Land Bank on their Corporate Plan for 2015/16 – 2017/18 briefing

NCOP Finance

16 February 2016
Chairperson: Mr C De Beer (ANC: Northern Cape)
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Meeting Summary

Land Bank briefed the Committee on its Corporate Plan. It noted that it shares characteristics of both a commercial bank and a Development Finance Institution(DFI). It would be meeting in the following week to approve the final Corporate Plan, which would be subject to approval of the National Treasury (NT). It was noted that Land Bank has one shareholder and its role and policies are set by that shareholder. In the last year Land Bank had focused on introspection and review of its role, and optimisation of the asset base of around R30 billion, attempting to achieve whatever it could with that money. Fit for the Future was an attempt instituted by a former Chief Executive Officer to clean up governance, and that had now moved on to stability and optimisation phases. Many of the key staff were new, and there was a new focus, looking at the mandate, business and funding model and systems. Land Bank is considerably smaller than many other development finance institutions, and does not have the same access to capital. It had been seen in numbers of new clients and resuscitated farms. A key point was that, unlike commercial banks, Land Bank must support at risk farmers and it has come up with various drought-relief assistance. It was still trying to finalise the AgriBEE corruption issues, although none of the current staff were implicated, and it had a number of court cases pending.

Members were appreciative of the opportunity to engage with the Annual Report and commented that they would like to engage on the Corporate Plan also. Questions covered the funding models, the impact of imports, how the Bank would help disadvantaged farmers to access land and ensure food security. Members asked if South Africa was using funding for agriculture in the right way, whether it was correctly harnessing water resources, if there was enough assistance to the food-producing provinces, and wanted to hear more about the actual impact on the ground, although Members did appreciate the focus on good governance for the moment. They wondered if the amounts for emerging farmers were adequate. Members asked for the asset optimisation and concepts to be explained more simply, and enquired how it was dealing with undeserving people getting loans, recovery of debt, and “bad” debt. Members asked if the offices were sufficiently accessible to newly emerging farmers.  Do any people that were involved in these cases still work with the Land Bank? He asked about the demographics of those who, the Land Bank assists and asked if the Land Bank is sufficiently accessible to newly emerging farmers. Members felt that its technical capabilities needed improvement and wondered if it had its own research capabilities and what conditions were attached to funding. Members asked about interest rates, the types of loan products, losses through corruption, and marketing assistance for the emerging sector. Members and the Bank recognised that one of the problems was the silo approach and the Chairperson stressed that the Committee would try to create the opportunity to bring all interested parties to the table and encourage greater cooperation.

The Committee adopted minutes of 2 February 2016.

Meeting report

Land Bank Corporate Plan for 2015/16-2017/18: Land Bank Briefing
The Chairperson commented that it would be useful for the Committee to engage more often with the Land Bank, given that it was an important entity. He noted the apologies of the Land Bank Chief Executive Officer.

Mr Mabotha Moloto, Chairperson, Land Bank Board, welcomed the assistance of the Committee in overseeing the Land Bank’s Corporate Plan. He announced that the Board would be meeting in the following week to approve the final Corporate Plan, which would be subject to approval of the National Treasury (NT).

Ms Loyisa Ndluvo, Executive Manager: Strategy, Marketing, Communications and Policy, Land Bank,  said that the Land Bank has focused on introspection and review of its role and optimisation of the asset base. The asset base is currently R30 billion and the Land Bank wants to ensure that it is doing everything possible with that money. The previous Chief Executive Officer (CEO) had created a governance institution called Fit for the Future (FFF) to clean up the governance of the Land Bank. After this clean up, the CEO moved to a second phase to stabilise, and that would then be followed by a third stage to optimise the Land Bank’s practices.

The team at the Land Bank was very new. Ms Ndluvo, together with the new Chief Executive Officer, and many other key staff only arrived in the current financial year.

She noted that the Corporate Plan for the 2016 financial year has 30 measurables on its scorecard. Most of these measurables focus on broadening participation. Unfortunately, the Land Bank is still very reliant on manual capabilities, although it is working on improving its internal capabilities.

The objectives of the organisational review that was conducted as a result of the National Treasury’s directive focused on the Land Bank’s mandate, its business model, its funding model, and its systems. Ms Ndluvo noted that the Land Bank is a much smaller development finance institution (DFI) than most others, and that it does not have access to the kind of capital that many similar entities enjoy. The organisational review aligns well with the goals of the Corporate Plan – for instance, improving financial stability.

Mr Bennie Van Rooy, Chief Financial Officer, Land Bank, set out the financial targets. He presented a chart that showed how the Land Bank has met all its financial targets for 2016. Total assets amounted to R39.4 billion, compared to a budget of R39.9 billion. From the customer perspective, the Land Bank had seen growth in the number of new clients and resuscitated farms. Of the 551 staff,  there was 56.8% representation by African, Coloured, and Indian people and females comprise 45.4%.

He commented that in relation to the drought, the Land Bank is doing what it can to support at-risk farmers. Of course, in many grain-growing areas there has been below-average rainfall. Economic projections for grain vary from week to week. The Land Bank’s exposure has been taken seriously. For drought relief assistance, measures put in place by the Bank included
- Carryover of a debt facility for production credit
- Restructuring and capitalisation of arrears/installment due
- Granting repayment holidays depending on cash flow projections
- Adjusting loan to value from 60% to 75% (fully collateralised)
- Extending the repayment period for the remaining term of the loan
The Land Bank has already extended R35 million to emerging farmers. The Land Bank will enter into commercially viable support structures to support its customers, both commercial and cooperative. Loans will be extended under National Credit Act rules.

Ms Ndluvo moved on to Agri Black Economic Empowerment (BEE) issues. She noted that these were a legacy issue. None of the current Land Bank members are implicated in the AgriBEE corruption case against former Land Bank members. In order to avoid prejudicing the case and subverting justice, the Land Bank should not and would not comment on that case.  The Land Bank’s focus now should be on the future, on modernisation, and good governance.

The Chairperson noted how important it was to engage with the Annual Report. He was glad that all provinces were represented due to the importance of these issues in upcoming provincial elections.

The Chairperson wanted to ask about the funding model. He asked if Land Bank had given consideration to how to fund young entrepreneurs, to bring young people into agricultural business. He noted that there was a drought in production due to imports and wanted comment on how that could be addressed. With regards to land and emerging farmers, to what extent does the Land Bank help disadvantaged farmers access land and ensure food security? He asked for comment also on whether South Africa was using the funds set aside for agriculture the right way? He also wondered if the country was using the Orange River and the Vaal River correctly? There are insufficient dams on the Orange River and too much water was running into the ocean unused. He noted that National Treasury was working on arranging for the building a dam on the Orange River, but there was a need to focus on the usage at the present.

Mr O Terblanche (DA: Western Cape) wanted to hear more about the Land Bank’s support for emerging farmers. He noted that this presentation focused more on the good governance clean up rather than on-the-ground impact. He hoped in the future to receive more information on the impact on the ground, although he was glad to  hear that the Land Bank is restructuring. He saw R35 million for emerging farmers as insufficient. He said that there has been very little specific information on drought interventions.

The Chairperson announced that the President had met with the appropriate ministers during the last week, in preparation for the budget to address the drought issue.

Mr F Essack (DA: Mpumalanga) asked about asset optimisation. He asked for these complex mathematical concepts to be explained more simply.

Mr V Mtileni (EFF: Limpopo) said that he had been familiar with the Land Bank since 2008. He noted that the institution’s operations had undoubtedly changed since then, due to various cases receiving media attention. He asked if Land Bank had now fixed the problem of undeserving people getting loans, and wanted to know if any of the money had been recovered. Do any people that were involved in these cases still work with the Land Bank? He asked about the demographics of those who, the Land Bank assists and asked if the Land Bank is sufficiently accessible to newly emerging farmers.

The Chairperson said that the office closest to his constituency is accessible.

Mr T Motlashuping (ANC: North West) thought that it would have been more helpful for the focus of the presentation to be on what the Land Bank has achieved, although the background was helpful. He wanted to hear about consequence management, as there  had been issues with misused government funds. He commented that when an institution had a qualitative indicator, its achievement cannot be quantitative, and that the goals and achievements must match. Page 11 of the presentation was unclear as to how the Land Bank did measure ‘growth’. He wondered why the turnaround strategy had a name? He wanted to know what type of formula was used to assess funding for various provinces, and said that Land Bank needed to be biased towards provinces that most supported food security, such as the Free State and the North West.

Mr S Mohai (ANC: Free State) said that Land Bank is one institution vital to the goal of putting agriculture at the centre of economic growth. Agriculture is critical to the country. Since the launch of Operation Phakisa, there have been high expectations of entities like the Land Bank. The technical capabilities of the Land Bank need to improve. He asked if there are conditionalities for funding from global multilateral institutions, and whether the Land Bank has its own research capacities?

Mr Gaehler asked firstly about the demographics of the company, why 42.3% was white representation and why there was statistic given for youth employment. He commented that there was a need to aid skills transfer to youth. Where were the 27 branches located throughout the country? He wanted to know whether the same mechanisms were used for loans as were used by the commercial banks? He commented that the emerging sector never gets support from commercial banks and so someone must take a risk on these emerging farms for the sake of the people. He asked also if the interest rates of Land Bank are the same as commercial banks, and if there is specific marketing assistance for the emerging sector? Is there a plan for departments overall to coordinate on assistance for agriculture? He also said that the taxpayers had a right to know if there are any bad loans among the new loans, and how much money the Land Bank had lost through previous corruption cases.

Mr Moloto said that his team had noted all the questions, and would answer the questions in reverse order.

Mr Moloto said that he understood the term “bad loans” to mean “non-performing loans”. He noted that there is a difference in pricing by the Land Bank between emerging markets and established commercial markets.

Mr Van Rooy said that the Land Bank is both a Development Finance Institution (DFI) and a bank. Because it only has one shareholder, the Land Bank cannot go to the market for capital. Funding can either come through direct injection from the shareholder or through capital guarantees from the shareholder. Capital is a necessary buffer for absorbing losses. If a bank is to provide interest and sustain losses, it will have to take those losses out of the capital base. For this reason, Land Bank is unable to provide concessionary business or business at a loss because it will erode its capital base. The Land Bank cannot sustain the same losses as a commercial bank.

He pointed out that taxpayers do not fund the Land Bank because the Land Bank does not take deposits. The Land Bank gathers funding from loan agreements with other banks and the debt market. The government capitalists the Land Bank, but funding comes from the capital market. From a liability and capability point of view, the Land Bank is like any other bank.

The Land Bank’s mandate is to support the agricultural sector in general, which has a variety of components including established practices, emerging farmers, and the value chain outside actual farming such as production and research. When the Land Bank determines pricing for established businesses, it is very similar to commercial bank practice. It would assess the credit of the business and charge a commercial-based price, dependent on the term of the loan.

Mr Moloto pointed out that  providing a loan is only one aspect of support for emerging markets and emerging farmers, including youth and women. Land Bank's concessionary rate for these groups is around 4% to encourage participation, with the aim of helping emerging farmers become commercial farmers. However, help is needed with land, water, skills training, and market access, otherwise these emerging farmers are not properly equipped to be successful. The Land Bank can enable the whole value chain from an emerging development perspective. Many of these initiatives are now encompassed in its new Corporate Plan and future strategies will strive to promote the whole value chain even better. There are specific loan products for emerging markets that can be customised for specific projects. Land Bank does not have three or four products but merely offers the one product or nothing at all. It has set very ambitious goals for investment in emerging farmers.

Mr Moloto commented on the queries on the slides. He noted that the measures set out on Slide 10 are typical of the banking industry. He explained the gross interest margin - if a bank grants a loan, a bank charges revenue and interest that results in gross or total interest. The higher the percentage, the more revenue the bank generates. The Land Bank is not a micro lender. Net interest is the difference between interest paid and interest received by the bank. This number is commonly used to assess bank performance. Net interest determines total asset income and profitability. The bank, to encourage development, can decrease the net interest margin at the risk of decreased profitability. Cost to income ratio measures the bank’s effectiveness. If it is over 100%, the costs exceed the revenues. The Land Bank’s branches used to be over 100% before re-structuring. Ideally, the long term target is for less than 50%. Capital Adequacy Ratio (CAR) is a very complicated concept invented by the Swiss. Land Bank has a condition from its shareholder regarding solvency: namely that the liabilities of Land Bank must balance with our assets. If an asset is a micro loan, then the liability must be bigger. Land Bank's shareholder said that 20% of its total assets must be funded by capital or government guarantees and the balance should be funded by liabilities. If its CAR exceeds 20%, then the shareholder will be comfortable with Land Bank's strength against losses.

Land Bank refers to “bad” loans as”non performing loans”, and that means that customers have missed a number of payments. 5.4% of Land Bank's loans are qualified as bad loans that have missed two or more payments. As part of the agriculture sector, the worst outcome for Land Bank is to see a farmer go out of business. For this reason it will always try to find ways to support businesses and farmers against their land being written off. Land Bank is prepared to allow loans to be “bad” loans while it looks for operational solutions to help that business become profitable. This made Land Bank different from a commercial bank. Commercial banks are only interested in collecting their money. In the face of a drought, for example, commercial banks would be unwilling to risk losses and thus not provide funding. The Land Bank is part of the agricultural industry and has a mandate o support the industry no matter of the definitions of “bad” loans.

Mr Jerome Mthembu, Executive Manager: Legal Services, Land Bank, said that between 2004 and 2008 the Land Bank managed two funds on behalf of the Department of Agriculture; Mafisa and the controversial AgriBEE. Loans given to a number of individuals related to Mafisa, and because they were given fraudulently they have been written off. Land Bank had managed to secure a criminal conviction and other Mafisa cases are still pending.

There are no staff still with the Land Bank that were involved with the AgriBEE. This case happened in around 2006 and part of the previous CEO’s cleanup project was investigating this fraud case. Land Bank had appointed an investigator for this, to assist the police, and trials were set down for March and July. Over R50 million was taken in this matter and Land Bank had done all it could to impose consequence management. It was fairly certain that those still before court would be convicted and some have turned state witnesses.

Mr Mtileni asked if the funds that were lost were covered by insurance. 

Mr Mthembu said that there was no insurance. These funds were managed on behalf of the Department of Agriculture. Land Bank's role was to make sure that these funds were distributed properly, but and unfortunately that did not happen at that time.

Mr Lofentse Radikeledi, Director: DFIs, National Treasury, said that he had been with the Treasury for a very long time and that, in general, coordination between departments was very poor. Both government and politicians needed to take drastic steps to address this. As an example, National Treasury conducted a DFI review in 2008 that found that even DFIs struggle to cooperate, and instead are competing with each other. He gave an example of housing development. The Land Bank provides loans, the Department of Agriculture (DAFF) focuses on production, and the Department of Rural Development and Land Reform (DRDLR) focuses on land acquisition. These three things must happen together, so it is very unfortunate that the three departments compete with each other. Government allocates these departments almost R19 billion so there is plenty of funding, but the impact is low due to a lack of coordination. These entities must work together. He said that political pressure would have to happen to promote this. ;These entities struggled in the past to cooperate due to questions of power. 

Mr Van Rooy, said that the Land Bank has a R1 billion loan facility in place with the African Development Bank (ADB). There are very specific conditions attached to this facility. The ADB must ensure that its mandate is followed and that Land Bank projects conform to this. Though this does not negatively affect the Land Bank, it does occasionally pose a challenge in selecting projects. Land Bank is confident that it can use the full amount of this funding. It is in the process of negotiating a loan agreement with the World Bank that would be a government guaranteed facility. Negotiations should finish during the second quarter of this calendar year. In terms of local institutions, Land Bank had determined a facility with the Industrial Development Corporation (IDC) for drought relief, with R300 million of funding. It also has significant funding from the Public Investment Corporation (PIC). These institutions, along with the Reserve Bank, work with Land Bank in its pursuit to implement the National Development Plan.

Ms Ndluvo concurred with Mr Radikeledi that government cooperation has been difficult. The Land Bank’s strategy is to combine its own funds with the public sector’s funds. It had concluded a Memorandum of Understanding (MoU) with the DRDLR to align with that department's  strategies on land acquisition. Land Bank had the perspective that farms are a full-time, physical business that need to be profitable, so when allocating land, it had to be given to people that can use it properly and profitably. This is still in the planning phase and there should be results seen shortly at the project level. Land Bank was now also pursuing a similar MoU with the Department of Agriculture Forestry and Fisheries. It is trying to deal with these issues pragmatically at a project level, rather than politically. It is also in conversation with the Development Bank SA (DBSA) around funding large-scale water infrastructure. All of these entities have skills to bring to the sector; Land Bank is now beginning to change and better harness these abilities.

Mr Moloto said that, in terms of the Land Bank’s new strategy, it will be moving into provinces with growth-potential crops.

Mr Van Rooy said that there is no formula for provincial funding allocation at the Land Bank. In its system, people apply and the Land Bank will then go through a credit approval process each time. It only operates in South Africa. Because there is more agricultural activity in, for example the North West and the Free State, it will naturally have more exposure there, but there is no formula. The credit granting criteria will depend on whether the applicant is a corporate customer or emerging farmer. For the commercial business, Land Bank will assess its profitability in a typical commercial bank fashion. The Land Bank only grants secured loans, not micro-loans. For a commercial farm, it would take stock as collateral, or over the long term would take assets as collateral. In a retail environment, affordability becomes an issue. In that situation, Land Bank needs to comply with the National Credit Act. In the case of emerging farmers, it will assess their ability to be successful and, if possible, take land as collateral. If not possible, it would have to take a portion of the profits because the Bank is unable to give unsecured loans. The key message is that the Land Bank is flexible in its criteria, though firm in its structures. 

Ms Ndluvo said that, when assessing performance, it is correct that goals and achievements must be consistent. Land Bank strives to define how it will assess success before the year starts, to avoid confusion as to whether it had or had not met its goals. For this year,Land Bank had anticipated or targeted R700 million as the target for farmer support. The charts in question contained a portion of the funding for developmental farmers as well. Land Bank recognised that its impact can and should be better, when supporting emerging farmers. Though it had done good work, it had to be honest about how to do better in delivering its mandate. 

Ms Ndluvo said that the Land Bank used to use a model to assess an individual’s contribution to a sector compared to that of government. This model is a broad economic model exploring induced benefits. However, Land Bank later realised that it needed a more direct, definitive model and had fixed this in this year’s Corporate Plan. She said that this would be shared with Members at the next meeting and Members would be able to assess the impact of individual investments as well as data on the sector generally. She believed that the new model for development impact is far more concise. In the future model, the Land Bank would strive to understand development in its totality, including gender issues, sustainability, and other factors.

Mr Moloto noted that the R700 million was the total target for emerging farmers. The figure of R35 million mentioned earlier was specifically for drought relief.

Mr Mohai asked whether, in pursuing coordination, the Land Bank has representatives in the public sector technical committees.

Mr Moloto said that, unfortunately, agriculture is not seen as “sexy” for young people, as these young people wanted to be in cities. It would be necessary to break that misconception because there is indeed money to be made in farming.

Ms Ndluvo agreed that young people do not find excitement in agriculture, even those who were raised in rural areas and appreciated the benefits of this. This was a real challenge for the sector. Land Bank had done an assessment of the age profile of lead farmers, and found the average age was 55. There is a big gap in the next generation’s ability to take over these practices that the sector recognises. Land Bank has made provisions for skills development to build on the work of agricultural colleges. There have been provinces like the Eastern Cape that emphasise skills development, and it was working with them, so it believed that it would be able to address the problem.

Closing Remarks
The Chairperson said that the plans and strategies fitted in well with the provincial strategies for development. Many government departments and DFIs had strategies, and everyone wanted to promote growth. He confirmed that this Committee would indeed like to hear the finalised Corporate Plan from Land Bank. It would be important to bring all the role players to the table and encourage cooperation. The Committee would look at setting up a full day meeting to allow all the role players to interact. It would be necessary to tighten up the loose ends. The Committee would also like to hear the Land Bank’s Annual Report at the end of the year. The Committee had a lot of work, but all players must take the country forward and encourage growth and employment.

Adoption of Committee minutes
The Committee adopted the minutes of the meeting on 2 February 2016.

The meeting was adjourned.


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