Induction Workshop: Financial Advisory and Intermediary Services, IRBA, DBSA, Pension Funds Adjudicator & Land Bank

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Finance Standing Committee

21 August 2019
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

As part of its induction workshop,  the Committee received presentations from the  Financial Advisory and Intermediary Services, Independent Regulatory Board for Auditors,  Office of the Pension Funds Adjudicator, Development Bank of Southern Africa and the Land Bank.

All the entites presented on their roles, challenges faced and the compliance and oversight regime for their respective areas of the financial services sector. Budgetary constraints and lack of sufficiently expanded jurisdiction were a significant theme. IRBA especially stressed the need for the Committee to fast-track legislation to empower it. OPFA and the FAIS Ombud noted the disruption caused by the transition to the “Twin Peaks” legislation and replacement of boards with the Financial Sector Conduct Authority. The Committee agreed on the need to empower IRBA, as well as stressing the importance of clearing up governance confusion and inefficiency due to the new governance regime under the FSCA. DBSA outlined its role in helping municipalities and government departments execute projects, and explained its funding and operational model. The Land Bank similarly outlined its mode of operation, noting its challenges to disburse funding to developmental projects instead of commercial ones, but nevertheless highlighting its expansion of developmental funding in the last 7 years. The Committee questioned DBSA’s high interest rates and asked for examples of oversight visits it could undertake. It welcomed Land Bank’s expansion and mission but noted the slow progress made in transformation of the agricultural sector. Issues of government grants to achieve blended finance and the creation of agricultural credit boards were floated.

Members pointed out that these institutions were established to close a gap in the market and they had be seen in the context of the developmental state, where the state had to intervene in the economy to address historical imbalances.

Meeting report

The Chairperson welcomed the committee members and officials from the National Treasury and presenting entities to the Induction Workshop.
The Chairperson noted time was short. The rest of the induction workshop would be held the following week in Pretoria.
The Chairperson gave the floor to the first presentation from the FAIS Ombud.
Financial Advisory and Intermediary Services Ombud Presentation
Mr Naresh Tulsie, Ombud, FAIS, thanked the Chairperson and introduced his colleague, Mr Shaun Maharaj, CFO, FAIS Ombud. 
Mr Maharaj stated that the organisation’s mission was to promote consumer protection and contribute to the integrity of the financial services industry. Its role was as the Preferred Alternative Dispute Resolution Mechanism for disputes in the financial services industry. The office was established by the FAIS Act of 2002. The FAIS Ombud provides an impartial and free service to consumers who feel they have been mistreated by financial services. Complaints usually arise where, in dealing with the consumer, financial service providers 1) contravene the FAIS Act in a way likely to cause financial prejudice to the client, 2) where the financial services provider has acted wilfully or negligently and has caused or is likely to cause prejudice or damage to the complainant, or 3) where the financial services provider has treated the client unreasonably or unfairly. Determinations of the Ombud are legally binding and enforceable. The FAIS Ombud is also bound by the FSOS Act of 2004 or “catch-all act”, as the Ombud covers all complaints not covered by other complaints schemes or ombuds in financial services.
Mr Tulsie, detailed the FAIS Ombud’s key strategic objectives. Goal 1 was to resolve complaints in a fair, expeditious and informal manner. Ensuring this is achieved is aided by monitoring statistics of complaints by the FAIS Ombud. The Ombud attempts to resolve issues informally by talking to both sides, then through invitation to a meeting with both parties in an attempt to reach amicable conclusion, and finally the issuance of a determination which is legally binding if all else fails. 97% of appealed determinations are upheld.
Goal 2 was operational excellence, which covers operation within the assigned budget, and an attempt to enhance internal effectiveness. Operational excellence involves dependencies on human capital, IT systems and performance management.
Goal 3 was sound and effective stakeholder relations with consumers and providers, as well as regulators and the media, and other ombud offices. The National Treasury was another key stakeholder. The Ombud was attempting to enhance accessibility and awareness of the Office through consumer education.
The Ombud concluded his presentation.
Independent Regulatory Board of Auditors (IRBA) Presentation
Mr Abel Dlamini, Chairperson, IRBA, thanked the Chairperson and introduced Mr Bernard Agulhas, CEO of IRBA.
Mr Agulhas explained that the role of the IRBA is to protect public and investors from auditors that do not deliver. Its responsibility was not the protection of auditors. This was achieved through IRBA’s mandate encapsulated in Auditing Profession Act, and through 5 key capacities:
-Audit accreditation to determine whether applicants are fit to audit. There was often confusion between accountants and auditors: there are 60000 accountants, but only 4500 auditors in South Africa. Auditors are legally required to register with IRBA, whereas accountants only join voluntary membership bodies.
-Issuance of standards for auditors
-Inspection of auditors
-Investigation of auditors that do not comply
-The disciplining of auditors, with the ultimate sanction being the removal of license to practice
The role of an auditor was broader than signing off on annual financial statements. When an audit is performed, the signing off must give confidence to the market, which allows investment and stimulation of the economy. Audit failures are not unique to South Africa.
Mr Agulhas progressed to the key themes underlying restoration of confidence in auditors. There had been a loss of confidence in auditors from markets due to audit failures in recent years. He noted that business failure was not equivalent to audit failure. IRBA had come up with key areas to cover, including working closer with stakeholders to see how trust could be rebuilt. Comprehensive regulation was needed: only auditors themselves were currently regulated in financial reporting chains, not financial managers, executives, or boards. All stakeholders needed to be regulated. Mandatory audit firm rotation was introduced due to audit failures where auditors were too close to their clients, affecting objectivity. Mandatory Audit Firm Rotation (MAFR) requires firms to rotate auditors every 10 years. IRBA also proposed to strengthen audit committees: in cases like Steinhoff it is clear that audit committees were not sufficiently attentive and this caused audit failure. If audit committees play their role it can preclude business failure. There are huge expectations of what auditors can and can’t do: at the moment auditors aren’t trained to find fraud – but he commented perhaps they should be, given this seems to be in the public expectation. Auditor behaviour also had to be changed, including objectivity and independence. Audit quality standards were also being looked at.
17% of JSE listed companies have introduced voluntary audit firm rotations despite regulations only coming into effect in 2023. 38% of these rotations were due to MAFR compliance. The market had become aware of need for independence of auditors. Shareholders had changed from barely voting against reappointment of auditors at all to nearly half voting for auditor rotation. In this case, market education worked.
The current audit environment involved corruption in public and private sectors, systemic failures, a lack of professional scepticism and independence, the need for ways to break up power of the Big 4 audit firms, a lack of transformation and fragmented regulation. High profile cases of audit failure included African Bank, Linkway, Steinhoff and VBS among others.
Because of limited funding it was hard to allocate resources to the large number of cases dealt with. Capacity limitations hamstrings IRBA. The number and complexity of regulations had increased. Disciplinary cases were expensive and IRBA struggled to complete with big firms with deep pockets to protect the public. IRBA had proposed amendments in the Auditing Profession (AP) Amendment Act to make it easier and cheaper for IRBA to operate. At present, IRBA required R44m just to cover legal matters. IRBA had also applied to the Minister of Finance to recover R27m through the Criminal Asset Recovery Act.
IRBA asked the Committee to fast track the AP Amendment Bill. The Bill focused on improvements to the processes for IRBA. The new act allowed IRBA to access information better, including search and seizure and subpoenas. It also simplified disciplinary hearings to make them cheaper for IRBA, and provided for an increase in sanctions and giving the Minister of Finance the power to determine maximum fines, instead of the current cap in the legislation. Amendments would only affect auditors.
Mr Agulhas stressed the need for comprehensive regulation: the 2013 World Bank Report on Observance of Standards and Codes Accounting and Auditing (ROSC) had recommended regulation of all parties involved in the financial statement process, including accountants. Accountants were not regulated at the moment. Since the 2016 State Capture revelations, the spotlight was not only on auditors but the whole financial reporting process. This did not only show the lack of compliance, but the lack of corporate governance and board/committee failures. There were few consequences for these people as they were not regulated by legislation.
The risk of fragmented regulation was that it became difficult to monitor systemic failures if only one part of the process was under IRBA’s jurisdiction. IRBA proposed there was a need for one system to govern the whole financial reporting process.  
Office of the Pension Funds Adjudicator (OPFA) Presentation
Ms Muvhango Lukhaimane, Adjudicator, OPFA, introduced her colleague, Mr Bulelani Makunga, who was the CFO at the OPFA.
She explained that the OPFA was established by the Pension Funds Act, and had been in place for 21 years. It aimed to ensure procedurally fair, economical and expeditious resolution of complaints, and was a Schedule 3A public entity.
The OPFA’s strategic goals included disposal of complaints received expeditiously and achievement of operational excellence. Currently it was very difficult to get the skills required, and the OPFA spent a lot of time and money training its staff complement of 64 employees. Issued determinations were meant to be easy to understand so that complainants could use them. A lot of time was also spent on stakeholder management, including enlisting services of the regulator where OPFA saw systemic issues.
Complaints received by OPFA had been steadily increasing, mostly down to compliance issues. The OPFA attempts to close complaints in a reasonable period of time. OPFA had been told by Treasury not to hire new staff but increase efficiencies in the operating process.
The bulk of complaints had to do with the non-payment of pension and provident fund contributions. Municipal payment of contributions to employee’s pension funds had been a particular issue. A usual indicator of an employer in jeopardy was the non-payment of pension fund contributions, which was often not discovered by employees for a long time. Another issue was death benefits – funds hold discretion for allocation of funds to deceased beneficiaries’ dependents, and investigations in this regard were costly in terms of time and money. The move to Umbrella Funds was also an issue – the consolidation of funds brought in governance issues as we moved away from employer single regulation of funds, as there were multiple employers contributing. Governance was suffering. Administrators (Sanlam, Old Mutual, or comparable) were responsible for nominating boards, not members.
As of November 2018 due to the Financial Sector Regulation Act, there was a new FSCA Commission and OPFA now made use of oversight committees for governance.
Mr Makunga reported that the OPFAs funding was achieved through levies imposed on industry. Currently OPFA depended on the 2018/19 gazetted levies, meaning it was currently not properly funded through levies set for the current financial year. OPFA had made arrangements with Financial Sector Conduct Authority to fund the Office until it could receive levies through the 2019/20 Financial Sector Levies Bill for 2019/20.
The creation of the FSCA also gave rise to the (free) Financial Services Tribunal, which would save OPFA legal fees. Governance changes to come included the OPFA’s reporting office changing from the FSCA Commissioner to the Ombud Council and Chief Ombud. OPFA would be funded wholly by levies, which posed challenges as the need for a higher levy would not be popular in the industry.
Challenges included a steady increase in the number of complaints received – increasing pressure on current capacity with no change in the staff complement. The specialised environment OPFA worked in required development of the adjudicator’s own pool of staff, which posed problems.
Priorities for OPFA included improved stakeholder engagement, intensification of consumer awareness and education, measurement of the impact of its service offering, and optimisation of resources to meet increase in complaints.
Mr I Morolong (ANC) noted that public representatives were obsessed with the capacity of citizenry to be able to participate in programmes of government. He asked FAIS what its capacity to reach the ordinary South African was: its footprint, number of cases, demographics, determinations made - to what extent did ordinary consumers benefit? On IRBA’s introduction of the MAFR 10-year rotation (IRBA) – was this a South African norm or an international norm?
Ms P Abraham (ANC) asked FAIS whether there was a relationship between the Ombud and the media. If so, what kind of relationship was it? She also enquired whether FAIS had budgetary issues. She noted IRBA’s fundamental issue was non-regulation of other sectors – which sounded like a policy gap, which the Committee could fix. She asked IRBA to make a proposal as to what the Committee could do to assist. She agreed on the issue of relations between auditors and auditees – her view was that audit firms had a responsibility to build the nation. She enquired whether IRBA would not recommend or encourage the presence of internal auditing which would play a role in assisting entities to prevent serious audit findings that lead to qualifications. She further asked what kind of role OPFA played before the end of people’s careers. Finally, she requested clarity on the appointment of the Chief Ombud.
Ms M Mabiletsa (ANC) noted the emotional nature of OPFA’s presentation, given many people in her constituency were facing pension savings issues. People had worked and contributed but could not draw their money. She asked what OPFA could do in this case.
Mr F Shivambu (EFF) stated that he had to leave early for the Ethics Committee, where he would be looking at problems of non-declaration in the ruling party. He noted a few broad issues the Committee should cover, highlighting funeral and burial schemes and policies. These were criminal and violent spaces in terms of people being taken advantage of. Perhaps the Committee needed a detailed report from all bodies dealing with the funeral industry as to how to improve it. The FAIS Ombud dealt with these issues. He noted his frustration: in many instances people need money urgently, but the institutions they contribute to will not pay out. When issues were resolved later this was not helpful. There was a need for the Committee to check what extent industries are regulated and what actions must be taken.
Mr Shivambu asked the FAIS Ombud: if it only dealt with claims up to R800 000, what happened after that? The Financial Matters Amendment Bill was introduced with a number of provisions. When the Act was signed into law, the IRBA component was removed. In his view, this was because private audit firms were powerful, and the ANC wanted to collaborate with them for tax avoidance purposes. IRBA was toothless/useless in the manner it was configured. He proposed the legislature should not rely on the executive to deal with legislative issues – as this raised the matter of separation of powers. Parliament had to legislate in areas of shortfall. It seemed that the passing of the “Twin Peaks” legislation had led to incomplete implementation, and instability in the FSCA. He asked OPFA who the GEPF ombud was, and departed the meeting.
Mr G Hill-Lewis (DA) asked the OPFA for details on the number and nature of complainants. What proportion of these complaints related to the GEPF, as the Committee was seeing them the following week? Having started in this Committee only a few weeks ago, he had received at least a complaint a day on GEPF issues. He noted IRBA had been running African Bank investigations for several years, and other investigations had been outstanding for a long time. What was the total for auditors found against and barred from practicing?
Mr W Wessels (FF+) asked FAIS how many complaints were received and what the average turnaround time was, as well as which sector these complaints were in. He noted the theme of IRBA’s presentation was a lack of capacity, and highlighted that the Committee had to continue with the strengthening of IRBA. Did IRBA think auditors were sufficiently trained to do public sector audits? He noted complaints from CAs that training did not prepare them for public audits. Audits were inefficient as CAs did not understand the public sector. Did IRBA have any recommendations for preparation of auditors for public sector auditing? In OPFA’s case, one problem lay with the public sector, but the other problem, not in scope was where, for instance, funds were transferred to the PIC and lots of problems occured. Should the PIC Act not be amended to give OPFA jurisdiction over the PIC given its use of pension funds? There were a lot of complaints over PIC conduct but no ombud to address them.
Mr G Skosana (ANC) noted OPFA’s mention of municipalities and municipal employees pension fund with non-payment of contributions. He raised a Municipal Councillors Pension Fund (MCPF) case: a councillor died, but it took 2 years for the fund to pay out, despite alleged 100% contribution by the municipality. What was role of the OPFA where contributions were fully made but money was not paid? He also noted the MCPF’s matter of changing administrators which delayed fund payments to beneficiaries. On the investment of money – did OPFA have oversight for this in municipal funds? He noted the serious challenges municipal funds faced when there was a mass exit of councillors (for instance after local government elections), which caused serious delays - what was the role of OPFA in this regard?
Ms Z Nkomo (ANC) asked OPFA what its role was in cases where pension funds mismanaged contributions. She noted an Ekurhuleni case of a pension fund which would not pay contributors despite retirement as the fund did not have money.
Ms Lukhaimane explained that the OPFA became involved where there was a complaint by one of the spouses. Sometimes divorce orders were so badly drafted it was impossible for a fund to pay directly to the spouse who was not a member. One fund could be lax while the other was strict. This was when OPFA got involved. These issues often rested on the wording of the divorce order.

For all sorts of reason, people did not preserve benefits. So, when they retired, they had small reserves of pension savings. When they left an employer, they cashed out and did not transfer the savings. Treasury was working on education and preservation of pension funds. Often people who could be preserving their funds were advised not to.
The Ombud Council had to be set up first to ensure progress in the appointment of the Chief Ombud. This was creating instability for statutory ombuds (FAIS/OPFA) and also short-term ombuds like the banking ombuds. Ombuds were struggling as they did not know who to report to. The non-establishment of the Ombud Council was a problem for governance.
If contributions had not been paid the Adjudicator ordered that the employer pay all the contributions due. OPFA orders are high court orders so the sheriff could attach property to ensure payment. As far as funeral issues were concerned, the OPFA was not involved. In terms of proportion of GEPF complaints, the OPFA had no numbers but it was the second largest number of complaints transferred. There was a need for someone to deal with the GEPF, as although OPFA had a working relationship with that body, it had no jurisdiction over it.
Complaints mostly (60%) arose from a delay in payment of benefits. Other complaints included non-payment of contributions, as well a delay in payment or non-payment of death benefits (10%). The bulk of death benefit issues were complaints over the allocation of funds by pension funds, which the fund had jurisdiction over despite benefit notes or wills. Funds must find legal or factual dependents of the deceased. The Act gives funds 12 months to do and investigation – mostly allocation would happen within 12 months. But complexities arise often. If a delay is understandable or reasonable, the PFA would give funds an extension with a specific timeframe to conclude investigations and pay out.
Municipalities fall within OPFA’s jurisdiction. Only GEPF and the Post Office Retirement Fund were outside its jurisdiction. The problem with municipalities was mostly late payment interest which accumulated quickly. Because municipalities did not pay on time they ended up paying much more than they should.
The PIC was an asset manager which was outside PFA jurisdiction and managed elsewhere under the FSCA.
On municipal funds, the problem was that, 15-20 years ago, a moratorium made it so that once an employee chose a fund, they could not transfer. 2 people could work in the same municipality and earn the same amount and retire with vastly different retirement savings due to choice of fund. Despite various interventions members are still not allowed to move funds. MCPF’s issue of non-payment of final benefits was often due to the complexity of dependents and funds had to be very careful. The OPFA did not play a role when funds changed administrator, this was under the FSCA. It might be that there was a delay in the payment of benefits – often there was a spike in complaints after an administrator change. If there was a delay in payment, the OPFA would check if the fund had an investment policy in line with section 28. If the fund had a sound investment policy and there was a spike in the market, members must be able to live with this. S28 said that investments must be spread to help the liquidity of fund.
On Ms Nkomo’s Ekurhuleni case, the mentioned party was not a fund but the administrator of the Municipal Employees Pension Fund (MEPF). The problem with the MEPF was that it provided for a withdrawal benefit of contributions multiplied by 3. Then it went to the FSCA to change this multiplication to 1.5, essentially halving the withdrawal benefit for members. Investments had gone through a bad time and the FSCA allowed a rule change. The issue was not bankruptcy but the halving of benefits with the stroke of a pen.
Mr Agulhas said it always took a crisis like the one SA was going through to bring introspection and change. Part of IRBA’s challenges had been the lack of legislation to help and support it. The lack of powers had been a key reason for the lack of effectiveness. There was a need for IRBA to have comprehensive oversight of the whole reporting chain. In terms of root causes – IRBA did not believe auditors did not have technical competencies or skills – problem was more auditor behaviour which was difficult to regulate. Auditors didn’t act ethically sometimes.
IRBA had done a lot of research on MARF. In most jurisdictions the audit profession, which was very powerful, resisted and defeated a move to MARF. In many areas, there was mandatory audit tendering but not necessarily rotations. The Netherlands also had MARF. Instead of producing research saying this is what IRBA wanted to do, it became clear that IRBA had to introduce MARF.
Mr Agulhas agreed that auditors had a responsibility to act in the public interest. Some auditors had forgotten this in favour of commercial interest.
Internal auditors were part of the financial reporting chain. The Institute of internal auditors voluntarily approached IRBA to become part of financial reporting oversight regulation.
IRBA did not have sufficient powers, but this would change with the APA Amendment Bill. The IRBA section of the FMA Bill was removed due to an objection from the auditing profession over search and seizure powers, and Treasury continued consultations. Other acts provide this power to other regulators, and IRBA was clear that search and seizure was a matter of last resort.
On the number of auditors sanctioned, not all investigations ended in disciplinary hearings and licence removal could only happen after a hearing. It was too cumbersome to hold frequent hearings, although this would be made easier by the APA Bill. The bulk of disciplinary action was where consent orders meant that auditors voluntarily admit fault and pay fines. The only license removed was KPMG for the Linkway audit.
He appreciated that the Committee saw the need for more funding for IRBA.
He closed with a comment on the public sector: IRBA had strengthened competencies to audit in the public sector, working with institutes and universities as well as Continuing Professional Development (CPD) for auditors.
Mr Tulsie noted that, at the moment, FAISO did not demographically represent the country very well. Most complaints came from Gauteng, KwaZulu-Natal and the Western Cape. There was concern over FAISO’s extent in geographically remote areas where consumers had less access to electronics. FAIS had set up an outreach committee to better educate the public on its role, and published in many media outlets. Outreach was also achieved through community radio stations in multiple languages. FAISO was starting to see traction in the number of calls received by the office, resulting in the creation of a client call centre that could respond in people’s home languages. FAISO engaged in a process for telephonic registration of complaints, and became part of consumer roadshows and reaching out to communities.
Mr Tulsie noted FAISO’s excellent relationship with media and pointed out that they had published its articles. There was a realisation that the Ombud must use social media to engage. A new policy was with accounting for approval, and after this a social media communications manager would be hired. Last year the Ombud approached the SABC, Media24 for more outreach, but budget constraints were tight.
Relating to the R800 000 limit on jurisdiction, Mr Tulsie agreed and had approached the board for an increase to a limit of R5m which was approved, but the board was then removed by legislation and replaced by the FSCA. This had created technical complexity and FAISO thought that a much higher limit should be implemented.
On funerals, FAISO received very negative responses from concerned business interests after issuing a determination on a certain funeral business. The Ombud had aimed to beef up enforcement capacity through early information sharing that could preclude the dissolution of business, which meant complainants could not receive relief.
The Ombud’s budget for the last financial year was R57m, which was supposed to cover dealing with over 10 000 complaints per year plus over 1000 property syndicate complaints. It was not a simple matter of resolving complaints or giving a determination – almost all decisions were taken on review, which was costly for the Ombud and consumers attempting to earn relief. The Ombud had reached out to the Legal Practitioners Council to make legal assistance available on a pro bono basis, and engaged with many voluntary associations to spread its message.
The Bulk of complaints came from the financial services sector, as well as some from investments and forex. Banking complaints had started to come to FAIS, which was understandable as the Banking Ombud had limited authority and jurisdiction. Most consumers buy large assets with finance and are required to take out insurance. The Conduct of Financial Institutions (COFI) Bill would change the FAIS Ombud completely but for the better.
The Chairperson noted issues in the former Venda over pensions. He asked for concerned stakeholders to come together and reach clarity on this matter.
He said the collapse of big auditing firms should be a matter of concern for public representatives. For now, the public was only focusing on Steinhoff – but if a big firm like KPMG had a serious challenge and the Committee did not get a briefing, it was not alive to the realities of society. Parliament had not only to oversee the public sector – matters that affect the public had to be of interest to public representatives. The collapse of big corporates had a huge impact, including the loss of jobs. When the USA had problems with the collapse of large corporates, its Congress became interested. Parliament had to play a similar role in South Africa. The Committee would have to ask entities working with Treasury to compile a report in this regard. Basil Read and Group Five had collapsed.
The Chairperson noted that Basil Read had a large contract to do highway interchanges and construction on the N1 – when it collapsed it noted that government was not issuing contracts to large corporates. What had led to the collapse of the construction industry? Public representatives should be concerned over the collapse of big, old corporates. Public representatives were not auditing firms – but had to be concerned about the lives of the public. There was a need to go deeper in oversight of issues that affect the public and what remedial action could be taken. MPs needed scientific reports on the collapse of big firms – they could not rely on rumours. He thanked the presenters for their input.
The Committee adjourned for lunch.
The Chairperson welcomed the committee and delegations from DBSA and Landbank.
Development Bank of South Africa (DBSA) Presentation
Prof Mark Swilling, Interim Chairperson, DBSA, introduced his colleague, Ms Zodwa Mbele, Group Executive: Transacting. He tendered the apologies of the CEO who was travelling overseas.
Ms Mbele explained that DBSA was 100% government owned. The Bank was growing, its current balance sheet being R89bn, with equity of R34bn. The Bank had an A+ rating from the Association of Development Finance Institutions. The Bank is a development finance institution that advanced funding in order to produce developmental outcomes like improvement of quality of life, support of economic growth, support of regional integration (the Bank operates across the African continent) and the promotion of sustainable development.
The Bank was not dependent on the government for funding – the last time it was funded was during its restructuring in 2012/13, when government gave a capital injection of R3bn – DBSA raised funding from the market.
The Bank funded a wide range of sectors including transport, energy, ICT, water and sanitation, education and health.
The frontline business was responsible for origination, as well as including the project preparation unit which attempted to identify development opportunities without waiting for clients to come to the Bank for help. The Bank had to play a role in the development of infrastructure from planning to implementation. The Infrastructure Delivery Division (IDD)section implemented projects on behalf of the Department of Public Works (DPW) and other state organs (Prasa, municipalities and others). This business was carried out on a cost-recovery basis. The Bank also had a support section typical to most financial operations. Checks and balances on the frontline business were carried out by these support services.
DBSA’s strategic objectives emanated from national, regional and global frameworks. In South Africa, the blueprint was the NDP. Regionally, the plan was the Regional Infrastructure Development Masterplan, and globally the bank looked towards the Sustainable Development Goals.
The Bank took an integrated approach to infrastructure development. DBSA provides free planning services to municipalities without resources. The Bank does not pay tax or dividends. DBSA’s finance and building operations were mostly public but did include private clients
In terms of project preparation, DBSA was the custodian of 3 climate finance facilities which funded projects for mitigation of environmental adaptation. The Infrastructure Investment Programme for South Africa (IIPSA) had also been key to municipal assistance.
In terms of bridging finance, DBSA focused on conditional grant finance bridging. Waiting for a grant to be in place was often too slow for a project to be successful. DBSA provided for faster access to finance which would then be repaid by the conditional grant. This service was provided largely to municipalities.
One may have government departments which have been given projects but not been given funds. The Constitution provided for the engagement of other state organs to fulfil these projects. When contractors provide services to DPW through DBSA they feel more comfortable and report being paid on time.
DBSA was funded from different sources, but not the government. Funding was raised in capital markets, mostly through bonds. One bond was listed in Luxembourg. The Bank also had lines of credit with multilateral finance institutions. DBSA also maintained credit from local commercial banks. Cash generated internally was the fourth source. Internal cash flow was roughly R4bn per annum.
The high disbursements seen in 2015/16 were due to the IPP project and Eskom’s line of credit with DBSA. Energy was one of DBSA’s key sectors, accounting for 59% of disbursements. South Africa received 71% of DBSA finance, and the rest of Africa 29%. This 70/30 split was informal but maintained by the bank. 72 projects had been accomplished to date.
Land and Agricultural Development Bank of South Africa (Land Bank) Presentation
Mr Arthur Moloto, Chairperson, Land Bank, introduced the organisation’s Acting CEO, Ms Konehlali Gugushe.
The Land Bank had a dual mandate to support commercial agriculture for food security, and to support development of emerging farmers to deal with South Africa’s painful history. This dual mandate was mainly funded from capital markets, and there were certain rules the bank had to comply with. Non-performing loans were limited in this regard. The two mandates carried very different risks. Commercial agriculture had a strong balance sheet, whereas emerging farmers had little equity and low security, making it much riskier. This made it much harder to lend to emerging farmers for developmental purposes. The President noted the need for blended finance in the SONA, as introducing government money reduced the risk and dependence on loans for development projects. The money managed by the Land Bank was commercial and institutional money, not government finances. This meant that the Land Bank could not lend money at submarket rate without the input of government.
Ms Gugushe said that the founding statute of the Land Bank included a recognition of the Bank’s mandate to support transformation of the agricultural sector. The Bank used funding and lending to allow access to this sector for previously disadvantaged people. It was important for the Bank to also be mindful of the importance of agriculture to the SA economy.
The Land Bank was supposed to address a gap in the market that was not fulfilled by the commercial sector or government. As a development finance institution, the Land Bank had to fill the gap between commercial lending and government grants to allow people to enter into the agricultural sector to be able to access commercial loans. The Land Bank owned roughly 25-30% of agricultural debt, the rest was owned by private lenders.
The Land Bank was expected to be financially sustainable and not be a drain on the fiscus. The Land Bank was 90% funded by debt capital markets, loans from financial institutions, and a few multilateral institutions. The Bank operated only within South Africa, therefore had to hold only rand-denominated debt. The Bank did nevertheless have credit lines with certain international institutions. The quality of the loan book and profitability of the business were key to shareholder expectations. Agriculture was cyclical and climate-dependent, making it risky. Commercial banks thus often had a low risk appetite in situations of high risk to the agriclutral sector, which the Land Bank fills. There was an expectation of concessionary funding from the Bank. The Bank was also expected to provide a high quality of services.
Agriculture was a large employer but the employment quality remains low. The Bank’s strategic objectives were supported by the Bank’s Strategic Pillars: Sector growth support, supply chain development, production expansion and intensification, and agricultural innovation.
Subsistence farming was outside of the Bank’s mandate as these farmers could not absorb debt. Smallholder farmers have a turnover under R1million, medium farmers up to R10 million, larger farmers up to R50 million and commercial agriculture past R50m. All except subsistence farmers were targeted by the bank.
From R1bn out of R21bn to Transformation projects in 2012, the Bank now lends R8bn of its total R45bn lending to Transformation projects. The balance went to commercial projects.
Challenges faced by emerging farmers included lack of equity, the high cost of debt which was a hindrance to emerging farmers, as well as the lack of collateral for new black farmers. The bank attempted to address these issues through specialised products including special mortgage loans at subsidised rates. Its normal mortgage loans were longer term than commercial ones.
Ms Gugushe noted the difficulties for development finance to have a high conversion rate of disbursement of loans in development/transformation projects. The bank disburses to roughly 30% of commercial inquiries, but only 15% of development inquiries.
The cost of funding for DBSA had increased sharply from 5.79% in 2014. The bank’s funding used to be continuously short term, which damaged its stability. The bank now had much more long-term debt, at roughly 50% of the bank’s debt profile. This had led to an increase in the cost of funding to 8.95%. This makes it difficult for the bank to lend at prime-3 or prime-4 rates. This determines the loan book structure of the Bank, as the Bank had to support its business through commercial agriculture to make its transformation projects sustainable.
The Bank operated 9 provincial offices and 17 satellite offices. Farmers were generally in rural settings, so the Bank had to maintain branches as close as possible to rural areas.
The Bank remained profitable. Its R3.5bn recapitalisation was released in tranches into government equity. The Bank had a R45bn rand loan book. It held equity of roughly R5.7bn. The Bank continued to be profitable despite the agricultural sector’s rocky status.
Mr Morolong noted there was no way to address imbalances of the past without changing ownership patterns in the country. He was pleased about the expansion of the Land Bank to rural areas. However, he did not get the sense that the Bank was a catalyst for change. He got the sense that a lot of South African emerging farmers were left out in the cold.

Mr Morolong asked for detals on the lending criteria to emerging farmers juxtaposed with what product offerings were to commercial farmers, Land Bank’s turnaround time, and a disaggregation of the R8bn to transformation finance.
Ms Abraham asked DBSA to mention some domestic projects that the Committee could check on during an oversight visit. Could DBSA point out successes of projects with municipalities? She asked the Land Bank how people qualified for funding, and what the extent of transformation was. She further asked for some detail on the Bank’s relations with the World Bank.
Ms Mabiletsa asked the Land Bank how people achieved R50 000 in turnover (Land Bank’s minimum requirement) without access to funding. Was there a blended finance project to support land reform projects? How did one apply to the Land Bank for finance? How much more was available? What services were there for cooperatives and small-scale emerging farmers? She also enquired why DBSA had higher interest rates than other banks. Normally municipalities would go to commercial banks because DBSA interest rates were not competitive.
Mr Wessels said that the biggest mistake made in agriculture was the abolition of the agricultural credit board, which filled the need for soft loans to emerging farmers. He enquired as to whether the Land Bank was developmental or commercial. It did make sense theoretically that one could not grant loans to non-performing farmers due to the commercial source of land bank funding. On the other hand, why was it that emerging farmers did not have collateral? The issue was that the Department of Agriculture, Land Reform and Rural Development (DALRRD) did not grant title deeds with the transfer of agricultural land. How much developmental finance was currently non-performing? There was a committee established in 2014 by Vinmark including a lot of role-players, such as the Land Bank, to create a partnership between public and private sectors to establish something like the Agricultural Credit Board – what happened to this? Last year the President mentioned the provision of R4.4bn for something like the credit board in the State of the Nation Address – would this succeed in creating a developmental arm for the Land Bank if it was once off funding? Was there a way to establish a structure to support developing farmers with soft loans? The problem was not only access to the loan, but the terms of repayment as there were long set-up periods for many cash crops, but loans must be repaid before income for the farmer. How would the funding mentioned in the SONA work?
Ms Nkomo stated that we could not reverse injustices happening for 300 years in 25 years. When the Land Bank gave money to small farming operations with long periods of repayment, what systems were there for oversight, capacity-building and monitoring?
Ms Mbele (DBSA) noted the success of DBSA projects in transformation in Angola and Zambia, as well as Mozambique’s successes (especially the electricity company EDM). DBSA lends to both metros and under resourced municipalities. Dannhauser in KZN was an example. In Buffalo City metro, DBSA had introduced demand management systems. Many municipalities had been supported by DBSA over the years. In terms of DBSA rates – municipalities follow the MFMA. DBSA could not afford to be cheaper than many banks as it did not also provide transactional services where it could recoup funds. DBSA was attempting to fill the gap for debtors who could not access these lines of credit.
Mr Moloto said that in terms of blended finance, there was an amount of money lent by government to the Land Bank for financing operations. This money had to be transferred to the DALRRD before it could be accessed by the Land Bank. There was a precedent for blended finance in the Land Bank, which worked well with the Jobs Fund. The model which was working was with commodity organisations, which eliminated problems of access to market as commodity organisations helped the emerging farmers. He agreed with Mr Wessels – there was a need to separate the loan book into two books – development and commercial. Development funding had to be supported by grants, whereas commercial clients could access market loans. The intention of Land Bank was for development projects to graduate to commercial projects. Many projects had a long development period needed to become profitable. The Land Bank wanted to support these projects but needed the support of government grants. The Bank’s management of private money created certain covenants meaning that violation would lead to an immediate withdrawal of capital and a massive repayment obligation. On the converse, he did not want farmers to become permanently dependent on grants. The Bank had met with other government stakeholders to engage in partnerships to deliver projects. Developing farmers needed more than just finance. Regarding land expropriation without compensation, the he indicated that if it was done responsibly and without threatening food security, it could be helpful, but if done incorrectly its consequences were devastating. If collateral was expropriated this could lead to defaults and cross defaults for the Bank.
Ms Gugushe appreciated the sentiment that redressing past imbalances requires radical action, and had to be enabled by the Land Bank. The Land Bank was, however, a lending institution that gave out loans that had to be repaid. When assessing people to qualify for loans, they had to have capacity to absorb debt, which necessitated a minimum turnover. A subsistence producer could not reasonably service a loan. Burdening these people with debt set them up for failure. The Bank did do green field projects and start-up farming, but it was primarily concerned with funding business operations which already had land, supply and access to market. Credit could not be given to people without these things. Deferral of repayment was possible with the Bank, but there had to be clear targets for profitability and repayment. It was unfortunate that cross-departmental cooperation was not what it should be. A successful partnership was the wholesale finance instrument – a sugar industry partnership with Akwandze which lended to farmers in Limpopo at 4% and helped farmers to develop their farms. At the time of harvesting, Akwandze took some of the proceeds. This partnership was possible due to a DAFF subsidy that allowed for low interest rates. This programme supported 400 farmers and was worth R1bn. The level of non-performing loans in the developmental loan-book was 18-20%. Land Bank’s non-performing loans in 2016 were at 6% and in 2019, 9,3%. It was important not to take the mindset that developmental projects equated non-performance. The Land Bank approved clients with the highest probability of success and enough support to operate profitably. Development clients had a shorter history of cultivation and could not build a buffer to sustain themselves through climate issues like drought. The risk of the developmental loan-book was higher than commercial.

In terms of the application process – as indicated there were Land Bank branches throughout the country. People could go to these branches and intermediary partners like agricultural co-ops. The process involved completing a loan application, as well as a site visit. The process of education was also important– water licenses take 300 days for approval for instance, and financing coud not be granted without this. On co-ops and small scale farmers, the Land Bank did provide funding to organised operations of this variety.

Ms Gugushe agreed that the abolition of the ACB was a mistake and left a gap in the market.
The Chairperson thanked the presenters. He noted there were reasons these were called developmental finance institutions and not commercial banks. These institutions were established to close a gap in the market – municipalities could not borrow, so DBSA had to provide lines of credit. The Land Bank was also established to close gaps. DFIs had be seen in the context of the developmental state, where the state had to intervene in the economy to address historical imbalances.

The Chairperson noted the impact of the Afrikaner government establishing corporations amongst other things to deal with the “poor white problem”. The Afrikaner government used these institutions to stimulate growth for Afrikaner constituencies. The new government had to use these institutions to address these imbalances. He noted the example of ZZ2’s dominance of the tomato sector due to support for the farming operation from the National Party government.
If the IDC did not promote black industrialists, how would black people become involved in the sector, given its capital-intensive nature? Development finance institutions could make a difference. It was not about only loaning money – it had to be a full package. Some years back the Portfolio Committee on Agriculture visited Tanzania and the USA. Tanzania had a university of agriculture which packaged a programme for developing farmers, including training, education and business support services. This university facilitated access to the latest research for farmers, which was vital to success for farmers. Elsewhere in Africa, small business was the bulk of the economy. In RSA, the bulk of the economy was held by large companies. Universities in the USA assist farmers with extension services. Access to money was all very well, but if farmers were not mentored and there was no incubation, farmers would not be successful. He noted the issue of misalignment of portfolios as regards Land Bank’s operation between Treasury and the DALRRD. This misalignment of entities causes problems to service delivery that must be raised at a political level.
The Chairperson thanked the presenters for their presence. Before adjournment he noted the Committee would be in Gauteng the following week, and would be joined by their colleagues from the NCOP.
The meeting was adjourned.

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