500 million  Price==R500 per bond  Interest Rate: Intangible Form== 5 year Government Retail Bond Tangible Form== Intangible Form-150 bp  Each bondholder receives annual report on projects in which bond proceeds invested  Maturity== 10 years  Amortization==single payment in year 10  Prepayment Options—in years 3-9

6. 6 Terms of Subordinated Debt Instrument (SI)  Size of Issue==R500 million  Compensation==Package of Benefits—charter points, tax benefit, business and learning opportunities, share in surplus, annual report on projects supported by R&D Bonds and goodwill  Maturity== 10 years  Amortization==single payment in year 10  Prepayment Options== none

7. 7 Market for Bonds  R&D Bonds: South African Residents: LSM 7 and 8, (4 million people) Expatriate South Africans: (2 million) Friends of South Africa Common Characteristic: recognize need to solve problems of unemployment, inequality and poverty but limited time and resources Assumed average purchase==2 bonds i.e. R1000 investment

8. 8 Market for Bonds (continued)  Subordinated Debt Instrument: Public and private financial institutions and companies in South Africa, Official development financing agencies and foundations.

9. 9 Investment Strategy  General Principles— Diversification of Risks, Invest in Institutions not Projects  Investment Strategy for SI— Fund Manager; Commercial Projects that meet Agreed Criteria;  Investment Strategy for R&D Bond — Market Niche; Implementing Agencies, Investments between R10,000 and R10 million;  Rationale for Strategy — Importance of Market Niche

10. 10 Some Interesting Issues  Why Are Financial Institutions Reluctant to Support Sub-Commercial Projects?  How Do We Assess Mixed (social and financial) Returns?  How Do We Draft Effective Loan Agreements for Sub-Commercial Projects?  Can Domestic Debt Instruments Be Used to Attract Funds from Expatriate Communities in Other African Countries?