Development Bank of Southern Africa & Land Bank 2012 Strategic Plans with Finance Deputy Minister

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Finance Standing Committee

24 April 2012
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Deputy Minister of Finance presented the Development Bank of Southern Africa's Corporate Plan 2012/13. As the leading development finance institution, the DBSA had a key role to play in harnessing its human and financial capital in new and innovative ways to support the national infrastructure development plan. The DBSA had repositioned itself as a centre of excellence in infrastructure development, complementing its ongoing work in local government with new initiatives and partnerships with various national departments to accelerate and deepen delivery in the key priority sectors of education, health, transport, and human settlements. The DBSA would pursue its expanded development drive. It had targeted an infrastructure investment disbursement of R6.9 billion for the coming financial year. In addition, a series of mandates had also been agreed and signed to implement and support the financing of infrastructure in key priority areas such as health, energy, water and sanitation. The Minister had entrusted the DBSA with the responsibility to establish and manage the R9 million Jobs Fund.

The Deputy Minister was pleased to report that the Jobs Fund was progressing well. The second call for proposals had begun, and the DBSA anticipated good progress. The DBSA management gave further detail and assured the Committee that the DBSA remained financially sound, underpinned by its investments made to ensure that the DBSA had the financial resources to continue to execute its mandate. The DBSA carefully managed its cost base so that it remained within prudential levels of cost relative to income so that at the end of each financial year the DBSA realised a surplus that enabled it to continue its operations into subsequent years and allowed it to access capital in the open market which could then be deployed for infrastructure development. DBSA remained committed to supporting municipalities with focus on human and institutional capacity building and funding. Increasingly DBSA was lending less to metros, but was providing the expertise on planning, because they were increasingly able to raise debt [loans] on their own on the open market. The DBSA had grown to become also an infrastructure bank for all national infrastructure sectors. An increased involvement was envisaged in the health and water and sanitation sectors particularly in public private partnerships. The DBSA was also supporting independent power producers of renewable energy. The DBSA also envisaged a role in the transport infrastructure development programme. The DBSA had a huge role to play in the Southern African Development Community. DBSA was considering markets beyond SADC in order to capitalise on emerging market opportunities to support the footprint of other partners such as the New Path for African Development and the Public Investment Corporation. The DBSA had been designated as one of the development banks to cooperate in the BRICS framework agreement.

African National Congress Members appreciated the DBSA's elaborate and precise report and the documents received in good time. They sought clarity on the DBSA's internal capacity, the DBSA's retention strategy, the DBSA's municipal project development plan, and asked if the rural municipalities had the expertise commensurate with the DBSA's aims. The DBSA's support for the municipalities was appreciated but the grant fund appeared to lack monitoring tools. How far had the DBSA progressed in supporting the secondary municipalities and helping them to develop capacity? They also asked that the Committee review all the DBSA's municipal interventions, were puzzled that the number of municipalities targeted for turning around was expected to increase from the present six, highly appreciated the DBSA's targets for its knowledge sharing exercise but were concerned that Members of Parliament were not always considered as critical role players in these dialogues. They also asked how the DBSA ensured that suppliers were nurtured to provide services sustainably and competitively. Also BRICS intended to establish a development bank just for the BRICS countries. What was DBSA's view?

Democratic Alliance Members also appreciated the presentation, but asked why the former CEO had left and when he would be replaced permanently. They asked if any interviews had been held for the post of head of the International Division. The Jobs Fund was much cheaper than many other job creating proposals and certainly had the Democratic Alliance's support, particularly because it required matching by the private sector. However, disbursing R1.8 million, as reported by the Deputy Minister for the past year, was a fair performance for the Jobs Fund, but its new target of R5 billion appeared quite ambitious. There was some alarm in the press at the early end to the second phase of applications, and the DBSA was asked to clarify the closing date. Also the DA Members asked how the DBSA planned to increase the spend as the proposals became more marginal, if a reform of corporate governance had happened, if the shift in lending from metros to under resourced municipalities would have an effect on the DBSA's risk profile, and appreciated the DBSA's commitment to the shift into Africa but were concerned that it was 10 years too late. They also asked the DBSA to recommend that the private sector should be involved in the Presidential Coordinating Committee and not only be invited later to the Presidential Summit. It was general knowledge that the state could not work alone. The six public private partnerships in health were a magnificent step in the right direction and could afford some relief to the cost of the National Health Insurance plan. The DBSA had a huge role to play.

National Treasury explained that it was studying ways of subsidising some of the DBSA's costs.

The Deputy Minister of Finance presented the Land Bank's 2012 Corporate Plan. Government's intervention and the turnaround strategy had been successful. As a result of re-engineering, the Bank was now in a better position to make a meaningful impact in supporting the achievement of Government objectives. The Bank had reviewed its operations and improved service delivery to clients. The efficiencies gained from this process had already given the Bank good results. The Loan Book had grown significantly on the back of appropriate products being made available to clients. Bank clients had returned as the result of such improvements. Non-performing loans were continuously being brought down. The Bank was demonstrating a new commitment to development. It was even more encouraging to learn that the Bank had already exceeded the developmental target that it had set itself. The Bank also committed itself to lend an additional amount of R5 billion in development by 2016. The recently approved 2012/15 Land Bank Corporate Plan clearly demonstrated the maturity that the Bank had achieved over the past four years.

The Land Bank was one of the critical Government institutions capable of reducing the incidence of poverty and creating economic development and providing food security. The Land Bank board was very appreciative of the Committee's support over the past four years together with that of the National Treasury, the Department of Agriculture, Forestry and Fisheries, and the Department of Rural Development and Land Reform, which had ensured that the Bank was in a viable situation. Significant strides had been made in various areas of the operations of the Bank. The Land Bank had continued to improve on its controls and processes. The finances today were much healthier than before, and the Bank was more than confident that even more would be achieved. The board expected that the Bank's sustainable business model would allow it to increase its impact on development. The Bank's lending activities had been well articulated, through a model that was developed in line with the DBSA. The Bank's management noted that the Bank's cost to income continued to decline, and that the Bank had reviewed its business plan which had become old and updated it to the Fit for Future plan, the primary vehicle through which the Bank's sustainability goals would be achieved. The Bank aimed to be predictable and to enhance its customer interaction, with sustainable delivery targets. The FFF's progress was indicated. The sustainable business model was indicated. Market share, calculated from Department of Agriculture, Forestry and Fisheries statistics was indicated. The Bank remained the cheapest money-lending institution in the agriculture. Therefore it should have an impact on the rising food prices in South Africa which were among the highest in the world. Key performance indicators and sustainability benchmark indicators were given and an upward growth in development lending was projected to 2016.

A Member of the Congress of the People congratulated the Land Bank on its rapid turnaround and commended its sustainable business model, but noted, however, that the Bank was not at all worried about its loan book, whereas the commercial banks were cautious and agriculture was not the most profitable of businesses. He asked about the Land Bank's involvement in the IDASA small-scale agriculture projects, and noted agriculture's small contribution to the gross domestic product which clearly showed that agriculture was perhaps a neglected sector. Democratic Alliance Members asked if there had been any discussion with the Department of Rural Development and Land Reform on the farms which did not form part of the curatorship model. The approximately 10% figure for abandonment of farms was significance. Of especial concern was the 65% of farms that were struggling. What were the interim financing arrangements for these farmers? African National Congress Members asked how far the Bank had progressed on the repossessions of farmers, by when would these Bank's new subsidiaries be established and who would be the beneficiaries, if there was any insurance for farm workers, if there was any cap for the Bank's cost to income ratio, asked for an analysis of the jobs created as a result of the Land Bank's interventions and how many were temporary jobs, and how the Bank matched its credit risk scoring model with its intention to assist farmers who were previously disadvantaged.

Meeting report


Mr T Nchocho, DBSA Acting CEO and Managing Director, gave further detail, firstly noting the evolution of the DBSA from the early days around 2000 when it was primarily just a lender, mainly to municipalities, to the time around 2006/10 when it began to play an additional role of providing institutional capacity and implementation support also mainly to municipalities, to a point where today it aimed to establish itself as a centre of excellence for infrastructure development, not only for municipalities but addressing all national sector programmes around water, energy, transport, information and communications technology (ICT), health, education, housing, etc. (slide 2; Corporate Plan, page(s) 7). 

The DBSA assured the Committee that it remained financially sound (bar chart, slide 3; Corporate Plan, page(s) 41-45). Its stability was underpinned by the investments that it made by way of loans and equity investments to ensure that the DBSA had the financial resources to continue to execute its mandate. The DBSA carefully managed its cost base so that it remained within prudential levels of cost relative to income so that at the end of each financial year the DBSA realised a surplus that enabled it to continue its operations into subsequent years and lastly ensured a sound state of health as reflected in the DBSA's balance sheet in order to allow the DBSA to access capital in the open market which could then be deployed for infrastructure development.

The DBSA was known largely for its activities in the municipal financial space. An overview of the municipal landscape with percentage figures for eight metro core areas, 112 secondary municipalities, and 158 under resourced municipalities was given (slide 4). The key message was that infrastructure backlogs continued to be dominant and the need for social and economic development remained very high. Secondary and under resourced municipalities were particularly hard hit, since they often lacked strong economic bases and were often unable to attract the skills needed to run their institutions. Therefore there was need of special interventions. Increasingly, especially since the 2008/09 financial crisis, there had been an increasing lending by commercial banks to the metros. 

DBSA remained committed to supporting municipalities with focus on human and institutional capacity building and funding. Key DBSA support interventions were indicated for the above three categories of municipalities (slide 5; Corporate Plan page(s) 16-18, 25-27, 108-127). Increasingly DBSA was lending less to metros, but was providing the expertise on planning, because, as indicated above, they were increasingly able to raise debt [loans] on their own on the open market.

The DBSA had grown not only to become a municipal finance bank but also to become an infrastructure bank for all national infrastructure sectors (pie chart and table, slide 6). The loan book was currently just under R40 billion. That money was invested in percentage terms across the infrastructure sectors. Going forward (see the table) there was envisaged an increased involvement by the DBSA in the health sector, particularly in the public private partnerships (PPPs), in the water and sanitation area, where the DBSA had a memorandum of agreement (MOA) with the Department of Water Affairs. The DBSA was also supporting independent power producers (IPPs) of renewable energy. The DBSA also envisaged a role in the transport infrastructure development programme in which Transnet would lead the project for the expansion of rail systems and ports.

Infrastructure development implementation support to Government at national and provincial level was indicated (chart, slide 7; Corporate Plan: executive summary, page(s) iii-viii). Agreements were concluded with various departments to provide facilitation support in the following areas: institutional, policy and planning support, project development, project implementation, fund management, and advisory services. Programme expenditures incurred by the DBSA were fully recovered from the respective national or provincial departments. The DBSA had entered into formalised development partnerships or development mandates with, for example, the Department of Energy, since 2010, in the preparation of the bid processes which culminated in that Department's going to market in August 2011 to procure IPPs; the outcome had been the announcement of the successful bidders at the Conference of the Parties 17 (COP 17). The Minister of Health had designated about six hospitals that he and his Department wished to implement in the form of PPPs. The DBSA was working to undertake the feasibility study and the institutional and financial modelling. It was hoped to take at least two of those projects to market this year. 

The DBSA was supporting job creation through the Jobs Fund (table, slide 8; Corporate Plan, page(s) 115). Preliminary targets for three years were indicated. An operational overview (as at 31 March 2012) was given for applications received, grant funding approved, matched funding, total project value, and projected jobs. (Dr Paul Kibuuka, Development Fund Manager, ran the Development Fund). It was required that the sponsors or owners of a project should also make a contribution to the capital requirements of that project. It was hoped to create by means of these projects some 180 000 jobs. There would be monitoring and evaluation of the projects so that DPSA could report to the nation on the job creation impact of the Jobs Fund. Members of the public and promoters of projects were currently submitting in the second window of applications for the Jobs Fund. This window was open until the end of May. Details were available on the DBSA website.

The DBSA financed social and economic infrastructure projects in all 15 countries that formed part of the Southern African Development Community (SADC). (map, slide 9; Corporate Plan, page 21). The International Division's operations recognised the diversity and also similarities of the countries in the region, leading to a natural market segregation. Potential projects under negotiation or consideration in energy, financial services, and housing, were listed. DBSA was considering markets beyond SADC in order to capitalise on emerging market opportunities to support the footprint of other partners  such as the New Path for African Development (NEPAD), the Public Investment Corporation (PIC), and to be aligned with national Government's economic priorities as well as the broader development aspirations of the continent.

DBSA International (DBI) supported growth in SADC and beyond (chart, slide 10; Corporate Plan, page(s) 23). The pattern of change from the current structure to the proposed structure was shown. Key points included that the DBSA had begun to investigate creating a subsidiary to house the business of the International Division. It was envisaged that the shareholding of the DBI would include key local, regional and international entities, with the DBSA remaining as the majority shareholder. The intention was to create an organisation able to ring-fence its operations from that of the DBSA, allowing for improved risk management and a more focused execution of a regional mandate. The core rationale of this initiative had to do with managing and reducing the risk of the growing regional portfolio of the DBSA as well as harnessing additional funding – especially concessional funding and risk capital from like-minded development and financial institutions and international cooperating partners. It was also, among other things, strategically to position DBSA's international business in the region and the rest of Africa as a strong champion of regional projects with more strategic and financial clout. A progress report would be provided to the Committee.

The DBSA, under the Brazil, Russia, India, China, and South Africa (BRICS) group of countries framework, had been designated as one of the development banks to cooperate with other banks in the framework. The four thematic areas from the framework agreement between DBSA and the Brazil, Russia, India, China, and South Africa (BRICS) group of countries were: capital markets and intermediaries – leading to increasing access to capital markets; knowledge and institutions – leading to the exchange of knowledge and building of capacity; foreign exchange – decreasing dependency on the US dollar in the region; and trade and investment – facilitating greater trade and investments in the region (chart, slide 11; Corporate Plan: executive summary, page viii). DBSA's role was to facilitate the creation of the instruments and platforms that would be to the benefit of South Africa incorporated (SA Inc) in executing its role on the continent in infrastructure development and in the context of the BRICS opportunities being presented to both South Africa and the DBSA. This did not imply that the DBSA owned or created these instruments themselves but rather pursued coordinating the creation of such for SA Inc's benefit in general.      

(Please see presentation document for full details)

Discussion
Dr Z Luyenge (ANC) appreciated the DBSA's elaborate and precise report and commended it for ensuring that Members received the documents in good time. He sought clarity on the DBSA's internal capacity to ensure that it achieved its goals. He also asked about the DBSA's retention strategy. He asked further about the DBSA's municipal project development plan, and if the municipalities, especially the rural ones, had the necessary expertise that could be developed further in order to be commensurate with the DBSA's aims. Did the DBSA have a mega-plan to ensure that communities in the jurisdiction of such municipalities were assisted and enabled to catch up with those municipalities better endowed? He gave as an example the disparity between municipalities in the Eastern Cape.

Mr Jabu Moleketi, DBSA Board Chairperson, replied that the DBSA's mandate had changed, as Mr Nchocho had clearly indicated in his presentation. Thus the DBSA was looking at the broader market for the needed skills.

Mr Nchocho said that many of the existing staff had long tenures in the institution. The rate of turnover was lower than 10%. The DBSA was able to retain its skills, and its recruitment programme was speedy and robust. Remuneration and retention strategies were constantly reviewed. He noted that the Gauteng area was highly competitive in recruitment.

Mr Nchocho replied to Dr Luyenge on rural municipalities. This was a critical point with which the DPSA was grappling. Also there was a tendency when the DBSA withdrew from its interventions for these municipalities to retrogress. The DBSA alone could not address these disparities, so its approach was to seek a compact with the Department of Cooperative Governance, the provinces, and with the National Treasury. It sought to establish a capability probably at the provincial level and maybe at the level of districts to address these municipalities. It was very difficult to send an engineer to each small town.   

Ms Z Dlamini-Dubazana (ANC) thanked the Deputy Minister and his team for the presentation. She sought clarity on the investment banking division and large-scale infrastructure. She asked where were the programmes whereby the DBSA would achieve those projects. Had the DBSA achieved the previous programmes and were they measurable?

Mr Nchocho replied that the DBSA's main focus had been around energy and also water over the past two or three years. The DBSA had already invested just over R7 billion in renewable energy projects, and there were more projects coming through as a result of the IPP process, in which the DBSA was likely to participate to the extent of between R13 billion and R15 billion of investment. In transport it was still early days.

Ms Dlamini-Dubazana appreciated the DBSA's support for the municipalities, but it was also worrying that this grant fund appeared to lack monitoring tools. Did each municipality that applied for funding indicate why it needed money from this grant fund? If so, what was the DBSA's monitoring tool?

Mr Nchocho replied that once the DBSA had approved a transaction, a loan or a grant, and signed the necessary agreement, the DBSA had a specialist team for monitoring and evaluation who physically tracked the financial flows to the client. 

Ms Dlamini-Dubazana asked how far the DBSA had progressed in supporting the secondary municipalities and helping them to develop capacity.

Mr Nchocho asked Dr Paul Kibuuka, Managing Director: Development Fund, to respond on the training of municipal officials.

Dr Kibuuka replied that the training of municipal officials was identified mainly in two areas, in the workplace skills training plan, and in the deployment programme. The DBSA offered training in planning, finance, administration, leadership, and training in technical areas.  

Mr T Harris (DA) appreciated the presentation, but echoed Mr Van Rooyen's concern (expressed at a previous meeting) with departments and entities being like a drama society (Mr Van Rooyen's metaphor was the 'Hollywood Syndrome'). One had a similar issue with the Acting Chief Executive of the DBSA. Why did the former CEO leave and what was the time frame for his replacement appointment?

Mr Moleketi replied that the previous CEO had left at the end of March. He denied that the DBSA was a cast of actors. Mr Nchocho had been acting only since the beginning of April. The DBSA had started headhunting for the position and hoped to make an appointment by July. This was one of the primary responsibilities of the Board. South Africa was a place of opportunity and the Board had not wished to hold him back.

Mr Harris was concerned at the media reports on the prospect of Mr Mo Shaik joining as head of the International Division. What was the status of that post? What were the appointment procedures? Had any interviews been held? What experience was required for that position. Was Mr Mo Shaik indeed a candidate?

Mr Moleketi replied that a headhunter had been commissioned to search for a replacement. Every competent South African had a right to apply. As a South African, Mr Shaik had the right to apply.

The Chairperson was satisfied with Mr Moleketi's response, and disallowed Mr Harris's question on whether Mr Shaik was actually a candidate.

Mr Harris had calculated that the Jobs Fund entailed about R60 000 for every job, which was relatively good. The only scheme that was better was the Youth Wage Subsidy. However, it was much cheaper than many other job creating proposals, and certainly had the Democratic Alliance's support, particularly because it required matching by the private sector. He had read that the Jobs Fund's target now was R5 billion. This appeared quite ambitious given that one would imagine that the low hanging fruit would come in the first round. Disbursing R1.8 million, as reported by the Deputy Minister for the past year, was a fair performance, and Mr Harris failed to see how it could be increased to R5 billion.

Mr Nchocho replied that the target for next year was not R5 billion but R3 billion.

Mr Harris said that there was some alarm in the press at the early end to the second phase (window) of applications.
Could the DBSA comment on the actual deadline for the second round? The press said the end of April, the Acting CEO said the end of May.

Mr Nchocho confirmed that the second phase did close at the end of May.

Mr Harris asked how the DBSA planned to increase the spend as the proposals became more marginal.

This question appeared not to have been answered.

Mr Harris had previously served on the Select Committee on Finance in the National Council of Provinces (NCOP) in which he had met the DBSA two years ago. There was a proposal at that time to disallow related party transactions in the DBSA and for a reform of corporate governance. Did that happen?

Mr Nchocho replied that the corporate governance of the institution was such that both employees and board members were bound by the governance framework that placed prohibitions on related party transactions. Even the disciplinary code of the DBSA had been reviewed to ensure that any offence arising under this violation would be dealt with accordingly.

Mr Harris asked about the shift in lending (Corporate Plan, page 4) from metros to under resourced municipalities. This was needed but surely it would have an effect on the risk profile? The ability of a metro to repay was surely much higher than the ability of a marginal municipality.

Mr Moleketi acknowledged the risk of default, but it was necessary to step back and consider the role of a development bank, which was first of all to intervene in those areas where development was necessary and take the risk that ordinary commercial funders were not prepared to take. This was DBSA's specific role, and the DBSA acknowledged that it came with risks. It was not the DBSA's role to compete directly with the private sector.

Mr Nchocho confirmed that the DBSA was committed to ensure that its lending did not compromise its stability. The DBSA was grateful to the Minister and Deputy Minister of Finance and the team at the National Treasury for their supportive and mitigating measures.

Mr Harris appreciated the DBSA's commitment to the shift into Africa. However, he was concerned that it was 10 years too late. Now South Africa was competing with the rest of the world and had missed the competitive advantage it would have had when Members were making their speeches on the African Renaissance.

Mr Nchocho was not sure that the shift into Africa was too late; it was a progressive approach, as the DBSA had formerly been an exclusively South Africa-only institution. It was a prudent move done in a measured way.

Ms Sinazo Sibisi, DBSA Group Executive: Group Strategy Marketing and Communications, replied that the DBSA sought to assist regional communities, and New Path for African Development (NEPAD) and African Union (AU) processes in better planning for infrastructure and with a more integrated plan in project preparation in order to make projects more 'bankable'. This latter was of key importance in involving the private sector while advancing developmental objectives.  

Mr D van Rooyen (ANC) welcomed the presentation. He asked that the Committee, at some stage, take stock of all the DBSA's interventions in municipalities.

Mr Nchocho noted Mr Van Rooyen's observation. To avoid judging itself, it might be advisable for the DBSA to commission an independent study and perhaps the management could make a proposal to the board as to how the study should be done.

Mr Van Rooyen expected that the number of six municipalities targeted would decrease in the next financial year, but the opposite was reflected in the Corporate Plan. He was confused. What did this suggest? Was one expected more municipalities to be turned around?

Dr Kibuuka replied that the numbers in the balanced scorecard on the number of municipalities supported was an indicator targeting the DBSA's support to the investment business of the DBSA, and because it was an internal investment support for turnaround, the DBSA assessed on average how many municipalities on average the 'work out unit' of the DBSA supported on turnaround, with especial reference to distressed municipalities to which the DBSA had lent and which might struggle to pay back loans. On average the DBSA had about 10 municipalities to which the work out unit provided support. The DBSA was now looking at providing direct support to the work out unit in terms of institutional and financial aspects to turn around those municipalities. To begin with, the unit would support six, up-scaling to eight, and eventually 10. The DBSA was thinking of increasing this number going forward by way of increasing its support to under resourced municipalities. It should be noted that the Siyenza Manje programme had been handed back to Government, with the technical aspects in the hands of the Department of Cooperative Governance and incorporated into the Municipal Infrastructure Support Agency (MISA). All the financial aspects had been handed back to National Treasury under the municipal finance improvement programme.    
 
Mr Van Rooyen alluded again to the same programme of the Development Fund and the intake rate of the Academy. For three consecutive financial years, from 2012 to 2015, the DBSA was targeting an intake of 10 000 consistently. What were the variables that informed these figures and this simple conclusion? This question cut across all the other figures given in this particular Development Fund table.

Dr Kibuuka replied that the DBSA worked with the municipalities to determine their training needs, with a focus on the secondary and under resourced municipalities. The DBSA, however, also supported metros. It also referred officials to the Academy. The DBSA had also supported the national councillor induction programme in partnership with the South African Local Government Association (SALGA) and the Department of Cooperative Governance. Follow-up training programmes had been identified. These three sources of information had assisted the DBSA to determine that these numbers should be held at around 10 000.

Mr Nchocho took note of Mr Van Rooyen's request for a rationale.

Mr Van Rooyen said that this issue of numbers would recur. He highly appreciated the DBSA's targets as part of its knowledge sharing exercise to have six round tables in 2012/13. Why six? Was it a focused dialogue?

Mr Van Rooyen, however, was concerned that in some instances Members of Parliament (MPs) were not considered as critical role players in these dialogues. What was DBSA's approach.

Ms Sibisi replied that the DBSA usually invited members of academia, people from Government departments, and key experts local and international, to these dialogues. The DBSA had had discussions with the Portfolio Committee on Cooperative Governance and Traditional Affairs and with the Speaker of the National Assembly in how to work with the parliamentary committees. These discussions should be taken forward. 

Mr Van Rooyen observed that the DBSA's procurement policy was very silent on the DBSA's targets and how the DBSA was assisting South Africa to meet its developmental objectives. How did the DBSA ensure that suppliers, more especially those from previously disadvantaged communities and the intended beneficiaries of Black Economic Empowerment (BEE), were nurtured so as to continue to provide services sustainably and competitively. He gave as an example a scheme launched by Eskom.

Mr Nchocho said that it was important to remember that the DBSA was a financier. So it would give money to a municipality or to a state-owned enterprise (SOE) or to a private company, and it was that client entity which then undertook the actual procurement of the engineering and construction services. However, the Board, in particular the sub-committee on investment and credit, was very insistent on the DBSA as an organisation compelled these client entities to embrace the procurement, empowerment and enterprise development objectives of the country. This was why, even in the IPP programme, as the DBSA advanced money, it required clarity on commitments that project owners made on how communities in the Northern Cape, Eastern Cape or elsewhere would benefit. However, the DBSA could exert influence only through its financing arrangement, since the DBSA did not do the procurement itself. 

Mr Van Rooyen asked about the DBSA's projected borrowing requirements of approximately R9.8 billion in 2015, which were lower than the R10.3 billion projected for 2014. What were the reasons? One would have expected an upward trend.

Mr Nchocho replied that the numbers were derived from the DBSA's lending and investment activities. The numbers tended to vary from year to year and the DBSA managed them within certain prudential limits as set by the National Treasury regarding the level of gearing that the DBSA could take.

Mr Van Rooyen said that the media had reported that BRICS intended to establish a development bank just for the BRICS countries. What was DBSA's view?

Mr Moleketi replied that the BRICS was an interesting forum of powerful developing nations. The DBSA wanted to see improved trade between the BRICS countries. One of the areas was trading and investing in local currencies.  

Mr D Ross (DA) asked for more on the role envisaged for the DBSA as a centre of excellence in infrastructure building. Mr Ross asked that, to broaden the base of funding and the role that the private sector should play, the DBSA should recommend that the private sector should be involved in the Presidential Coordinating Committee and not only be invited later to the Presidential Summit. It was general knowledge that the state could not work alone.

Mr Nchocho replied that the DBSA had attended the Presidential Infrastructure Commission. The private sector had been invited to participate in the entire programme. However, the strategic planning was handled by the Cabinet through the sub-committees under the Public Investment Corporation (PIC).

Ms Sinazo Sibisi, DBSA Group Executive: Group Strategy Marketing and Communications, replied, on the centre of excellence concept, that in accelerating infrastructure delivery and quality it was necessary to move beyond finance to addressing challenges in the whole value chain. One of the key challenges, as everyone knew, was around planning with effective developmental impact. She explained what was meant by this. Depending on the institutional capacity of the client, it might be necessary to assist the client in implementation of projects. So DBSA was having to play a more strategic role in working across the value chain to accelerate the delivery of infrastructure, within South Africa and across the continent. The DBSA sought to be a centre of excellence in accelerating delivery, in enhancing developmental impact, and in making sure that the interventions were sustainable.  

Mr Ross's colleagues had alluded to the infrastructure backlogs. He was pleased with the focus on the smaller municipalities.

Mr Moleketi replied that the delivery of infrastructure was not just solely for a Government entity, but Government's role was to coordinate and to ensure timely delivery. The role of institutions such as the DBSA was to produce packages that attracted the private sector in the delivery of that infrastructure. Ultimately it was the private sector which was going to deliver this infrastructure. Bringing in the private sector had to do with timing and sequencing. It had to be understood that the private sector had specific interests as defined by the interests of shareholders. Government had a bigger pool of shareholders, namely the South African citizens. In most instances those two did not necessary sit very comfortably side by side. Thus the timing would be determined by those who held a broader mandate on behalf of the citizens of South Africa. 

Mr Ross alluded to the energy problems with the distribution lines, in which the backlogs could be close to R40 billion, up from R32.6 billion two years ago, with ever increasing losses on the networks. The funding seemed to be hugely problematic. The Financial and Fiscal Commission (FFC) had proposed a once-off conditional grant: of course, such would not be acceptable for banks – but the DBSA should apply its collective mind as to how the solution should be funded. It was a constitutional problem that the networks belonged to the municipalities but municipalities seemed to think that they were not responsible for maintaining the networks, because Eskom was selling the power and that was a national competence. This was an area in which the DBSA, by way of funding, could make a huge contribution.

Mr Nchocho replied that the Department of Energy had invited the DBSA to discuss how the two parties could work together for the execution of a specialised grant for upgrading the distribution sector assets. Upfront, Eskom was investing in generation but transmission, but the problems were in distribution. 

Mr Ross was very pleased that, in terms of energy, the independent power producers (IPPs) had taken off so well. It was a little bit late, but, taking into account present supply constraints, this was a step in the right direction.

Mr Ross said that the six PPPs in health were a magnificent step in the right direction. He asked about the dates of implementation. This could afford some relief to the cost of the National Health Insurance (NHI) plan. The DBSA had a huge role to play.

Mr Nchocho replied that the DBSA hoped to take at least two PPPs to market in the course of this calendar year.

Mr Ross referred to the problem with the water infrastructure, especially the sewerage purification works all over the country. The Minister of Water and Environmental Affairs had even said that these should be privately managed. Would the DBSA play a role in funding these projects and ensuring compliance?

Mr Nchocho replied that the DBSA had not really addressed this issue but noted Mr Ross's observation.

Mr Moleketi, emphasised the above, pointing out that the DBSA was not the originator of projects. Its role was, however, a complex one, but where it acted as an adviser, when it saw a problem, it made proposals, but left it to the originator to take the next step.

Mr Moleketi noted that in Africa there was unequal development. He foresaw interventions for the next 50 years, in which there would be a role for all companies in the development of the African continent. The development path of China had taken close to four decades from where some African countries were in the second decade of the 21st century to where China was now. It was necessary for the DBSA to have medium to long term goals such as the current leadership of the South African Government had adopted. The DBSA would partner not only with South African companies but also domestic ones.

Mr Moleketi said that water losses in most municipalities were around 20% to 30%. Rehabilitation of old infrastructure was therefore a serious challenge.

Mr Lefentse Radikeledi, Director: Development Finance Institutions, National Treasury, said that DBSA's was expected to expand its role in infrastructure development in South Africa; however, the DBSA's balance sheet showed that the DBSA was stretched, and it would at some point need to be assisted. He explained why. National Treasury was studying ways of subsidising some of the DBSA's costs.

The Deputy Minister said that this information brought comfort to the Committee and to the DBSA that the state would support it going forward. 
 
The Chairperson did not allow follow-up questions. It was clear that it would be valuable to visit the DBSA, an institution at the centre of infrastructure development in South Africa, on the continent of Africa, and in BRICS. It was important to examine further the DBSA's capacity building programme at local level.     

Land Bank Corporate Plan 2012/15 presentation
The Deputy Minister of Finance presented the Land Bank's 2012 Corporate Plan. The Land Bank was going to be celebrating its centenary in October, a year after the Public Investment Corporation (PIC)'s, and in the same year as the liberation movement was celebrating 100 glorious years. It was well-known that throughout the Land Bank's history it had undergone serious challenges and changes. Therefore one was looking forward to the outcome of the management's initiative to publish the Bank's history which would have lessons for all of us. When the Bank faced challenges in governance and lack of direction, Government had to step in and bring it back to its rightful path. This intervention had been successful, and the days of reporting on the turnaround strategy were now over.

The Land Bank's presentation focused on the Bank's concentration on agriculture since then. This included information on how this was achieved and how the Bank's loan book was increased, the impact on development, and the forward-looking 2016 corporate landscape. The Bank had made some significant strides, on which the management gave details. As a result of re-engineering, the Bank was now in a better position to make a meaningful impact in supporting the achievement of Government objectives. The Bank had undertaken steps to assist it to review its operations and improve service delivery to its clients. The efficiencies gained from this process had already given the Bank good results. The Loan Book had grown significantly on the back of appropriate products being made available to clients. Bank clients had returned as the result of such improvements. Non-performing loans were continuously being brought down. The Bank was demonstrating a new commitment to development. It was even more encouraging to learn that the Bank had already exceeded the developmental target that it had set itself. The Bank also committed itself to lend an additional amount of R5 billion in development by 2016. This was one of the targets set out in the Bank's five year plan, on which the management gave details. The plan had recently been approved by the Land Bank board and the Shareholder, the Minister of Finance. It began to give a view of what one could expect from the Bank. Through this additional set of STRETCH targets the Bank was making a statement that demonstrated its commitment to making a meaningful contribution to the developmental objectives while ensuring long term stability of the Bank. The recently approved 2012/15 Land Bank Corporate Plan sought to explain how the elements of the journey came together and what the associated targets would be at each point. It clearly demonstrated the maturity that the Bank had achieved over the past four years. The Shareholder further committed itself to policies that had an impact on improving the lives of South Africans. The Land Bank was one of the critical Government institutions that were capable of reducing the incidence of poverty and creating economic development and providing food security.

Mr Patrick Mathidi, the Land Bank board member representing the board chairperson, said that the board was very appreciative of the Committee's support over the past four years. In addition, the three Government departments – the National Treasury, Agriculture, Forestry and Fisheries, and Rural Development and Land Reform, had also ensured that the journey taken had put the Land Bank in a viable situation. He thanked the Bank's management for its commitment in ensuring that the Land Bank moved from strength to strength. The Bank's achievements were largely to the credit of the management (executive) team. The board members were proud to have been part of that journey. Significant strides had been made in various areas of the operations of the Bank. Specifically in the area of development, R1 billion had been committed to development over the 'last' two years ending March '2012/13'. The target had already been exceeded for the previous financial year, 2011/12. As the Deputy Minister had indicated, over the next five years, the target was about R5 billion, earmarked specifically for development. The Land Bank had continued to improve on its controls and processes. The finances today were much healthier than before, and the Bank was more than confident that even more would be achieved. The board expected that the Bank's sustainable business model, as the CEO later explained, would improve the way in which the Bank conducted its business and allow it to provide more necessary focus on and increase its impact on development. The Bank's lending activities had been well articulated, through a model that was developed in line with the DBSA. The Bank's positive performance in a sea of challenges had been very encouraging. The CEO later indicated the Bank's objectives and targets for the next five years.

Mr Phakamani Hadebe, the Land Bank CEO, gave a short presentation. He also provided, as a supplementary document, a comprehensive performance report on the Bank's Corporate Plan. He concentrated on the Land Bank's fulfilment of its commitments to the Committee on 18 October 2011, and how the Bank envisaged the way forward. He also presented a five year programme – the 2016 corporate landscape. The Corporate Plan informed the Bank of what it was to achieve over the next three years. The Corporate Plan was for the next three years in line with the Medium Term Expenditure Framework (MTEF). The 2016 corporate landscape was for another two years. This was important because for so long, when the Bank visited the Committee, it had looked at the market conditions. Based on those market conditions, the Bank had determined how it expected to perform and, for example, how its book would grow, without looking at the broader picture of the Bank's sustainability. Importantly, the Bank now had, annually, sustainable ratios. He highlighted the regulatory framework, with particular reference to the National Credit Act 2005 (slide 2). He referred to the three phase turnaround strategy from September 2008 to March 2012 (slide 3). All that the Committee and the Standing Committee on Public Accounts (SCOPA) had required, had been done. Also the human resources (HR) capacity requirements had been dealt with. The Land Bank was content with using the SAP system of information and communications technology (ICT). The balance sheet continued to improve. The Land for Development Finance Unit (LDFU) was for projects outside the Land Bank's mandate. The Bank was close to closing a deal on its biggest LDFU transaction that was almost 50% of the whole project. It was hoped that this would be concluded by September 2012. The cost to income continued to decline.

The Bank had reviewed its business plan which had become old and updated it to the Fit for Future (FFF) plan, the primary vehicle through which the Bank's sustainability goals would be achieved (slide 4). The FFF indicated where the Land Bank should be by 2016. The Bank aimed to be predictable and to enhance its customer interaction, with sustainable delivery targets.

The FFF's progress was indicated. (Slide 5; Corporate Plan, page 11). Mr Hadebe noted that a business unit focused on emerging farmers had been established, and reviewed other progress (see document). Turnaround times had been improved, with an emphasis on customer centred service. Mr Hadebe acknowledged that there was still room for improvements.

The sustainable business model was indicated. (Chart, slide 6; Corporate Plan, page 10). Mr Hadebe noted that the Bank did not expect to make a profit out of the retail emerging small-scale farmers, but should obtain the advantage of having a bigger commercial side. The Bank would not be able to finance the emerging small-scale farmers by going to the money markets and borrowing. The investors would say that the risk was too high. So the Bank had decided to ring-fence the retail emerging market (REM). The Bank's profits from the Land Bank Insurance Company which was the Bank's subsidiary plus the profits made from the retail commercial banking and business and commercial banking, which was the commercial side of the Bank, was directed to the REM side of the Bank. He recalled Ms Dlamini-Dubazana's questions in a previous meeting and how the Bank had explained how the Department of Agriculture, Forestry and Fisheries (DAFF) would work with the Bank. The Bank now had results and enabled the Bank to concentrate on its core business. The REM side was meant for the small-scale farmers who did not have access to credit. 

Mr Hadebe was happy to report that the loan book performance grew by 47.4% (against a target of 10%) and non-performing loans (NPLs) declined by 39% as at February 2012 (graph and bar chart, slide 7; Corporate Plan, page 23).

Impairment was reduced by 35% as at February 2012 (graph and bar chart, slide 8; Corporate Plan, page 30).

The Bank's development targets from 2011/12 to 2013/14 were indicated (slide 9; Corporate Plan, page 22). Mr Hadebe was happy to announce the figure for total disbursements of R833.4 million, apportioned between REM, Retail and Commercial Banking (RCB) and Business and Corporate Banking (B&CB). Targets had been well exceeded. Out of the R1.4 billion that was non-performing, since the transfer to the National Treasury, the new non-performing loans that had arisen over four years were less than R50 million, because the Bank had been able to establish proper control systems. 

Market share, calculated from DAFF statistics was indicated (graph and bar chart, slide 10). The Bank remained the cheapest money-lending institution in the agriculture. Therefore it should have an impact on the rising food prices in South Africa which were among the highest in the world. If the Land Bank could have a market share of at least 35%, that would allow the farmers to add another 10% to 15% as savings in their operations. These savings would be transferred later to South Africans themselves.

Progress to date of the curatorship model was indicated (slide 11; Corporate Plan, page 13). Mr Hadebe acknowledged that the Bank had been struggling in this respect. The process had been rather slow. There was now a legal agreement, but it had become clear that if the Bank just put money in again, it would have the same problem again. It was now hoped to complete a report on this subject by August 2012.

The Land Bank's performance on the social accounting matrix (SAM) and development impact of the Land Bank's lending portfolio for the period 01 April 2010 to 31 March 2011 was given (slide 12; 2010/11 Financial Report, page 28). Mr Hadebe referred to the SAM that was presented the previous year on the impact of the Land Bank loans and noted that for each R1 million that the Bank disbursed, eight to 10 jobs were created not just in agriculture but throughout the business sector. If one was able to grow the Land Bank, source cheaper funding, and remained efficient, this was an area in which the Bank could assist the creation of jobs. 

The 2016 corporate landscape and steps to achieve it were indicated (slide 13; Corporate Plan, page 10). The Land Bank should, in 2016, have a market share of 35%. The development book should, in different sectors, be at least 15%. This meant that over the next five years the Bank would have to put in at least another R5 billion into development. Mr Hadebe noted problems with the reliability of data for the past five years. The Bank sought to be in the top three of companies for which to work in the public sector. 

Key performance indicators and sustainability benchmark indicators were given (tables, slide 14; Corporate Plan, page 3; see also Land Bank KPIs Status Report 29 February 2012).

An upward growth in development lending was projected to 2016 (graph and bar chart, slide 15; Corporate Plan, page 10).

Discussion
Mr N Koornhof (COPE) congratulated the Land Bank on its achieving such a good turnaround in a short time.

Mr Koornhof noted, however, that the Land Bank was not at all worried about its growing loan book, whereas the commercial banks were cautious about their loan books, and agriculture, in these difficult times, was not the most profitable of businesses. Could the Land Bank give the Committee its assurance that it was comfortable with its loan book and would not surprise the Committee in the next two years?

Mr Hadebe replied that the Bank's non-performing loans in the past three to four years had been less than R50 million.  He assured Mr Koornhof that the Bank was comfortable  with its loan book, but pointed out that the investment in agriculture was growing exponentially in South Africa, because the South African agricultural business was now targeting the rest of the continent which offered opportunities to South African farmers. Over the last two or three years there had been an improvement in the risk management processes. Therefore the improvement from a low base was significant. However, some of the macro factors at a country level applied also to the Land Bank.

The Bank was concerned that at one stage it had too conservative an approach to lending compared to the commercial banks and as a result was losing a lot of business. However, the Bank was now seeing the positive results of that approach in that impairments were decreasing. The Bank's norms and standards were very conservative. The Bank had put in place a model which the Bank called provision of aftercare support. This sought to remove impediments to access to credit.
 
Mr Ross had found a reference, through the Google search engine, to the IDASA small-scale agriculture projects (www.idasa.org/our_products/resources/output/small_scale_agriculture_in), in which, he thought, the Land Bank was involved.

Mr Ross asked for feedback on the R1 billion for emerging farmers. This was also good news, and he was glad to see that IDASA was involved in it.

Mr Hadebe replied that the Bank was happy with IDASA's efforts.

Mr Ross asked about agriculture's contribution to the gross domestic product (GDP), which was only 2.3%, compared to the manufacturing sector's contribution of 14.5%, which clearly showed that there was a niche market in terms of the jobs that could be created be agriculture. Thus there should be a concerted focus on agriculture, which was perhaps a neglected sector.

Mr Hadebe replied that agriculture's contribution of 2.3% was that of the primary sector of agriculture. The contribution of the entire agricultural sector could range from 6% to 8% if one considered the entire food chain. He agreed with Mr Ross that many opportunities existed. If one had read the New Growth Path, one would have noted the growing role of agriculture.

Mr Ross commended the Bank on its sustainable business model and on its turnaround strategy. The problem seemed to be again the retail emerging markets side that needed to be subsidised via the business model. Members had not been fully briefed on how this model worked.

Ms A Steyn (DA) from the Portfolio Committee on Agriculture, Forestry and Fisheries asked if there had been any discussion with the Department of Rural Development and Land Reform on all the other farms. The curatorship model was based on a particular set of 208 farms. What about the other farms that did not form part of this curatorship model but which could move into this programme at a certain stage?

Mr Hadebe replied that the Department of Rural Development and Land Reform was part and parcel of the process of trying to resuscitate those farmers. Cabinet had indicated that the Bank would use this as a pilot project. If it worked, it would be used as a model for the other farmers. The Bank welcomed the growing role of Government in agriculture. 

Ms N Twala (ANC), the Whip of the Portfolio Committee on Agriculture, Forestry and Fisheries, asked what were the causes of the impairment (slide 8; Corporate Plan, page 30).

Mr Lebogang Serithi, the Land Bank CFO, replied that impairments were 'a good thing', because of ongoing recovery. In terms of the Bank's model, they took into account they took into account the latest history of recovery. As a result of additional recovery, the Bank had to impair less of the loan book itself.

Mr Ross said that the curatorship model was highly significant. Especially significant was the approximately 10% figure for abandonment of farms. He was especially concerned about the 65% of farmers who were struggling. What were the interim financing arrangements for these people?

The Deputy Minister replied that the Bank was there to assist those who were struggling. It was working with the DAFF and with the Department of Rural Development and Land Reform to assist.

Mr Serithi, who was running the project to assist the 65% of farmers who were struggling, replied that the Bank had conducted an exercise to verify the reasons why the bona fide farmers who wanted to farm, but for various reasons could not, were failing; the Bank had found that most of them were actually financing themselves out of internal working capital, meaning that they had scaled down their farming activities to allow them to farm in a small area. There was a farmer with 80 acres, but who because of lack of capital was farming on only one hectare. This demonstrated that there was scope to increase production on that farm.   

Ms Twala asked how far the Land Bank had progressed on addressing the repossessions of farmers.

Mr Hadebe replied that for those who did not want to pay the Bank would have to exercise its rights.

The Deputy Minister said that to those who were keeping the farms but not paying the Bank was saying that if the farm was not making a profit the farmer should be asked why he was keeping it. If the farm was making a profit, then the farmer should be asked why he was not paying.

Ms P Adams (ANC) noted that the Land Bank operated a subsidiary, the Land Bank Insurance Company, and wanted to establish two new subsidiaries. By when would these subsidiaries be established and what were the conditions that the Bank must meet in regard to their establishment? Who would be the beneficiaries and was there any insurance for farm workers.

Mr Hadebe replied that the Land Bank had had insurance companies since 1957. These had been requested by the farmers themselves to provide long term, mainly life insurance. However, the Land Bank had soon seen the need to introduce short term insurance, for example, of crops. The laws had changed, and one insurance company could not provide both types of insurance. The Financial Services Board (FSB) had approved the Bank's plans. The target was all farmers, not just farmers assisted by the Land Bank. The Bank was also developing products to assist small-scale, emerging farmers, as insurance was very expensive. Insurance for farm workers was something which the Bank could consider. 

Mr Van Rooyen noted the ambitious plan to 2016 and  asked if there was any cap for the Bank's cost to income ratio.

Mr Hadebe replied that in the normal environment of a bank, one was expected to have a cost to income ratio of about 50% to 55%; the sustainability model indicated what was the range of the risk that the Bank would be able to take. It looked very high, but it was necessary to point out that the Bank was dealing with legal issues, so the cost on the legal side was very high, in which the Bank received considerable professional help. On the other side the Bank was establishing a new model to take it forward, and this was costly. The Bank had taken a conscious decision that, as a Government entity, it should emphasise the Bank's revenue generating activities. As to cost to income itself, the Bank was doing very well. If one considered the commercial banks, and took out the non-interest income, their cost to income ratio rose to a level far above that of the Land Bank. From the Land Bank's book, interest income was 99% of the Bank's income. The Bank did not have other instruments to enable it to earn income other than by interest.

Mr Van Rooyen noted the ambitious plan to 2016. asked for an analysis of the jobs created as a result of the Land Bank's interventions. How many of them were temporary jobs?

Mr Hadebe replied that the Land Bank provided money for operational purposes and for construction, which had the added benefit of creating jobs, and was preferred by the Bank. This was separate from money loaned which merely sustained existing jobs. 

Mr Van Rooyen noted the ambitious plan to 2016.  asked how the Bank matched its credit risk scoring model with its intention to assist farmers who were previously disadvantaged.

The Bank replied that the Bank had addressed this operationally. It had a policy tailored to each specific business unit. In the REM, one of the key things that had been an impediment was lack of access to credit, because most of the farmers who were development clientele did not have assets. By assets, the Bank meant balance sheets. Such clients did not have securities which they could pledge. The Bank had addressed that issue by putting in place a specific credit policy that did not require those conditions for providing a loan, but rather securities such as cattle.

The Chairperson observed that the Land Bank's turnaround was one of the success stories of which one could be proud. The board and management team had moved the Bank, with the support of the National Treasury and in particular of the Deputy Minister, from a near disastrous situation. He valued the diligence and attention to detail of National Treasury's staff. The Committee congratulated the Land Bank, urged it to keep up the good work, and assured it of its support. It hoped to visit the Bank and have a full day for interaction. 

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