Deputy Minister of Finance briefing: Land Bank and Development Bank of Southern Africa Financial and Fiscal Commission Annual Report Annual Reports 2010/11

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Finance Standing Committee

17 October 2011
Chairperson: Ms N Sibhidla (ANC)
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Meeting Summary

The Deputy Minister of Finance and the Land Bank presented the Land Bank Annual Report 2010/11. The Deputy Minister of Finance described the history of the Bank as colourful with both good and bad aspects. The partnership with the Department of Agriculture, Forestry and Fisheries, the National Treasury, and the Department of Rural Development and Land Reform had brought very good results. Whilst there had been success, and the Land Bank had normalised its operations to some extent, there were still challenges, in particular, agrarian reform. The main challenge was the uplifting and empowerment of the emerging farmers. The priorities of the Bank were more to do with implementing its mandate than making profit. This implied low interest rates on loans to developing farmers, accompanied by after-care with cross-subsidisation from the commercial farmers to support and develop the emerging farmers.

Much had been achieved in an environment of the challenging conditions of the global economic meltdown. South African agriculture faced huge challenges such as drought, floods and veld fires in some areas. On the other hand, food prices had also been rising but farmers had not benefited from them as illustrated by the rising debt level in agriculture and decreasing income. The list of challenges indicated a tough time ahead for the Bank. The sector faced a dire situation. If the commercial farmers were facing such difficulties, it had to be asked what became of the emerging farmers. This however underscored the important role that should be played by the Government. As the shareholder ministry of the Bank, the Ministry of Finance had put much pressure on the Bank to produce appropriate strategies and policies. The Bank's board had submitted a development policy to the Ministry of Finance. This had now been approved. A further policy specifically designed to help emerging farmers had also been approved. Over the next two or three years much effort would be made to help emerging farmers become successful.

In 2008 and 2009 Parliament listed some of its requirements from the Bank, and the Bank had been steadily but surely working of resolving those issues. There had been concern about such issues as corruption at the Bank. It had also been felt that the Bank was not doing enough to bring to book those involved in corruption. The legal processes had not been as quick as expected. However, the police continued to make arrests in this regard. The Bank had reclaimed its reputation as an honest and principled institution carrying out its mandate with integrity. This was shown by the increasing number of investors and clients, and by the increasing calibre of staff joining the Bank. In spite of the global recession, the Bank had not only been able to grow its book, but also the quality of the book, which had seen decreasing impairments and also a decrease in the number of non-performing loans. It was important to note that the Bank had increased its loan disbursements and had managed to grow its revenue. This was a big achievement. Of especial importance was the Bank's growing role in providing financial access to emerging farmers. The Land Bank was still on track. The future looked bright. The Bank's Chairperson noted the Bank's achievements of unqualified audits for the past three years. The 2010/11 report was the cleanest of all. The Bank had also recovered its agricultural market share from well below 20% to a healthy 28%. The projections were that the Bank would grow its market share to 30% in the next two years and 50% in five years. The Land Bank's balance sheet needed to be further strengthened to enable it to meet its development mandate. It was diversifying its income streams and this would create even more stability in its revenues. Its credit rating still remained AA and that was primarily because of the assistance which the Land Bank had received from Government.

Members asked why there was no explanation for strategic objectives not achieved, why a change in the REPO rate affected the Land Bank, asked for an update on the progress of the investigation into corruption at the Land Bank and noted that confidence in the Bank had really to be developed, and former clients should be attracted back from the commercial banks. Members observed that the Bank had set no measurable objectives, and that the projected increase in world population to nine billion by the year 2050 – a 34% increase over the next four decades meant that agriculture would face tremendous challenges. Was it not perhaps time that the Land Bank should concentrate on existing farmers? Should there not be a dedicated model of financing at reasonable rates – 3% to 5% not 10% to 12%? Moreover, it had to be asked if one should not consider subsidy models to keep farmers on the land. Profitability was low and farming costs were increasing by the day. Otherwise food security would be endangered and we would face food riots in our country.

The Financial and Fiscal Commission presented its Annual Report 2010/11, beginning with an overview of the Commission's activities. In the past year it had met all its legal requirements. Its research strategy had moved quite rapidly into local government issues, including budget analysis, and into the implementation of economic modelling tools. Its response time to ad hoc requests had improved quite significantly, but had not impacted on the Commission's long term agenda, because it had put in place its modelling capabilities and budget analysis functions. The research team had quite significantly increased its amount of work published in accredited academic journals and presented at conferences. Stakeholder demands for the Commission's work had increased, which the Commission welcomed. The Commission was especially concerned that the position of Chairperson had been held in an acting capacity since 2010 and was combined with the post of Chief Executive Officer. This exposed the Commission to various risks. There were also three vacancies for Commissioners. The allowances paid to part-time commissioners had not been reviewed since 2008. This was a disincentive for them to participate in the Commission's work. Serious pressure on the Commission's budget had impacted the Commission's work. The information and communications technology infrastructure was antiquated. The Auditor-General's opinion was unqualified, but with matters of emphasis – fruitless and wasteful expenditure, irregular expenditure, and the Commission's accumulated deficit. The Money Bills Amendments Procedures and Related Matters Act 2009 had impacted on the Commission's work. The Commission was also faced with increasing costs of compliance. Audit fees consumed 8% of the Commission's budget. The Commission had shared its experiences with other African countries. In January and February 2011 it hosted the recently established Kenyan Commission on Revenue Allocation, and it maintained a high profile in the world in fiscal strength and centralisation.

Members asked for further detail of the Commission's survey on how it was perceived, if there were no internal auditors, about internal control, found the Commission's Annual Report 'frightening' and demanded three reasons why the Committee should not recommend that the Commission be closed down. If this was how the Commission was operating, how could it deliver on its mandate? How on earth could the Commission submit a late tax return? A Member felt that the Accounting Officer had not observed adequate oversight. Members also questioned the Commission's travelling expenses. The Acting Chairperson asked for the Commission's remuneration policy to be submitted in writing.

The Deputy Minister of Finance as Alternate Governor of the Development Bank of Southern Africa, together with the Bank, presented the Bank’s Annual Report 2010/11. The Deputy Minister said that the Development Bank of Southern Africa was a centre of excellence for infrastructure development which pursued new initiatives in partnership with select national departments. Key among these were Health, Basic Education, Energy, Water, and Environmental Affairs. Hospitals, schools and community projects were in the pipeline. Some of these would be rolled-out in the coming financial year. The Bank had delivered on a number of it key performance areas – in particular the road investment infrastructure programmes approved in neighbouring countries – Zambia and Zimbabwe. The Bank described its organisational framework and noted that its reporting focused, inter alia, on impacts on the communities, and remaining sustainable as an organisation. The Development Fund had grown quite significantly over the past three years. Its structure as an organisation in its own right was described. This was where most of the foot soldiers were deployed, such as the engineers and technicians, to ailing municipalities. It was important to work with communities to ensure that they were able to access the structures of Government, more importantly, what was due to them as individuals through the fiscus. The number of Government departments and municipalities supported by the Siyenza Manje programme increased from 86 in 2007 to 217 in 2010. The number of deployees increased from 97 in 2007 to 614 in 2010. Due to the reduction in the Medium Term Expenditure Framework allocation in the year under review, the number of municipalities supported, and the number of experts deployed had decreased. The number of delegates trained year on year had increased. There was, however, a decline in the number of delegates trained in the Southern African Development Community region. This was because of the splitting of the portfolio with the Bank's new partnership programme, the Pan-African Capacity-Building Programme, which was a partnership with the French Development Bank and the Industrial Development Corporation. Among financial highlights were that the Bank’s credit rating had been maintained, that the quality of the loan book had remained stable, and that non-performing loans were down from 4.9% in the previous year to 4.2% in the current year. The current year's first quarter financial results were described. The Bank was able to report that it had rendered what the Government had asked. A key concern was ensuring that it remained a sustainable institution.

Members asked about the Bank's micro-economic impact, in particular the impact on job creation, what sector in particular had benefited from the Bank's assistance, how many social compacts were signed with the communities, if the Bank experienced a shortfall in social and economic development, why the Bank was relying so much on its stakeholders in its efforts to ensure its sustainability, commended the Bank on its immensely impressive work, welcomed the Bank's invitation to visit, asked about the Bank's observation that the lack of institutional capacity at various levels of Government to plan, fund and execute infrastructure projects was a particular operational challenge, were concerned that the operating profit was down and about the size of the Bank's non-performing loan book. Members observed in the Bank the cornerstone of leadership, asked what the Bank did to retain staff after training them, if the municipalities actually consumed the service that the Bank gave them, and noted that skills transfer was of great importance. Without it, the Bank would be wasting its time and resources. Were staff members in the municipalities sufficiently trained to sustain what the Bank gave them? The Chairperson of the National Council of Provinces' Select Committee on Finance advised that the technical officials that the Bank had used in the Siyenza Manje programme should be redeployed to assist the Department of Cooperative Governance. The Acting Chairperson asked if, in response to service delivery protests, the Bank went out and identified challenges, or waited for institutions to come forward with requests. She asked about the Bank's arrangements for after-care following completion of projects, and called for more frequent engagements with the Bank.

Meeting report

 

Introduction
Land Bank Annual Report 2010/11 presentation
Deputy Minister of Finance, Nhlanhla Nene, accompanied the Land Bank delegation to present the Bank’s Annual Report 2010/11 as required by the Public Finance Management Act (PFMA). He also thanked the Portfolio Committee on Agriculture, Forestry and Fisheries for accepting this compromise of joint meeting.

The Deputy Minister described the history of the Bank as colourful with both good and bad aspects. It was thanks to the cooperation with Parliament that the Bank was now where it was today. It was also through the cooperation of the three Departments – the Department of Agriculture, Forestry and Fisheries, the National Treasury, and the Department of Rural Development and Land Reform – that the progress achieved had been made, particularly on the development of emerging farmers which was now firmly on the national agenda. One had reason to be encouraged, because this partnership had brought very good results. Whilst there had been success, and the Land Bank had normalised its operations to some extent, one would be the first to acknowledge that that the road ahead was still strewn with challenges, in particular, agrarian reform. The main challenge was the uplifting and empowerment of the emerging farmers, and defining the role of the Land Bank and the Departments concerned in this regard. It had become apparent that the Minister of Finance with the concurrence of the board of the Bank viewed the priorities of the Bank as more to do with implementation of its mandate than making profit. This implied that the Bank should put in place mechanisms such as low interest rates on loans to developing farmers, accompanied by after-care with cross-subsidisation from the commercial farmers to support and develop the emerging farmers. This necessitated a review of the Bank's funding mix and agreement on the role of Government in this regard. The report presented would indicate that much had been achieved in an environment of the challenging conditions of the global economic meltdown.

South African agriculture faced huge challenges such as drought, floods and veld fires in some areas. On the other hand, food prices had also been rising but farmers had not benefited from them as illustrated by the rising debt level in agriculture and the decreasing income in this area. The list of challenges, together especially with the decreasing incomes of farmers indicated a tough time ahead for the Bank. The sector faced a dire situation, in which a large number of commercial farmers sat with paid-up mortgage bonds but were struggling on the commercial side, with severe constraints on infrastructure and equipment upgrades, resulting in losses in their operations. If the commercial farmers were facing such challenges, it had to be asked what became of the emerging farmers, who had to deal with new mortgage loans, access to the market challenges, technical assistance and a number of other challenges. These impediments exemplified the challenges faced in the agricultural sector broadly and the emerging farmers in particular.

This however underscored the important role that should be played by the Government. As the shareholder ministry of the Bank, the Ministry of Finance had put much pressure on the Bank produce appropriate strategies and policies to deal with these challenges. He was happy to report that the Bank's board had submitted a development policy through the corporate plan to the Ministry of Finance. This had now been approved. A further policy specifically designed to help emerging farmers had also been approved. Over the next two or three years much effort would be made to help emerging farmers become successful. This was part of the next phase of dealing with the challenges that confronted the Bank. Now that the first phase had been completed, it was time to ensure that the Bank played its role.

In 2008 and 2009 Parliament listed some of its requirements from the Bank, and the Report demonstrated that the Bank had been steadily but surely working of resolving those issues.

Various parliamentary committees had expressed concern about such issues as corruption at the Bank. It had also been felt that the Bank was not doing enough to bring to book those involved in corruption. One underscore why some committee Members arrived at this conclusion. The legal processes had not been as quick as expected. However, the police continued to make arrests in this regard, and one could read about them in the newspapers. The Bank had reclaimed its reputation as an honest and principled institution carrying out its mandate with integrity. This was shown by the increasing number of investors and clients, and by the increasing calibre of staff joining the Bank.

Furthermore, when one looked at the financial market globally in the context of the world recession, it was characterised by three factors:

the decreasing loan books
  
the increasing impairments
  
non-performing loans (NPLs) and huge losses.

The Bank, however, had come out of the recession differently. It had not only been able to grow its book, but also the quality of the book, which had seen decreasing impairments and also a decrease in the number of non-performing loans.

It was important to note that the Bank had increased its loan disbursements and had managed to grow its revenue. This was a big achievement.

Of especial importance was the Bank's growing role in providing financial access to emerging farmers.

The Land Bank was still on track. That the challenges were huge was acknowledged. The strategy that the Bank had presented three years previously continued to bear fruit. Work was now in progress on the new business model to ensure that the Bank was sustainable in the long term. There would be less attention to the bottom line and more on the mandate.

The future looked bright although the year ahead would bring with it more challenges. However, a firm foundation had been laid to sustain the institution going forward. The development side of the Bank was at the heart of the work of the Portfolio Committee on Agriculture, Forestry and Fisheries.

Dr Ben Ngubane, Chairperson, Land Bank Board, thanked the Committee's for giving the Land Bank a haring. This indicated the seriousness with which it implemented its oversight mandate. He introduced the management team. He had served as Chairperson for almost two years and it had been a privilege. He had watched with awe the transformation of an institution that had grappled with issues around corporate governance, profitability and sustainability, adherence to the mandate, as well as issues related to acts of omission and commission by individuals who had plunged the Bank into disrepute and brought it to the verge of collapse.

The challenges around governance were aptly captured by management. These were expressed through management letters, as well as by the qualified audit report. He strongly believed that the Land Bank experience could be replicated by a number of state-owned entities (SOEs) which found themselves in a similar environment.

The Land Bank had managers who knew management, the governmental systems and the applicable laws; this knowledge had been at the centre of the improvement.

Dr Ngubane felt a sense of pride and achievement as the Bank and its Board prepared the Annual Report. All audit issues and qualifications had been dealt with precision. The Bank achieved unqualified audits for the past three years. The Auditor-General’s 2010/11 Report was the cleanest of all the Land Bank audit reports.

At the operational level, the Bank had also extricated itself from the trough of disaster, and recovered its agricultural market share from well below 20% to a healthy 28%. The projections were that in the next two years the Bank would grow its market share to 30% and 50% in five years. The sustainability of the Bank had been substantially boosted by strategic management intervention in a number of areas, including implementing new business and operational models, reduction of the non-performing loans from a staggering 20% approximately to only 11%. This was improving the quality of the loan book, as well as organisational design that positioned the Bank positively to address its development imperatives.

In addition, the net profit from continuing operations improved from R270 million in 2010 to R293 million in 2011 amid a tight global environment. The transfer of the Land Bank to National Treasury had had a positive impact on the Bank. Before the move, the Bank was experiencing losses and repeated qualified audits. The Bank's proximity to the National Treasury also opened the way to a better understanding of regulatory requirements thus enabling the Land Bank to understand the basic requirements for capital injections and guarantees for the shareholders.

While the Land Bank story could be classified as phenomenal, great challenges still lay ahead. As the Deputy Minister had pointed out, risks associated with agriculture continued to squeeze the Bank's margin. These included increases in input costs, continuing rising fund level debt, natural disasters such as floods, stock and crop diseases, veld fires as well as escalating food prices, while fund level incomes continued to shrink in an environment where the Bank continued to increase exposure in development. These challenges had put tremendous pressure on the Land Bank's margins as a result of its dependence on interest income.

Notwithstanding its successes, the Bank needed to change gear and focus its energy and resources on the challenges within its business environment and the economy at large. Without the new focus and rethink, the Bank ran a risk of basking in its past achievements while the business and economic dynamics continued to shift. The Land Bank as a primary delivery agency of Government in agriculture and rural development would not afford to run such a risk. The Bank together with other stakeholders, needed to develop and implement mitigating strategies if the sector was to survive. The Bank was geared to this challenge and other stakeholders were willing to join hands.

It must be emphasised that the Land Bank's balance sheet needed to be further strengthened to enable it to meet its development mandate. The Land Bank valued the Committees' continued support and counsel, and paid homage to the Minister of Finance and the consortium of departments – Department of Agriculture, Forestry and Fisheries, the National Treasury, and the Department of Rural Development and Land Reform. This consortium gave incredible strength to the Bank's push to make development one of its core functions. Of course success would depend on how quickly the Land Bank engaged with its stakeholders who were the emerging farmers and the rural communities, where all this development effort was directed.
 
Mr Phakamani Hadebe, Chief Executive Officer (CEO), the Land Bank, dealt with the details of the Report, which showed that the Land Bank was diversifying its income streams and this would create even more stability in its revenues, while management was dealing with the full dynamics of the scenario of increased loan disbursements and growing revenue.

Mr Phakamani Hadebe highlighted
  what had happened since 2008
  the Land Bank's performance
  the state of agriculture – this was important as it had a direct bearing on the Land Bank's performance
  the sustainable business model
  the way forward.

Members were well familiar with the regulatory framework – the Land Bank's regulation by the Land Bank Act and by the PFMA and the National Credit Act. The Land Bank's credit rating still remained AA and that was primarily because of the assistance which the Land Bank had received from Government.

Mr Hadebe highlighted a summary provided by the Auditor-General in the Annual Report 2007/08. He referred to page 42 that highlighted that there were no controls at all at the Land Bank. There was no business system. The Committees had demanded a turnaround strategy. He outlined the three phases of that strategy and the need to clean up and stabilise the institution both financially and in capacity. Furthermore it was necessary to enable the institution to endeavour to assist and promote development .

It had been hoped to complete the entire process by 2012. he analysed the process further, with reference to the parliamentary process, including the resolutions of the Standing Committee on Public Accounts (SCOPA).

Mr Hadebe reported on progress with the process, with reference to human resources and information technology (IT). The balance sheet continued to improve.

There was, however, one area which had remained an issue at the Land Bank. This was the Land for Development Finance Unit (LDFU) – the golf estates. Unfortunately the market was under duress, and was saturated with all these golf estates. It would be fruitless and wasteful expenditure to sell to the first comer. Out of nine projects, the Land Bank had managed to sell two.

The Land Bank was now able to issue a bond and had a very liquid market.

Cost to income ratio had been brought down from 92% but still remained fairly high at 82% and was expected to remain at this level for the next two or three years as the Bank dealt with the legacy issues on the legal side and also obtain assistance from consultants. On the other hand, as regards the staff at the Land Bank, 'we have a bit more than we really need'; but in the deliberations that took place at the Jobs Summit it was indicated that the last option was cutting the number of staff. What the Land Bank had done was, with the Minister of Finance and the Board, was give the staff members the commitment that if they were able to meet the targets to ensure that the Bank was sustainable, then they would be retained: they were informed to that effect in an open meeting of all the Land Bank personnel. 'We are going to see how we perform as we move forward.'

The cost to income ratio remained high because the Land Bank had installed a new system of SAP and had a new business model. So in the short to medium term the cost to income ratio would unfortunately remain relatively high.

On sustainability, the Land Bank recognised that it had to grow its book. The book had come down in the past 15 years or so, to a low of about R12.5 billion. The Land Bank had already been able to grow the book.

The Land Bank needed to produce appropriate products for development. In the past six years, the Land Bank had written off about R 4 billion [in loans] to developing farmers. It was not that emerging farmers could not farm; the problem was that the infrastructure and the existing system did not support them. Moreover, this problem did not apply to emerging farmers only, but also to commercial farmers; however, it made the lives of emerging farmers even worse. Government had a role to play in that respect.

The new business and operating model – Fit for the Future (FFF) – was intended in the next four years to ensure the sustainability of the Land Bank going forward. (See Annual Report, page 9.)

▪ It was necessary to ensure enhanced customer interaction. The Land Bank had never changed its strategy. When it was a single, agricultural financial institution farmers expected the Land Bank to help them. It was necessary to go in and attract the farmers.
▪ The second issue was the developmental impact, as already alluded to by the Deputy Minister and Board Chairperson.
▪ The third was a sustainable delivery channel. If the Land Bank continued to borrow just from the market, it could not find investors to take on the risk. It was necessary therefore to develop an appropriate system.
▪ Fourthly it was necessary to grow the business according to clear and achievable targets.

The above would take three or four years to complete. However, already there were achievements, for example:
▪ The establishment of a new business unit that dealt with emerging farmers. Cabinet had approved emerging farmer support facilities.
▪ Also the Land Bank had optimised the branch back-office activities.
▪ The activities of the branches' delivery channels had been optimised
▪ The service capacity and delivery of both the corporate and business units had been enhanced.
▪ It was evident that there was a culture of change at the Land Bank.
The above indicated that the foundations for the sustainability of the Land Bank had been laid.

Mr Hadebe pointed out that out of 45 targets, the Bank had missed only three. Though the development target was met on approvals it was missed on disbursements. The Bank also failed to meet its target on employment equity. (See presentation document for further information.)

Discussion
Ms Z Dlamini-Dubazana (ANC) asked how the Land Bank had arrived at the figure of R11.05 billion on business and corporate spending.

Ms Dlamini-Dubazana asked what sector had given rise to the R10 billion gross income from performing loans.

Ms Dlamini-Dubazana asked about collateral security and repossessed properties.

Dr D George (DA) observed that the loans were clearly under-performing (Annual Report, page 15).

Dr George noted a significant increase in investment income. Did that indicate some kind of a strategy shift?

Dr George asked about a quite significant underwriting loss on the insurance operation (page 27). He asked for an explanation.

Dr George noted that the non-executive directors were all paid at an upper quartile level. Why? (remuneration report, page 50).

Dr George asked why there was no detail on how the bonuses were calculated (page 53). Did any executive not receive a bonus?

Dr George asked why there was no explanation for strategic objectives not achieved (page 61).

Dr George asked about total loans and advances (page 123)

Adv S Swart (ACDP) asked why a change in the REPO rate affected the Land Bank.

Adv Swart tried to understand the issue of the arrears (pages 162-163).

A Member asked how the Bank saw the increasing production costs and the weakening financial position of its clients in the future. Did it have advice for the Planning Commission or the Cabinet on the cost drivers?

The same Member asked who held the collateral. Was it local or overseas money? He saw a danger of overseas countries acquiring South African land as collateral.

Dr L Bosman (DA) congratulated the Standing Committee on its achievements with regard to the Land Bank. The development of agriculture could not be achieved without a 'one-stop-shop' for loans and grants. He sought clarity on all the other funds that were available. He hoped that loans in future would be ring-fenced on a long-term basis. He asked if the Government would secure the Development Fund loans to the emerging sector.

Dr Bosman asked for an update on the progress of the investigation into corruption at the Land Bank. Confidence in the Bank had really to be developed, and former clients should be attracted back from the commercial banks.

Dr Z Luyenge said that the institution had set no measurable objectives.

Dr Luyenge said that lack of capacity in a vital institution such as the Bank would be a serious issue.

Dr Luyenge asked about training in the Land Bank.

Mr E Mthethwa (ANC) asked what the challenges around the development book were.

Mr S Abram (ANC) said that the projected increase in world population to nine billion by the year 2050 – a 34% increase over the next four decades meant that agriculture would face tremendous challenges.

Mr Abram referred to the implementation of a value chain financing model (page 62) and the historical perspective on the Land Bank (page 28). Government had embarked on proactive land acquisition. The policy apparently was that the land should be leased. This meant that the prospective farmer did not have any real collateral. He asked what the Bank's plans were to provide the financing, especially the R1 billion that the Minister of Finance referred to on page 3. Without that collateral, how were the farmers going to be assisted?
Also, was it not perhaps time that the Land Bank should concentrate on existing farmers? Should there not be a dedicated model of financing at reasonable rates – 3% to 5% not 10% to 12%? Moreover, it had to be asked if one should not consider subsidy models to keep farmers on the land. Profitability was low and farming costs were increasing by the day. Also South African farmers had to face almost a dozen different taxes and levies; and, in addition, the South African National Roads Agency Limited (SANRAL) was introducing all these toll roads. Otherwise food security would fly through the window, and we would face food riots in our country.

Co-Chairperson Johnson asked about the future of the Land Bank: where it belonged was not where it was. He also asked about subsidies and tariffs, the need for Eskom to engage with the farming community, and whether climate change was factored into the risk profile of farmers.

The Deputy Minister reminded Members that to be able to talk about a proper funding mix, or of a new model to take the Land Bank forward, was because the first phase of established the financial soundness of the Bank had been dealt with.

The Deputy Minister said that there was no institution that did not have problems of capacity. When the strategic plan was tabled, all the measurable objectives were listed, and the Annual Report talked to all of them, one by one (page 61 onwards). The consortium of departments was intended to pool resources and expertise to facilitate the developmental agenda of the Bank.

The Bank's authority was by decree of the President, so the Deputy Minister would prefer to refer Co-Chairperson Johnson's question to the Presidency rather than address it here.

It had been agreed that the commercial side of the Bank and its developmental business would be dealt with separately. To do so it was essential to ensure sustainability. Achieving financial soundness was, the Deputy Minister said, one milestone that had been achieved, and the Bank was now better poised to separate the two aspects and focus on development as Government would wish.

The Deputy Minister acknowledged that, as the Bank's Chief Executive had pointed out, even the commercial farmers were not benefiting from rising food prices. Therefore Government was looking quite seriously at this problem with a view to alleviating the farmers' burden, since food security was one of Government's key areas of focus to ensure that it could cater for the needs of South Africa's population.

Members might feel that some of the plans were taking long to implement, but sequencing was important,
The Committee would be provided with information in writing on progress with the Land Bank's litigation. The Bank was providing as much information to the South African Police Service (SAPS) in this regard.

Dr Ngubane replied that the total book of the Land Bank was R15.3 billion. The Bank had three subsections, but this was relatively new, and the Bank was reporting on the 2010/11 Annual Report. There were then two sections out of this R15.3 billion. There was the corporate finance unit. Secondly there was the retail unit. The R11 billion was for the corporate finance unit. The remaining R4.3 billion was split between what the Bank was now calling 'the retail-commercial' – 'commercial farmers up until R10 million or so that could borrow from the Land Bank'. However, there was also an arm ( or section) dealing with small-scale developing farmers (retail-emerging) . So the operations of the Bank had now been reviewed. The funds for small-scale, emerging farmers had been ring-fenced. In this market (retail-emerging) the Land Bank did not aim to make a profit, but just wanted to obtain a return. This was where the multilateral and governmental institutions could help. The second of the new sections (arms) was retail-commercial banking – loans up to R10 million. The third section (or arm) was the corporate finance unit. Over time, the Bank intended to enlarge both the retail-commercial and the retail-emerging.

For the Land Bank to have both a commercial side and a domestic side, it should not expect to obtain any profit from the developing side. If the Bank received sufficient funding from the state, it could achieve loans to emerging farmers at a rate of only 4%, as Mr Abram had called for.

Once the Land Bank had repossessed an asset and liquidated it, it then called on the security, then it became part of the assets on the Bank's balance sheet. However, the intention was not to keep it. The intention was to sell it, so that the Bank could recover what was owed to it. So the Bank had entered into an agreement with the Department of Rural Development and Land Reform to sell these farms to it at an agreed price, which was far less than what the Department paid outside.

There was a problem with farms exposed to land reform where the farmers had subsequently abandoned them together with their loans from the Land Bank. This added to that figure of R1.7 billion about which a Member had asked. This was why the Bank had highlighted that, going forward, in as much as the Land Bank had been able to reduce the non-performing loans from R3.2 billion to R1.7 billion. Going forward, that reduction would be less and less, unless the value chain financing model started operating, where the Department took those farms into its books, while still keeping the farmers who would be given five years to resuscitate their farming activities. These farmers would not pay interest to the Land Bank. Dr Ngubane was happy to report that the Land Bank had received about R302 million tax guarantees from the Department of Rural Development and Land Reform to help those farmers. The Land Bank had also received R24 million from the Department of Agriculture, Forestry and Fisheries to clear the production loan. The farmers who were owning these farms would have to enter into a legal agreement to surrender their ownership to the Department so that the Department would be able to ring-fence and give the Land Bank a guarantee upon which the Bank would work with commercial farmers and agricultural institutions to assist these farmers.

Mr Sebastian Taurai, Finance Manager, Land Bank, explained staff costs.

Mr Hadebe explained that in instances of no
n-performance, the Bank tried to resuscitate farmers. When all else failed, the Bank had recourse to litigation and thence liquidation.

Mr Hadebe explained that the majority of the Bank's investors were domestic, and that the Bank was growing its book, but had come from a very thin base, in as much as the non-performing loans were still sitting at 11%. However, globally banks comparable to the Land Bank non-performing loans to the extent of 15%. Because the Land Bank depended on its balance sheet to obtain money from the market, it could not go that far.
 
Financial and Fiscal Commission Annual Report 2010/11 presentation
Mr Bongani Khumalo, Acting Chairperson and Chief Executive, Financial and Fiscal Commission (FFC, the Commission), gave an overview of the Commission's activities. The Commission in the past year had met all its legal requirements according to its mandate. In terms of the Commission's strategy, the research strategy had moved quite rapidly into local government issues, including budget analysis. It had also moved rapidly into the implementation of economic modelling tools.

Also its response time to ad hoc requests had improved quite significantly. However, the ad hoc requests had not impacted on the Commission's long term agenda. This was because the Commission had put in place its modelling capabilities and budget analysis functions. This helped the Commission respond quite quickly to this kind of request.

The Commission's research team had quite significantly increased its amount of work published in accredited academic journals and presented at conferences. This also helped members of the research team to keep in touch with their own academic aspirations and remained motivated.

Stakeholder demands for the Commission's work had increased. Such stakeholders included [provincial] treasuries and municipalities. The Commission welcomed this as it was in line with its Act.

Having highlighted the core issues, there were other issues that needed to be mentioned.

 
There had been an Acting Chairperson and CEO (Mr Khumalo) since September 2010. This created uncertainty.

▪ The combination of the above two posts was quite a complex arrangement.
There was no Deputy Chairperson.

▪ It was necessary therefore to deal with the same set of issues in one capacity, and then deal with the same set in the second capacity. This exposed the Commission to various risks.

It was really a matter of self-discipline that one was able to survive.

How to deal with this matter would be discussed with the Office of the Institutions Supporting Democracy and with the Minister. It was important to separate the two positions. There were also three vacancies for Commissioners. There should be nine, but there were only six. In particular, the post of Commissioner for local government had been vacant since 2008. The post of Commissioner for provincial government had been vacant for practical purposes since 2008; a commissioner had accepted the post but never taken it up and only formally resigned in January 2011 having never participated in any of the Commission's activities.

Other issues:
  There had been serious pressure on the Commission's budget. This had impacted on the Commission's operations. There had been problems in dealing with the finance unit. It had been necessary to resort to internal transfers to fill positions in that unit and train them on the job to assist the Chief Financial Officer.
  The information and communications technology (ICT) infrastructure was antiquated.

The Auditor-General's report had raised three specific issues. Although the opinion was unqualified, there were matters of emphasis:

1. Fruitless and wasteful expenditure – the result of interest charges imposed by the South African Revenue Service (SARS) on the grounds that the Commission had made its payment to SARS late: the Commission had lost an objection on this matter. Mr Khumalo explained further. SARS had corrected its records, but the letter of acknowledgement arrived after the audit had been completed.

2. Irregular expenditure – through the employment of an ICT service provider who was unable to produce a valid tax clearance certificate and whose services could not be terminated because the provider was in the middle of work that could not be interrupted because of the need to maintain continuity of the ICT systems The State Information Technology Agency (SITA) had cautioned against stopping the work. To do so would be too costly. However, the contract had now been contracted.

3. 'Going concern' was related to the Commission's accumulated deficit of about R3.4 million. This was not an issue raised for the first time. It was raised in 2007, when it was about R3 million. It was not picked up over the past two years. The base line of the Commission's budget had not kept pace with changes in legislation that had expanded the mandate of the Commission.

The Commission Secretary continued the presentation, noting that the Commission's focus in 2010/11 was undertaking cutting edge research with special attention to innovation, the developmental impact of public resources, and providing stakeholders with coherent and appropriate ICFR policy advice.

The Commission's research efforts were also directed to the appropriate consolidation of the public deficit and debt reduction as a result of the 2008/09 global financial and economic recession.

Secondly the focus was on the appropriateness of inter-cyclical stabilisation policy .

The third was the need for creation of favourable conditions for economic development in South Africa.

The fourth was the need for Government in the face of fiscal consolidation to focus more closely on fiscal responsibility, improving the quality of services, and paying attention to the issue of unfunded mandates.

The Money Bills Amendments Procedures and Related Matters Act 2009 (MBAPRA) had impacts on the
Commission's work.

The Commission was also faced with increasing costs of compliance. Audit fees consumed 8% of the Commission's budget – a sizeable proportion that had to be reduced.

The Commission had tabled its 2011/12 submission on the Division of Revenue. In terms of the Inter-governmental Fiscal Relations Act, it had responded to the 2010 Medium Term Budget Policy Statement. It had responded to the Division of Revenue Bill 2011. It had commented on the 2011 fiscal framework and revenue proposals and had done the same with the 2011 Appropriations Bill. It had finalised research on the 2012/13 Division of Revenue and had recently tabled that submission to Parliament. Last year it had tabled its annual report in August. It had responded to all stakeholder requests.

Moreover, the Commission had shared its experiences with other African countries. In January and February 2011 the Commission hosted the recently established Kenyan Commission on Revenue Allocation.

As a best practice institution the Commission continued to maintain a high profile in the world in the area of fiscal strength and centralisation.

The Commission also served in an advisory capacity to the Department of Basic Education's Heads of Education (HeadCom) Committee and on the sub-committees on finance and infrastructure. The Commission also served in an advisory capacity to the Department of Transport road coordinating body.

The Commission sat also on the Department of Health's data advisory group, and also participated in an advisory capacity at the Water Research Commission.

The research programme had not done as much as it could because of research constraints. Other institutions also had had to deal with limitations of resources. The Commission sought to enter cooperation agreements with other institutions which did work in the same area as the Commission. A number of institutions that were supposed to consult the Commission before taking certain actions had failed to do so. This had impacts on the validity of legislation or executive action and could be challenged in court.

It was important to highlight the lack of definition of executive authority of the Commission. The only definition that it had was the definition of executive authority for the purposes of the PFMA. This was contained in the PFMA regulations of 2005.

The allowances paid to part-time commissioners had not been reviewed since 2008. Thus there was a partial disincentive to part-time commissioners to take part in the business of the Commission.

The Commission had attempted to reduce the size of its premises but had faced delays on account of delays in processes with the Department of Public Works through which the Commission had to contract when acquiring premises.

A perception impact assessment survey had been undertaken. This had indicated incorrect perceptions of the Commission – these the Commission had been trying to correct, while trying to disseminate the Commission's products more broadly.

The Commission's recommendations for 2011/112 had already been tabled and debated in Parliament, so they would not be elaborated here.
(Please see presentation document for further details).

Mr Mavuso Vokwana, Chief Financial Officer, FFC, reviewed the financial highlights, with special attention to the income statement and balance sheet, and movements. There had been an increase in revenue, but there had not been a proper base line correction. There had been negotiations with National Treasury in this financial year. There had been an increase in staff costs of 10% which involved inflation increase and the need to compensate special skills. There had been a 45% increase in professional fees because of one of the major challenges that had been highlighted the 8% of the budget consumed by audit fees. Research costs were also high. Other stakeholder involvement was also needed. The Commission's asset base had not increased. Liabilities had increased by 42%. The allocated revenue was 99% of the Commission's revenue. Other revenue was 1% of the total revenue.

▪ Personnel costs, in particular research personnel, were the main cost driver.
  Audit fees accounted for R1.4 million, which was a very high amount for the Commission.
  Information technology (IT) accounted for 11% of the budget.
  Office premises accounted for 25% of the budget. The Commission sought to cut the amount of office space to reduce this amount.
▪ The Commission sought a stable budget of around R42 million, but had been receiving less than that.
(See presentation document for further details).

Discussion
[Dr George had wanted to talk about the shameful state of the Commission, but had had to leave early.]

Ms P Adams (ANC) asked for further detail of the Commission's survey of how it was perceived.

Ms Adams asked, with reference to audit fees, if there were no internal auditors and if they were not employees.

Ms Adams asked, with reference to the Auditor-General's report, for further explanation of procurement and contract management, and about internal control and the oversight responsibilities as regards to reporting.

Ms Dlamini-Dubazana found the Commission's Annual Report 'frightening'. She asked for three reasons why the Committee should not recommend that the Commission be closed down. If this was how the Commission was operating, how could it deliver on its mandate? Had the Commission deliberately not followed correct procurement procedures? Was it due to lack of capacity?

 She pointed out that a clearance certificate was a technical document to ensure that a service provider could not pass to the next phase of the contract without completing the first. Such matters raised by the Auditor-General were of serious concern. Why was there no compliance with the Act? If the liability exceeded the total assets, the Commission had to be asked if it could explain how it could be sustainable. She asked the Commission to be specific and explain its internal control methods.

She asked if the Commission had a policy on staff loans.

How on earth could the Commission submit a late tax return? Was there no person in charge of such matters?

She questioned the salaries of Commissioners.

Adv Swart was very disappointed in the Auditor-General's report and asked, in particular, about procurement and contract management (Annual Report, page 99). The Commission had not given an explanation for this matter of emphasis.

The Auditor-General had observed that the Accounting Officer had not observed adequate oversight (page 100). Mr Swart wanted to emphasise that point, especially in view of the high esteem that the Commission enjoyed in the eyes of the public, and the good reports that had been given in the past and which Mr Swart had found very useful.

Adv Swart asked about operating expenses (slide 27). Could the Commission give a figure for its travelling expenses? Was it foreign travel or domestic?

Adv Swart asked about the going concern issue (page 199).

Dr Luyenge said that there were major issues of governance, and a lack of structures at the lower levels. One might ask the National Treasury when it had last heard that there was an FFC, for it appeared that the organisation was merely housing 'warm bodies'. He supported Ms Dlamini-Dubazana's question as to why the FFC should not be disbanded. Moreover, it might be asked why the FFC should not be a candidate for admission to the intensive care unit (ICU). However, it was futile to ask the FFC that question because it would not have the capacity or authenticity to respond.

Mr E Mthethwa (ANC) asked why travelling costs and premises consumed half the FFC's budget.

The Acting Chairperson acknowledged the good work that the Commission had done in the past. However, the Auditor-General's report gave rise to serious concern, for example, item 15, page 99.

The Acting Chairperson asked when the Commission was going to fill its vacancies. What was the succession plan and why must the Commission wait a year to fill a post?

The Acting Chairperson commented on the high level of absence at the Commission's meetings.

The Acting Chairperson asked for the Commission's remuneration policy.

Mr Khumalo wanted to respond to Ms Dlamini-Dubazana's question on why the Commission should not be closed down with reference to its achievements rather than to the Auditor-General's report. However, he understood that there were issues that required management intervention. Part of the problem was that the finance division was very weak – its staff had been taken from the general employees and had been trained to assist the CFO. The kind of people that the Commission had in that division was not consistent with National Treasury's compliance requirements. Some of the issues were long-standing. In the past the CFO function had been outsourced. When the CFO was appointed he basically worked alone. The Commission had decided that it needed to perform these functions, including legal functions, internally. Continuation of outsourcing would have resulted in rising costs. Some of the issues around supply chain management were new and needed organisational capacity to implement. Without the necessary human resources, it had not been an easy journey.

The Commission had approached the National Treasury to provide it with technical assistance in restructuring its finance division.

The contractor in question had been handling the IT system, and had been retained in order to complete work in progress.

The fruitless and wasteful expenditure was not the fault of the Commission and was now an academic issue. It was the result of an employee not paying to SARS, and SARS' mis-allocating money on its own side. He explained in detail. It was an issue created and corrected by SARS.

The purpose of the survey was to enable the Commission to deal with public perceptions so as to ensure that stakeholders understood what the Commission did. He gave examples. It was necessary, for instance, that stakeholders knew that the Commission made its recommendations to Parliament.

The internal audit function was outsourced – hence the professional fees. The Commission had engaged with the Auditor-General on this issue.

Travelling for the Commission was a key input and had, since 2003, been entirely domestic. It had expanded its work on local government and this required travel. Also Commissioners sometimes participated in parliamentary committee oversight visits. Desktop research by itself was not enough.

The Commission wanted to reduce its Cape Town office space by half, but the management of the managers of that building had refused to renegotiate the lease. The lease on premises in Midrand expired in June, but even till today there was still discussion between the Department of Public Works and the property managers. The Department of Public works could not sign on the basis that the property managers were non-compliant with Black Economic Empowerment (BEE) regulations. The property managers denied this. At the same time, in terms of his agreement with the Commission, he was not supposed to be paying rent on the other part of the building.

The Commission was confident that it was doing 'a fine job' and the accusation that it was merely housing 'warm bodies' was unfair.

The Commission, however, acknowledged its weaknesses, but had put appropriate measures in place.

Mr David Savage, Commissioner, FFC, said that it was a tight balancing act for the Commission to fulfil its mandate. From a governance and accountability point of view, the administration of the Commission had been very responsive. It was unfortunate that a good report had been marred by the problem with SARS and with the IT contractor.

Mr Krish Kumar, Commissioner, FFC, urged the Committee to examine the Commission's recommendations and its technical work, of which it was very proud. It was cutting-edge work that added value to Government and to the country. Its recommendations were based on solid quantitative and data-hungry research. However, the Commission thought that it could do better. The Commission would this year review its supply chain management to streamline it, manage risks and ensure compliance with regulatory requirements.

Mr Khumalo said that it was the President who appointed Commissioners. The Chairperson of the Commission could suggest names, but beyond that had no say in the matter.

The Commission had a code of conduct, but there were no sanctions. If Commissioners attended four meetings a year, they had fulfilled their basic requirements. The present team of Commissioners had been highly supportive and their attendance, with one exception, had been satisfactory.

Development Bank of Southern Africa Annual Report 2010/11 presentation
The Deputy Minister said that the Development Bank of Southern Africa (DBSA, the Bank) was aware that the developmental needs of southern Africa were structural in nature. Although considerable progress had been made over the past decade and a half, the levels of poverty remained very high, with high backlogs and lack of access to basic services, high unemployment , and structural weaknesses in key areas of the economy. The Government's Five Priorities emphasised the pivotal role of development finance institutions (DFIs), particularly in infrastructure development, leveraging private sector investment, facilitating investment in the green economy, and promoting regional integration. The Bank was a centre of excellence for infrastructure development which pursued new initiatives in partnership with select national departments (see Annual Report). Key among these were Health, Basic Education, Energy, Water, and Environmental Affairs. Hospitals, schools and community projects were in the pipeline. Some of these would be rolled-out in the coming financial year. In regard to the performance in the year under review, the Bank had delivered on a number of it key performance areas – in particular the road investment infrastructure programmes approved in neighbouring countries – Zambia and Zimbabwe. South Africa's commitment to the north-south corridor was adopted by the President.

Mr Paul Baloyi , Chief Executive Officer and Managing Director, DBSA, referred to the presentation, page 3, slide 8, with reference to the Bank's organisational framework and how the divisions were structured.

How the Bank was governed and measured was described (page 4). He noted that the Bank's reporting focused, inter alia, on impacts on the communities, and remaining sustainable as an organisation.

The Development Fund had grown quite significantly over the past three years (page 5). Its structure as an organisation in its own right was described. This was where most of the foot soldiers were deployed, such as the engineers and technicians, to ailing municipalities. It was important to work with communities to ensure that they were able to access the structures of Government, more importantly, what was due to them as individuals through the fiscus.

The Committee was welcome to visit the Bank.

Mr Paul Kibuuka, Group Executive and Managing Director: DBSA Development Fund, gave information on the number of Government departments and municipalities supported by the Siyenza Manje programme increased from 86 in 2007 to 217 in 2010. The number of deployees increased from 97 in 2007 to 614 in 2010. Due to the reduction in the Medium Term Expenditure Framework (MTEF) allocation in the year under review, the number of municipalities supported, and the number of experts deployed had since decreased. During the 2011 financial year the programme also completed 1 114 and 1 994 projects respectively, and up-scaled the recruitment and deployment of artisans in preparation for the rollout of the municipal infrastructure and operational maintenance programme. The number of delegates trained year on year had increased. There was, however, a decline in the number of delegates trained in the Southern African Development Community (SADC) region. This was because of the splitting of the portfolio with the Bank's new partnership programme, the Pan-African Capacity-Building Programme, which was a partnership with the French Development Bank, the Industrial Development Corporation and the DBSA. The Pan-African Capacity-Building Programme had taken over training in countries beyond the SADC region. The decline in numbers was attributable to the implications of the need to recover costs within the region for all training activities.
(Please see presentation document for further details.)

Mr Anton, the Acting Chief Financial Officer (CFO), said that notwithstanding challenging economic and market conditions, the DBSA once again posted its group financial results for the year 2010/11. Members would have had the opportunity to read the Annual Report, of which the DBSA was very proud as to content and presentation. He highlighted key features of the financial results:

   R37 billion approved exemptions over the past financial year (slide 11) – this had never been achieved before: this was mainly in respect of energy, water and roads. The majority of these approvals were in the public sector.
  Disbursements were in excess of R8 billion (slide 12). This was for the third year running. 75% of all disbursements were in respect of the public sector – in particular in energy, transport, and ICT.
  In addition to its own contribution to development (slide 13) the DBSA assisted in unlocking other sources of funding for municipalities. He gave examples. A graph illustrated total beneficiation.
  The DBSA's credit rating had been maintained in line with the sovereign credit rating (slide 14). This comforted the DBSA.
  The growth social assets and development loans was illustrated, with an increase in 15% (graph, slide 15). The bottom line of that graph illustrated the growth in equity investments of about 10% over the past year.
  Growth in loan and equity disbursements was mainly funded by borrowed funds, which led firstly to an increase in the debt to equity ratio of the DBSA to 161%, which was, however, still within the prudential limit of 250%. By extension, this increase in borrowed funding also had an impact on the DBSA's net interest margins.
  The quality of the DBSA's loan book remained stable (slide 16).
  Non-performing loans (NPLs) were down from 4.9% in the previous year to 4.2% in the current year. The cost of income, at the 1.2% mark, was still well below the prudential level of 45%.

The current year's first quarter financial results were described. Loans and equity disbursements were up on budget. The net interest income was better than budget. All categories of expenses were well below budget. Sustainable income was also up – to R190 million for the first three months. The debt to equity ratio was now at 164%. The interest margin was at 45%. The cost to income ratio was at 36.9%.

The last year's results were still in the process of being finalised. However, the DBSA could report that it was R75 billion positive to budget.

Mr Baloyi referred to the value chain of the Bank and the levels of intervention from concept to actual operation, maintenance, and the oversight that the Bank provided (slide 20).

The Bank was excited by the work that it was currently doing at national level in terms of departments slide 21) to roll-out infrastructure at national level. He was pleased to say that the initial work was done during the year, and the Minister of Health had announced that the intention to build six hospitals. Similar work had been done in education. Similarly, work was being done in water and sanitation, transport and human settlements. If Members visited the DBSA it would be able to tell them more of what it did at national level. The DBSA was able to report that it had rendered what the Government had asked. A key concern was ensuring that the DBSA remained a sustainable institution as to its financial position.
(Please see presentation document for further information.)
 
Discussion
Ms Dlamini-Dubazana asked about the Bank's micro-economic impact, in particular the impact on job creation. To what extent had it achieved in terms of performance, such as with hospitals? What sector in particular in South Africa had benefited from the Bank's assistance? How many social compacts were signed with the communities? Which particular programmes were leveraged? Had the Bank experienced a shortfall in social and economic development? Why was the Bank relying so much on its stakeholders in its efforts to ensure its sustainability.

Adv Swart commended the Bank on its immensely impressive work. It seemed very positive. He welcomed the Bank's invitation to visit. He asked about the Bank's observation that the lack of institutional capacity at various levels of Government to plan, fund and execute infrastructure projects was a particular operational challenge facing the Bank (Annual Report, page 24). What steps were being taken to address that? It seemed to be that money was coming on line, but the Bank faced difficulties in that regard (page 24, bottom of the page).

Whilst one appreciated that this was a development bank without a focus on profit, there was a need for sustainability and one was concerned that the operating profit was down (page 78). He asked about segment profit (page 103), about a net loss in sustainable earnings (pages 104-105), and to explain the substantial differences. He was concerned about the size of the Bank's non-performing loan book (page 144). One understood that there was a possibility of a financial bailout for Swaziland. Was there a problem with the Bank's loans to Swaziland? He was confident that the Bank had full explanations for the issues raised.

Dr Luyenge appreciated the elaborate presentation, and observed in the Bank the cornerstone of leadership. He asked what the Bank did to retain staff having trained them.

Dr Luyenge's heart was with the municipalities, because that was where things were supposed to be happening. Did they actually consume what the Bank gave them? Was there an appreciation on the part of the municipalities to use the services of the Bank?

Skills transfer was of great importance. Without it, the Bank would be wasting its time and resources? Were staff members in the municipalities sufficiently trained to sustain what the Bank gave them?

 Mr C de Beer (ANC, Northern Cape), the Chairperson of the National Council of Provinces (NCOP)'s Select Committee on Finance, recollected an engagement with the DBSA in June that lasted six hours. He had called for a detailed report on what the DBSA did in municipalities and on the evaluation of the Siyenza Manje programme. His experience was that the DBSA played a leading role in the municipalities where it engaged with the technical issues. However, when those officials left, there was a vacuum. What was needed was a skills transfer. He advised that the technical officials be used to assist the Department of Cooperative Governance which was to assume responsibility for the Siyenza Manje programme, because that Department had a serious challenge as to its capacity. The Select Committee had visited the North West the previous week, and noted that those technical people that the DBSA had used should be redeployed to assist in the programme as it was not being rolled-out by the Department of Cooperative Governance.

Ms Adams asked about the second quarter operating expenses, in particular the difference between the budgeted and actual expenditure figures for personnel expenses. Did the vacancies influence those figures, and when and how was the Bank going to solve the problem?

Ms Adams asked about the DBSA's vision. Did the DBSA review this vision, and how far had it reached in realising it?

The Acting Chairperson asked if, in response to service delivery protests, the Bank went out and identified challenges, or waited for institutions to come forward with requests. In this regard, how did it relate to the institutions concerned?

The Acting Chairperson asked also asked about the Bank's arrangements for after-care following completion of projects.

The Deputy Minister thanked Mr de Beer for sharing the Select Committee's experiences with the work of the DBSA in municipalities.

The Deputy Minister replied that the difficulties in transferring skills also went to the heart of the recruitment programme in municipalities. The problem of capacity was related both to the capacity of being able to train and to the capacity of being able to receive the training. It was not enough to put in resources; they had to be received by a receptive audience. His response also related to the Acting Chairperson's question on after-care. The Bank had learned some lessons and there should be some remedial action while working with the Department of Cooperative Governance and a division of the National Treasury. These were matters on the DBSA's agenda. However, its was not the role of the DBSA to run the municipalities. He acknowledged that this was an important matter, because, unless one could unlock the problem of service delivery in municipalities, the work done by the Bank was undermined by the inability of the municipalities to take the Bank's assistance forward.

Mr Baloyi responded to the questions on the way the Bank reported in terms of its impact at community level. The Bank, like any other organisation, did research and analysis of the totality of what the Bank did. As it produced the results it was then able to quantify the number of households that were connected, the number of jobs that the Bank had facilitated directly and through the institutions with which it worked. In this regard the Bank could not take all the credit. The Bank did not have the capacity to report on individual projects in the results. However, before each project was created, the Bank estimated what value the project would create and how many jobs the project would create. This was called a developmental analysis and was what motivated the Board to approve a project rather than the financial aspects.

Annually, or every three years because these projects took a long time to mature in terms of impact, these projects were evaluated to see how effective was they were in terms of, for example, ensuring access to water, electricity and sanitation, and, in the longer term of improving the health status of the community. When the Committee visited the Bank, it would be shown some of the actual projects.

Mr Baloyi had anticipated the question on the Bank's operating income. He stressed that the Bank did not focus on making money, because the client that it funded, was, in general, the shareholder, which was Government. However, the Bank did aim to make enough money to pay for the cost of the work that it did. When the Bank did make a profit or surplus, it spent it back on Government, because most of the cost of the developmental capacity-building, the training and deployment of people at local level was carried at the DBSA. He referred to slide 13. Moreover, the Bank tried to give municipalities cost-effective funding, even to the extent of absorbing some of the costs of funding, where it could, but the Bank's ability to do so had greatly diminished with the economic crisis.

Mr Baloyi responded to a question on why the DBSA was so reliant on the state. As a DFI, its job was to take the greatest risk, to do the most difficult work, and use its profit to help the state deliver on its mandate. There was no other financial institution that was able to do the work of the DBSA. Ordinary banks would not do that work, give discounted funding, or help with capacity-building.

There was a great risk together with a great cost that accompanied the DBSA's work. Should the Bank ever reach the point where it got into trouble, [the state] would help the Bank. So far, however, it had not had to ask for such assistance. The state's assurance gave the Bank the courage to take that greater risk and spend the Bank's money. As an organisation it was measured on its developmental impact.
 
 Mr Baloyi responded that the non-performing loans book was an historical issue over a period of 27 years. A significant proportion of that pertained to municipalities. Such municipalities went into default, because invariably they were in areas where they were unable to collect their rates,such as the metros in Johannesburg. The Bank took the risk of lending them money. Some of them succeeded, and were able to repay the loans. Some of them failed. The question that the Bank faced was whether it should liquidate the municipality, which it could do under the law. However, it chose not to do that. It rather extended the period or undertook a whole basket of interventions to try to sustain them. It was important to look at impaired loans in the context of the whole book of the DBSA. The total value of impaired loans was 4.2% of the total book. As an organisation the DBSA was very well structured in this regard compared with other DFIs. Its portfolio was reasonably well-managed, and the Bank was not in a situation in which it was at risk of collapsing the next day. Although the Bank had to recover money from its clients, as did any other bank, it was by no means in a situation of crisis. On the contrary, its situation was very healthy. Indeed, in the past, it had been criticised by the former Minister of Finance for having too healthy a book, because it was not reflecting the external risks that the Bank was supposed to take. It was necessary to create a balance.

Mr Baloyi responded, with reference to his chapter in the Annual Report, on the question of the challenges. What the Bank had seen happening was the number of projects, especially in local government, that were requesting funding, had declined in the past two years. On the other hand, the Bank was supposed to be there in case the market failed, and other banks were unwilling to lend. Thus the market was working, and the Bank could not complain. However, the Bank thought that it could do better by capacitating municipalities, metros and provincial governments to create more projects to be funded. The Bank needed to do more to help Government to enable infrastructure to be funded. The Bank was assisting with the building of hospitals and schools. As regards roads, it was more concerned with provincial and local roads, not toll roads. It was a serious challenges to get departments to align.

The Bank's attrition rate was 'not bad' at between 10% and 13%, which was a national figure. However, the Bank had lost key and important staff, especially during the past two years, for example, the previous CFO, who had emigrated. However, the Bank had sufficient capacity to make internal appointments. This was important, since the Bank could not help other organisations if it did not have sufficient capacity itself. The targeted vacancy rate was less than 10%.

The municipalities indeed consumed the products and services that the Bank offered. As regards retention of skills, and attrition of skilled personnel at local level, there was some comfort in that there was a geographical shift. The mobility of staff was the other issue – indeed it was a whole basket of issues. The Bank sought to work with the Department of Cooperative Governance to develop sustainable solutions to ensure that trained staff stayed in their jobs. There was also the problem of young professionals – graduate engineers and finance people who were taken for advanced training.

Mr Admassu Tadesse , Group Executive: International Division and Group Executive: Group Strategy, Marketing and Communication, DBSA, gave the figure for the total number of jobs created as a result of the Bank's work directly – 22 200 for 2010/11. In total it was 42 000.

Mr Tadesse said that the Annual Report just gave a summary of annual disbursements. There were other, more detailed reporting instruments for reporting on a project by project basis on development impact.

Mr Baloyi said that the Bank obtained sovereign guarantees from the states to which it loaned money. Swaziland was one such country, and currently it was experiencing problems.

Mr Baloyi said that the only complaint that the Bank had with its vision was that it was externally focused. It would welcome any input from the Committee.

Mr Tadesse said that the Swaziland projects were being restructured and turned around, and one of these projects – a paper-milling project - was being transferred to KwaZulu-Natal. The other projects were going to be salvaged.

Mr De Beer appreciated DBSA's deployment in municipalities, especially in his own area.

Mr De Beer asked if the DBSA had a standardised model for building schools and hospitals to contain costs.

Mr Baloyi said that the building of the schools was the mandate of the Department of Basic Education, which had such a model. The Bank merely assisted the mandate-holder.

The Deputy Minister reiterated the invitation to visit the Bank. He also emphasised the Bank's assistive role in relation to departments such as the Department of Basic Education.

The Acting Chairperson called for more frequent sessions with the DBSA to enhance the Committee's oversight role.

The meeting was adjourned.

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