The Standing Committee on Appropriations heard briefings from the Land Bank and National Treasury on the deteriorating financial position of the Land Bank. The Land Bank noted that as there were sensitive discussions with National Treasury and the bank’s creditors following a series of downgrades and the bank going into default in April 2020, it would be able to present only on a limited range of information.
The importance of the Land Bank particularly for food security and transformation was emphasised by both Land Bank and National Treasury.
The Land Bank Board Chairperson strongly emphasised that no amount of reengineering of the balance sheet would save the Bank without recapitalisation from National Treasury. The CEO of the Land Bank highlighted the magnitude of its finance and liquidity challenges; the value of the defaulted loans and its implications; the reasons for the Bank’s liquidity challenges; and the interventions the Bank is exploring to resolve its financial challenges.
National Treasury explained the role that it has played over the years in supporting the Land Bank and that it was fully committed to supporting the Land Bank even as its own resources fell under serious strain. Treasury will await the work of the corporate advisors appointed by the Land Bank to inform the optimal capital structure for the Land Bank.
Members asked about the Land Bank’s turnaround time for new applications, the value of its non-performing loans, and the slow progress in fulfilling its developmental mandate. Members emphasised that the Land Bank needs to prioritise marginalised persons and report numerically on its progress in this. They raised concern about the demographics of the consultants appointed to help the Land Bank move out of its financial crisis. Members asked that the Bank clarify options for diversifying its income streams to ensure its sustainability in future. In answer to the question of whether the bank will be able to self-sustain without Treasury, the Land Bank reiterated that it is highly unlikely that the Bank will survive without a capital injection and that the Bank’s mandate is too important to allow it to fail.
Mr S Buthelezi (ANC), Committee Chairperson noted there have been concerning developments at the Land Bank. It had defaulted with a number of negative consequences flowing from this as the Land Bank was downgraded by Moody’s. This has urgent and important implications on the functioning of the Bank as well as on food security, land reform, economic performance and employment creation. Apologies were noted from the Minister and Deputy Minister of Finance.
Land Bank briefing
Land Bank Board Chairperson, Mr Arthur Moloto, in his introduction said that the presentation serves to share the liquidity challenges of the Land Bank and the proposed interventions. He assured the Committee that feedback from the Committee will be used to refine the entity’s strategies. The various Moody’s downgrades, its credit profile, climate risk and shareholder support have resulted in jittery lenders who have now ceased advancing facilities to the Bank and not allowing the rollover of loans on maturity when loans fall due. The Bank is currently engaging with a consortium of all lenders composed of commercial banks and institutional investors and those discussions are at a sensitive stage which limits what information can be disclosed at this stage. He advised that the Land Bank should come back with full and concrete information once certain agreements have been secured from the lenders.
Mr Moloto stated that what can be shared is that these engagements are being conducted with a view to restructuring the debt facilities and lengthening their terms. The liabilities of the bank are in the region of R45bn and almost 45% of that amount is short-term funding. He emphasised that the Land Bank has every intention to honor the debts and service the interests on those debts. It currently has a de facto standstill agreement where no interest and capital payment is being serviced and it intends to go back to the lenders within a month and present a proposal on how liabilities will be secured and new money acquired. He strongly emphasised that no amount of reengineering of the balance sheet will cure the problem without a capital injection from the shareholder. The Land Bank is at a point where it needs recapitalisation and it is in discussions with National Treasury to recapitalise the Bank.
Land Bank CEO, Mr Ayanda Kanana, presented the magnitude of the finance and liquidity challenges faced by the Bank; the total value of the Bank’s defaulted loans and the implications for the Bank; the reasons underlying the Bank’s liquidity challenges including timelines; and the alternative solutions and support available to the bank. The overview of the Bank showed that it is a development finance institution wholly owned by government to promote inclusive agricultural rural development for improved food security and economic growth. The Land Bank vision is to be a world-class agricultural development bank that stimulates growth, drives solid performance and spurs innovation.
Looking at the Bank’s contribution to the agricultural sector and the economy, the Bank has a market share of 29% of South Africa’s agricultural debt. 60.2% is with commercial banks and the rest is split between cooperatives and other institutions. The goal is that the Bank will make the table bigger and have more participants. The Bank has control of 29% of the market share exclusively using lending activities as it has not activated any other banking activities, which would allow greater control of the market share.
At the end of February 2020, the value of the Bank’s Development and Transformation loans as a percentage of the loan book sat at approximately 20% representing R8.9bn and growing from 0% just before 2012. Growing this Development and Transformation loan book is one of the Bank’s drives for the next five years. The commercial book has been relatively steady. The Bank defines Transformation as structural acquisition by black or transformed organisations and development speaks to small-scale farmers who need support in becoming commercial businesses.
Land Bank’s Financial Performance
Mr Kanana explained that the numbers presented are unaudited and will be finalised by the Auditor General in due time. The Bank’s loan book has grown from R39bn in 2016 to R45bn at February 2020. There has been a decline in the net interest margin and strong deterioration of the operating profit of the bank by February 2020 which is sitting at -R17m. Looking at Cost to Income Ratio, Non Performing Loans (NPL) Ratio, Liquidity Coverage Ratio and the Net Stable Funding Ratio, all ratios show a significant deterioration.
Mr Kanana explained that the Cost to Income Ratio is expressed by factors including the Bank’s payroll bill and intermediaries’ bill putting the bank severely under pressure. The NPL ratio accounts for R5bn in loans not performing well as some of the Bank’s farmers are unable to service their loans due to economic stress and the mismanagement of a particular book that is in the process of being reclaimed. The Capital Adequacy Ratio is still intact but only marginally as there is not a sufficient capital buffer. The Liability Profile has changed from 2016 to 2020 showing that a longer term approach was favoured. The cost of funding has steadily increased from 6.3% to 9.1% from 2016 to February 2020. Mr Kanana shared that the Bank has been unable to pass the full cost to the client, which affects the economic viability as the Bank relies on one source of income being interest income. In any case, this cannot be fully passed on to the client because the bank still needs to remain competitive as a bank.
Slide 14 summarises the challenges faced by the Bank. From 2015 to 2020 there have been several factors, events and activities that have affected the current finances at the Land Bank. These include environmental factors and weather patterns like drought and disease that the bank is not insulated from as this impacts the ability of farmers to service the Bank’s loans. The Bank was recapitalised to the amount of R3.5bn in June 2009 having a loan book of R14.5bn and has since applied for recapitalisation in July 2019 in light of its book sitting at R45bn. Moody’s flagged the Bank for downgrade in November 2019; then downgraded the Bank’s ratings in January 2020 to a global rating of just below investment grade (junk status); then downgraded the Bank’s sovereign debt in March 2020; and further downgraded the Bank’s ratings in April 2020.
The Bank was placed on review in November 2019 with a negative outlook by Moody’s and the concerns raised here were alluded to in the ratings downgrade in January 2020. This included rising solvency pressures; low earnings; reliance on volatile debt and capital markets; government fiscal challenges and the prolonged period of uncertainty in the new CEO appointment. Following the January 2020 downgrade, some investors reduced their exposure to the bank and some facilities the Bank had were frozen. The Board wrote to the Minister of Finance in February 2020 about the Bank’s liquidity challenge and the Minister responded with Treasury’s approval of the utilisation of the R5.7bn guarantee.
Mr Kanana explained that when Land Bank participates in the market and borrows on a short term basis this money is then passed on to farmers on loan on a long term basis. Farmers would prefer to have rolling facilities because of their seasonal work and the funds are never really settled and are recycled into the system. The bank cannot run away from borrowing money to pay other creditors which would be acceptable in the case that it is well-rated. However, once the ratings are downgraded, lenders become jittery. This has largely contributed to the liquidity situation of the bank, even though there was a bank guarantee from Treasury. Once the covenants or ratios have been breached, investors shy away from investing money and they start to question the viability of the business.
At end March 2020, Land Bank received another downgrade as all the development finance institutions (DFIs) were downgraded and it saw further disinvestments as a result of this. Factors included the state not being able to support the DFIs as the impact of COVID-19 started to be felt in the economy and the agricultural sector. The implications of this downgrade including the default.
Mr Kanana explained the default in April 2020 involved a loan facility that is expected to be paid back on a quarterly basis. The bank could not afford to repay this and even after 14 days the bank could not service it, triggering the default. Other incoming loan maturities pushed the bank to the threshold of cross-loan defaults in the week of 20 April 2020. The global rating was then further downgraded into non-investment as highly speculative and the national scale was just two notches above non-investment. Any further downgrade will have the national scale rating also go below non-investment and once it reaches non-investment on the national scale, it will be extremely difficult to remedy and convince the market that Land Bank is still a bankable client.
The presentation noted some corrective interventions. In August 2019, the Bank requested a R5bn recapitalisation, the CEO and CFO were appointed in February and March 2020, the shareholder guaranteed R5.7bn in February 2020 for the Land Bank fundraising programme and the Bank engaged the services of ENSafrica in April 2020 and RMB in May 2020. The Land Bank has also formed coordinated groupings for the Bank’s funders including two banking groups and one steering committee.
Land Bank is currently in a de facto standstill meaning all creditors of the bank are not being serviced in their interest and capital payments and have been asked not to accelerate and have a run on the Bank. This is to help the bank get room to implement a turnaround plan. It has also announced a liquidity facility of R3bn to help the bank survive and a balance sheet optimisation exercise to ensure that the Bank is able to respond to its mandate accordingly and emerge with a repurposed bank.
National Treasury has said that it wants to see a self-sustaining bank that is fit for purpose and responsive to its development mandate. Land Bank cannot be funded adequately from a net interest margin or repayments and so there will need to be an injection of money from the Bank’s shareholder. The Bank is responsible for defining what the injection will look like and price it accordingly and all that work is underway. This goal of a repurposed bank forms part of Land Bank’s 2025 vision and reflects the two units of the Bank - a commercial unit and development unit - to ensure that Land Bank is fit for purpose and is able to self-sustain and come to an optimal balance sheet. He closed by echoing that the Land Bank is too important to fail as its failure will cause a crisis of multiple proportions. The goal for the Land Bank is to allow for youth, women and Africans to take their rightful place in agriculture. The Bank is appealing for support to ensure that the Bank survives this turbulent season.
National Treasury briefing
Acting Head of Asset & Liability Management in National Treasury, Ms Tshepiso Moahloli, shared that Treasury is tasked with ensuring adequate oversight over state owned entities and is aware that many are in the red. She assured the Committee that National Treasury has been aware of some of the challenges of the Land Bank and their applications for recapitalisation. She explained that there are many other state objectives competing for the same resources in Treasury against a background where expenditure is drastically increasing and revenue rapidly decreasing.
Ms Moahloli noted that the Land Bank had guarantees that were issued and had to come back and make a request for utilisation and at the time Treasury understood the Bank’s situation and was not too wary to provide the utilisation. In playing its role of oversight, Treasury cannot run the bank but issued guarantees with conditions intending to address certain behaviours and achieve certain outcomes. One of these conditions was that the guarantees must be used to fund debt that is long-term because at the time 45% of debt due in the short term was seen as unsustainable. Treasury allowed utilisation of R1.4bn but could not continue utilising these guarantees. As the COVID-19 crisis unravels, this sends the financial market into a bout of uncertainty limiting the amount of money available.
Since the initial request for guarantees, Land Bank indicated that they could not access the markets and came back to request recapitalisation of R5bn immediately followed by R17bn to total at R22bn. This request comes as revenue is declining and the government budget is unsettled. The rate at which the events were unfolding limited the possibilities of resolving the challenges at the Land Bank speedily. Government was expected to respond to COVID-19 in a speedy manner and is expecting a new fiscal framework that outlines the condition of the fiscus suggesting a difficult picture. She emphasised that this is a phenomena that has affected countries globally but the strength of different countries allows some to fare better. She assured the Committee that where Treasury is, is not a sign of a lack of commitment from government or an undermining of the importance of the Land Bank. Treasury has been engaging in the various processes happening at the Land Bank to move towards a sustainable resolution of their current liquidity and default challenges.
Ms Moahloli stated that Treasury will await the work of the corporate advisors appointed by the Land Bank to inform the optimal capital structure for the Land Bank. The resources for government are getting squeezed and government does not yet have an understanding whether the emergence out of the COVID-19 pandemic will be followed by a V-shaped recovery showing short term shock translating into growth picking up immediately or an L-shaped recovery where we will come out still operating at low levels. Treasury has appealed to lenders to continue supporting state owned entities (SOEs) to reduce the burden on the state especially in an environment where everyone is impacted. In the same vein, National Treasury has appealed to SOEs to do certain things within their businesses to run the entities as efficiently as possible so they do not have to put a lot of strain on the fiscus in its precarious condition. Treasury continues to work with entities to show its commitment even as the state resources might not reflect this.
Mr O Mathafa (ANC) welcomed the presentation and commended the bank on its intervention efforts, particularly in addressing the staffing vacancies. He asked that the Land Bank clarify if the new arrangement is able to respond to the concerns raised by Moody’s. On the non performing loans (NPLs) he asked what the acceptable percentage is for the Bank’s loan book for NPLs and what the Bank is doing to address the increase. He asked that the Land Bank provide the reason for the increase - speculating that it may either be an inadequate screening process or other external factors that need to be addressed. He stated that the CEO correctly refers to inadequacy of the capital buffer and Moody’s raised that the bank is sitting at 1.4% above what the law requires. He asked that the Bank clarify what its response will be in ensuring adequate capital for the buffer required by law and the operational requirements of the bank.
Looking at the historic mission of the democratic government to improve the lives of the marginalised, Mr Mathafa asked what percentage or amount of the R45bn book reflects loans made to black people, youth and women. He asked that the Bank clarify its current view on new applications as new applicants will often be Africans who have not had access to the agriculture sector. On the cost to income ratio, the CEO raised the payroll bill and the financing costs. He asked the Bank what it is planning to do to improve the cost to income ratio.
Mr D Joseph (DA) expressed serious disappointment about the Land Bank and agreed with the comment that the Land Bank is too important to fail. By defaulting on its loans and failing to control its internal payroll, the Land Back has failed the farmers, the small-scale farmers, and the foundations of transformation in our democracy in redressing South African society. He emphasised that the Land Bank is a fundamental instrument in bringing about change and ensuring food security.
Mr Joseph asked that the Bank clarify the timeframe set for the consultations and he raised a concern about obtaining the help of international investors during the COVID-19 global crisis. He asked what the bank is going to do about the internal payroll and the turnaround strategy relevant here. He asked if there is any corruption at the Land Bank and what the interventions are if there are such challenges.
Ms M Dikgale (ANC) thanked the presenters and commented that the developments in the Land Bank are not positive. The Land Bank’s vision statement says it wants to be a world-class agricultural development bank but this is now not reflected in its financial position as the bank’s liquidity position has reached a distressed level. She asked how it is responding to the non-performing loans. Companies with a similar loan function follow up on such loans. The presentation indicates the various turnaround plans without timeframes and she requested these timeframes. The Land Bank’s recommendation was that the Minister of Finance and National Treasury assist the Bank and she asked if the Land Bank is not destined to follow in the footsteps of South African Airways who consistently asked for assistance with no positive results thereafter.
Ms D Peters (ANC) asked how the bank intends to survive the downgrade, probably without the support of Treasury, and also avoid going into these problems again in the future. The Northern Cape and Eastern Cape farmers are experiencing a double whammy with the drought and the COVID-19 crisis. Is the Bank looking at relieving the farmers indebted to the bank and how does the bank see itself being able to support and help these particular farmers? She asked how long it takes the Bank to process applications for loans. Provinces like the Northern Cape tend to get forgotten by those in national offices. She cited a 70% black owned company in the Northern Cape with Defence Force contracts that applied for a loan and has not received a response. She asked how the bank clarify is approaching the necessary upliftment of black farmers, youth and women as this bank should deliver on the 1955 Kliptown promise that the land shall be shared by those who work it. In the loan book, what percentage is directly for previously disadvantaged people, in particular youth and women? There are many cases where people have been given land to farm on but have not been able to do so because of lack of access to equipment and financing. In the current democratic and constitutional dispensation it does not seem like the Land Bank has the drive, passion and eagerness to catalyse transformation. In the drive for the amendment of s25 of the Constitution to allow for expropriation without compensation, the Land Bank is directly important in the implementation stages.
Mr N Ntlangwini (EFF) thanked the presenters and said that the Land Bank, as it works to improve food security and provide funding, should prioritise black women. National Treasury should ensure that resources are put into the bank and that qualified individuals are appointed to run a productive cash flow. She asked who the funders of the Land Bank are. She asked what amount the non-performing loans represent, how many loans they represent and the racial demographic spread of the non-performing loans.
Mr X Qayiso (ANC) commented that both National Treasury and the Land Bank are tasked with a critical role as Land Bank plays a radical role of transformation in respect of land. Black farmers face challenges in accessing assistance. He agreed with Ms Peters about the ‘Cinderella provinces’ as Free State province people are also experiencing the challenge of accessing support as they struggle with climate conditions such as the ongoing droughts. He asked the Bank to clarify how it positions itself on amending s25 of the Constitution to allow expropriation without compensation as a means of radicalising the economy. On the challenge of people resigning and leaving, does the Land Bank have a retention strategy? He asked how the Bank plans to resolve its inaccessibility in future as a number of black farmers have sent complaints that they do not have access to support from the Bank.
Mr A Sarupen (DA) asked if the restructuring of the Land Bank includes a plan to diversify its income streams and increase its reach further down the value chain. He asked how it intends to attract downstream value players given their strong cash flow so that they service their loans at the bank. What measures will the Bank put in place to improve its governance and avoid the current challenge reoccurring in future?
Mr S Buthelezi (ANC), Committee Chairperson, thanked the presenters for an enlightening presentation and commented that this information can guide the Committee’s work. He could not avoid noticing that the consultants appointed to assist the Land Bank are white and well-established service providers. They should make an effort in working with black firms and black professionals going forward and future presentations should indicate its black economic empowerment decisions in the acquisition of goods and services. He asked that the Land Bank comment on its impairments and write-offs for non-performing loans. He asked about the role of the intermediaries at the Land Bank, why they are important, what demographics they reflect, and whether they add to the core structure of the Bank. What is the attitude of emerging farmers like the Black Farmers Association (BFASA) on the use of intermediaries?
Mr Buthelezi asked that the Bank share information on the planned developmental projects and the implications of the challenges the bank is currently facing on these projects. What has happened with the proposal for blended finance? On the optimisation of the balance sheet, he agrees with the Land Bank Chairperson that no amount of reengineering this balance sheet will help; it is clear that it needs an equity injection. The Bank’s development mandate is currently an unfunded mandate and he is struggling to figure out why this is so. Since PIC and IDC are some of the Bank’s lenders, he asked if the Bank has ever engaged with them for conversions to hold equity in the Bank to strengthen the Bank’s balance sheet. PIC and IDC hold shares in a number of companies. He cited the example of Sasol, in which both PIC and IDC hold equity. A year ago the share price of Sasol was about R470 per share and today it is below R90 per share and seemingly PIC and IDC have no problem in maintaining holding equity in such companies. Historically, the Land Bank has played a developmental role in creating Afrikaaner farmers. The type of structure the Bank currently maintains of going to the market, raising money, placing a margin on the interest and passing on that amount to the emerging farmer will sustain the Bank's challenges in not being able to fund black farmers. The Bank should fulfill its developmental mandate, but this cannot be an unfunded mandate. Otherwise, land reform will remain a pipedream.
Land Bank responses
Mr Moloto, Land Bank Board Chairperson, replied about the unfunded mandate, saying that Land Bank has appeared before this Committee before and made the point that to expect development farmers to be financed from money raised from capital markets is not a realistic solution. In an ideal world, it is better that a large portion of the money advanced to emerging farmers be in the form of a grant and a small portion to reflect debt. On the possibility of opening the space for PIC, IDC and perhaps private shareholders to hold equity in the bank, the Finance Minister has clarified the position that the model of the Land Bank being 100% owned by the state should be revisited given the fiscal pressure the state is experiencing. The Minister has suggested that it is important that the space be opened up for other players to invest in the Land Bank.
On the use of white consultants, Mr Moloto replied that it has a panel of legal practitioners on its system and it does not go on tender but rather invites individuals and firms to join the panel. Since he has joined, the Bank has had black attorneys and advocates and continues to have them in other areas of the Bank’s business and further details can be provided on this aspect. In this instance it was deemed to be appropriate to use ENSafrica and RMB as experts in the field to try and restructure the Bank’s business.
Mr Moloto replied that non-performing loans (NPLs) are bound to happen particularly in the agriculture sector where business is faced with challenges of hail, drought and disease. NPLs will always be part of the Bank’s business model, but what is important is how these NPLs are managed and how the impact of NPLs is minimised on the balance sheet.
On the Bank’s turnaround times for applications, Mr Moloto replied that the Bank is the first to acknowledge that it has been inefficient in some respects. In response to these challenges, the Land Bank has observed that it needs to change its credit policies, modernise its IT system and limit touch points in the system to improve its response time for applicants.
On sustainability without support from National Treasury, Mr Moloto replied that this may be possible through the Bank scaling down its operations to improve on its gearing ratio. National Treasury, as part of its guarantee conditions, indicated that it needs to bring down its gearing ratio as it is too high in light of the minimal equity held by the Bank. This was deliberated on and the selling of assets was considered to bring this ratio down but this raised several detrimental implications. The Bank needs to find creative ways of reducing the cost to income ratio, even as undesirable it is to retrench staff. On corruption, he replied that Land Bank runs a tight and clean ship and in the face of any corporate governance lapses, the board does not hesitate to take disciplinary action and dismiss people where necessary. He emphasised that the Land Bank prides itself in maintaining the highest ethical standards.
Mr Ayanda Kanana, Land Bank CEO, assured the Committee that its sentiments on BEE in the use of consultants is heard. The Bank is looking at the cost implications of the running model of intermediaries and whether the Bank is benefitting from this process. As part of the optimisation solution, it should be able to answer how the model will be dealt with and if it will be direct or indirect lending. Land Bank does have some duplications as it has provincial networks, a head office and intermediaries doing the Bank’s work. The Bank will continue looking at these duplications and respond to the Committee’s concerns when there is more information. He confirmed that he has had the opportunity to engage with farmer associations like BFASA on intermediaries and the benefit of the structure for black farmers. This matter is under review and he requested time for the Bank to formulate a comprehensive answer to that particular question.
Mr Kanana informed the Committee that the Bank has been engaging with the Department of Agriculture who have indicated that there is a process involving the land that is available and that this land is due to participate in the land reform exercise. Whether it is pre- or post- land reform, that land still needs to be commercialised and the Land Bank plays a key role in ensuring that the African farmer is able to participate with lower collateral expectations. He assured the Committee that the Bank has had development projects in the past which contribute to the upliftment of women and youth that Executive of Strategy and Communication, Sydney Soundy could speak to in numbers.
At the beginning of March the Bank did commence with a developmental project. It is aimed at 180 projects throughout the country focusing on ways to integrate farmers into the value chain system, to ensure that these farmers enjoy the economies of a value chain. Agricultural products at the primary level can only sell for so much but once these products are processed and sent to the end market, the economies are largely beneficial to the people who take it from that point onwards. Land Bank is looking at ways to integrate farmers to ensure that the ownership goes beyond just primary agriculture to processing and that the Bank is able to fund this successfully. These are the projects that the Bank has launched with its teams and they are trying to ensure that every farmer is on board. He confirmed that he has already engaged BFASA on these projects. The Land Bank is hoping that post-COVID-19, it will be able to commence with its road shows as the Bank does not view itself as a hospital that farmers must go to, but rather the favoured approach is that the Bank go to farming and rural communities and ensure these farmers participate in the economy.
On the capital buffer, Mr Kanana replied the balance sheet on its own is not sufficient and the R5bn reflecting the Bank’s equity investment will not be adequate in carrying the bank going forward. The money that is sitting in the farming community tends to be recycled in that space as opposed to turning about and coming back, which requires the bank to keep borrowing to stay afloat. A bank that has poor credit rating will not last and so this model is being revisited.
Mr Kanana replied that the Bank has noted the disappointment on failed transformation and failing the farmers and he assured the Committee that the Bank is accountable to the Committee and is seriously working on addressing these issues. The Land Bank must be able to provide transacting capability to its farmers, must be able to offer and utilise internet banking, and must be able to respond within 48 hours to applications. These are initiatives that the Bank is looking into and is trying to ensure that farmers benefit. Mr Kanana affirmed that the Land Bank has an insurance division and should be able to offer life cover, insurance and structural support to farms. The Bank should be able extend its cover to the employees of a farm so that farm employee families are looked after through a life cover policy. He mentioned these options to show that the Bank has options that it is currently considering to formulate an appropriate response.
On timeframes, Mr Kanana confirmed that the liquidity solution he mentioned of R3bn involves a two week exercise that the Bank is engaged in with its lenders and is in the process of submitting the necessary information to the lenders. On the longer term liability solution referred to as the optimisation of the Bank’s balance sheet, a lot of work has gone into repurposing the Bank. It is now looking at the financial model and pricing model. Within a period of six weeks, the Bank intends to emerge with a product. Addressing the comparisons made by Committee members to other state entities that are not performing well, he understood where this sentiment came from but insisted that the Land Bank is a critical entity experiencing issues of a mismatch. He reminded them that the Land Bank has repaid its facilities and returned guarantees to the State previously whilst it was cash flush. The Bank remains confident that it can still revisit that space and share in that glory and would not want the State to throw out the baby with the bathwater in this instance. He assured the Committee that, as a critical organisation, with the right support and the right framework, the Land Bank should be able to deliver on its commitments.
On the relief programmes, Mr Kanana explained that the Land Bank has had a drought relief programme and was offered R100m by the Department of Agriculture for COVID-19 relief. Land Bank is working with the Department of Agriculture on these applications should the Bank’s clients require that support. He warned that the Bank has had to temporarily close for new applications due to the liquidity challenges so it does not affect those already in the system and facing challenges. Until the bank reaches a point where it has enough liquidity to service agriculture in the way that intends to, new applications will be closed.
Mr Kanana agreed that the bank is meant to be a catalyst for transformation. The 180 projects targeted have a women and youth focus. The Bank has challenged itself to have those with or without collateral so that it can blend the money and lower the fence for African farmers to come in. The Bank will do its best to lower the bureaucracy demands around the applications and ensure that the Bank is able to respond with speed whether it is an approval or a decline. The Bank is currently setting up service standards that clients and staff must understand to improve on the Bank’s response time.
Land Bank CFO, Ms Khensani Mukhari, replied that the reason for the R5bn in NPLs is multifold. The Land Bank is concentrated on agriculture and challenges like drought and disease experienced across different provinces affect the bank directly. Further there was one intermediary which because of drought and farmers not being able to repay the loans, kept recycling the loan. In that instance, Land Bank has stepped in to take over management of that loan book. She clarified that in managing NPLs, there is a team in Land Bank looking at the loan book entirely before there is a default to ensure that the bank is aware of the condition of the book and can take a proactive view on likely performance. Given the Bank’s mandate, it does not rush into liquidating clients but rather makes an effort to remediate before legal steps are taken. There is a team at head office and in regions interacting directly with clients on originations, support and collections that runs well. The current NPLs are largely concentrated with the intermediary mentioned and the development book carries a significant portion of the NPLs.
On loan impairments, Ms Mukhari explained that the way that the Bank runs its loans is through moveable and immoveable property so that the loans have a high level of security. Due to this, the Bank does not carry a lot of impairments because when a loan reaches a stage where it should be recovered, the Bank will first try to recover the outstanding balance from the customer, which minimises the impairments.
The Committee Chairperson asked that the CFO should speak in numbers and percentages and not whether something is significant or not.
Land Bank Executive: Strategy and Communication, Mr Sydney Soundy, gave some background to blended finance. One has to look at the agricultural sector as a full ecosystem so that all players should work on a coordinated and collaborative basis to get agriculture to work. The Land Bank is an important part of that ecosystem as a catalyst for financing the sector. One has to appreciate that new entrants in the system come with particular requirements or challenges. Examples would include whether new entrants have their own contribution to the project, if they have sufficient collateral, and if these new entrants are appropriately trained with expertise and experience. Beyond the Land Bank financing these entrepreneurs in the agricultural sector, what type of support do they have for the financing to be sustainable for extension services that need to be provided to new entrants and more importantly access to the markets. Without access to markets the ability to be commercially viable gets compromised. As a result of these complexities, the Land Bank needs to review this whole entire system.
The proposals for blended finance aimed to help the contribution aspect of a project so that the own financing contribution which previously disadvantaged persons largely cannot contribute would be addressed by blended finance coming as a form of own contribution that is put into the transaction or project. This was aimed at minimising the gearing of the debt for that particular business to enable farmers and entrepreneurs to pay back part of the loan. Blended finance was thus supposed to be a combination of a grant which was provided by the Department of Agriculture and a loan provided by Land Bank. When this kicked off in the beginning of 2019, the Bank was undertaking a pilot programme because the vision for this blended finance was that it was going to be made available for all financial institutions and they would be called participating financial institutions. The Land Bank has undertaken projects that included this blended finance mechanism with about R100m of grants going towards this particular programme. After that the pilot programme was paused as there was a need for the Bank to review the pilot’s progress, its challenges, the criteria to be used going forward so that by the time this program is unfolded in a broader spectrum, those lessons have been learned. The Department and Land Bank are now working on new criteria which delegates can share as a follow-up to indicate the progress in the implementation of this blended finance mechanism.
Land Bank’s developmental mandate
On supporting the Bank’s development mandate, Mr Soundy pointed to the presentation’s indication that despite the Bank making significant progress, it was still uncomfortable with where it currently sat on development as 20% of the loan book for development is still not sufficient. However the structure of the funding of the institution is important to provide the Bank with the capacity and capability to further improve on these numbers. On the numbers representing marginalised people, in the last financial year the Bank provided supported women-only businesses to the tune of about R100m and youth-only businesses with about R20m. He agreed with Members that these numbers need to be grown further in future.
Mr Soundy shared that the Bank has utilised intermediaries to support smallholder farmers in the form of wholesale financing facilities, which are used to subsidise the cost of funding for the end farmer so that these farmers do not have to pay the standard commercial rates. In the last financial year, the book supported R2.2bn of disbursements to 642 smallholder farmers. On procurement of legal advisors and corporate finance advisors, he explained that the Land Bank operates within the confines of current objectives of the Broad Based Economic Empowerment model and the Bank’s procurement of services in the last financial year for level one up to level 4 entities was 97% of the Bank’s procurement spend. The corporate finance advisor and the legal advisor are level one entities.
National Treasury response
Chief Director in National Treasury Asset and Liability Management Division, Ms Unathi Ngwenya, replied to the concerns raised on the unfunded mandate. As part of the broader framework of reforming SOEs, the Land Bank has been a focus. The costing of the development mandate and the commercial mandate was done so National Treasury has sight of what the development and commercial mandates are for SOEs. This process is intended to allow transparency when placing these mandates in the budget and avoiding cases of equity being deteriorated via subsidies happening in the income statement and balance sheet of these entities.
National Treasury Acting Head: Asset & Liability Management, Ms Tshepiso Moahloli, reflected on the question of the Land Bank balance sheet. After Treasury recognised the weak balance sheet, it asked Land Bank to reduce the gearing ratio, that is, the extent to which the Bank is funded by debt relative to equity. That has been a key condition placed on the requested guarantees. Of the R45bn debt, R5bn is guaranteed by the state. She clarified that the state does not get involved in liabilities acquired without guarantees. She suggested that in resolving the Land Bank’s financial challenges there are interventions that can be explored from an equity perspective as well as from the perspective of liabilities and assets which need to move in line with the equity that is available. There is room for work to be done on the balance sheet and all the ratios, as presented, need to be improved on as the Land Bank cannot grow at a rate in which it is not able to be supported. The loan maturities are not a function of support but rather a function of how it is run so it is important that Land Bank lengthen maturities. Management and the Board need to ensure that as they are discharging their duties, those elements of running a business are intact. As a shareholder and as government, government creates a framework within which entities need to operate and it cannot be held responsible for the decisions made internally within these frameworks.
Ms Moahloli replied that, whilst Treasury is responsible for providing resources, the acquisition of skills and ensuring that the Land Bank is performing is the purview of the board, which is a role the board has fulfilled. The Land Bank has been turned around previously. Its current challenges may come to some as a surprise as the Bank was provided with equity and was previously running on the strength of its balance sheet as reflected by its minimal guarantees. The idea of a turnaround strategy is not for entities to be turned around every five to ten years because the key tenet in a turnaround strategy is sustainability. Bailing out companies creates moral hazard in the sense that it creates an expectation that bailouts should be done at all costs but right now the state itself has a weak balance sheet. The situation at hand opens up a broader discussion about reforming shareholder models and reviewing whether shareholding should be dispersed beyond government so that various shareholders with resources can continue to assist in the role of providing capital and support state objectives.
Ms Moahloli acknowledged the importance of the Land Bank for various key state objectives has been raised. Support from its shareholder should be provided in a responsible and informed manner as the Public Finance Management Act and the Constitution requires. Government is a representative shareholder and certainly a very visible stakeholder in the eyes of the people, but every South African who pays taxes is a shareholder and so the government’s duties should be discharged in a manner that demonstrates due care for the country in moving forward.
Follow up Questions
Ms Peters asked again if it is intentional on Land Bank’s part that applications are not answered after six months. The application by the 70% black owned company in her constituency has been left hanging for over a year.
Mr Joseph said that he is sensing that the Land Bank is approaching the Committee and Treasury for additional funding. He asked if there are discussions between Treasury and the Land Bank about specific figures that can be shared or is that interaction simply about assisting with turnaround strategies for financial models and administration.
The Committee Chairperson addressed National Treasury saying that giving guarantees facilitates the Land Bank back into indebtedness and further weakens the balance sheet of the Bank. The developmental mandate of this institution needs to be heeded so there should be an equity injection. The Land Bank should minimise use of consultants and the associated expenses. It should behave as if it is cash-strapped and work within its internal competencies. He asked the Land Bank Board Chairperson to clarify the relationship with Grobank, saying he is aware that many people who have left the Land Bank moved to Grobank. Has the Land Bank funded Grobank and if it has, was it then not funding its own competition? He asked that Mr Moloto follow up on approaching some its lenders, particularly those who are DFIs like the IDC and PIC, on holding equity in the Bank. Looking at the responsibility given to this institution, the shareholder should be public institutions. Bringing in private sector investment will weaken the ability to actualise its developmental mandate.
Land Bank response
Mr Moloto replied that Land Bank is the first to admit the inefficiency of its systems. The Bank convened a meeting of national managers including the Northern Cape managers and there was a bashing of heads. The Bank has appeared before Parliament previously and MPs raised these same concerns on the Bank's turnaround times. The regional teams have been asked by the board to modernise their IT systems so that a client is able to receive a response within three months. The managers have previously tried to excuse the inefficiency by citing missing documents. The board has emphasised that this is unacceptable as the Bank needs to have a template of all the necessary documents and then respond to clients when documents are missing. On the capital structure, RMB is assisting the bank to determine the appropriate amount that needs to be injected into the bank.
Mr Moloto replied that Grobank is owned by AFGRI, PIC and Fairfax, and the Land Bank holds a relationship with AFGRI and no relationship with Grobank directly. AFGRI, through UNIGRO, is the Land Bank’s service level agreement partner. Land Bank has not been funded directly. There was placement of money of about R330m in Grobank to buy some of their paper and this money was subsequently withdrawn at the instruction of the board. Land Bank does not have any other commercial link with Grobank and views Grobank the same as any other existing bank involved in the agricultural sector. If there is any collaboration that has to merge between the Land Bank and Grobank or any other bank, the board will have to consider and decide on what areas it would be willing to collaborate.
The Committee Chairperson acknowledged that there needs to be a follow-up meeting. As National Treasury looks at the supplementary adjusted budget, there should be some focus on the Land Bank. The Chairperson stressed that the Committee needs to focus on the Land Bank. Having interacted with the Land Bank in his previous positions at National Treasury and in the Department of Agriculture, he knows the Land Bank to be one of the institutions that is well-run despite its challenges. He said that some of the major challenges at the Bank include fulfilling its development mandate and supporting service providers owned by black people, women and youth. Black companies are complaining about being sidelined even during the COVID-19 relief funding. He asked that, in future, letters inviting companies and government departments to the Committee should be clear that they report on their activities regarding the transformation mandate as uplifted in the Constitution.
The Committee adopted the minutes of the 11 May 2020 meeting.
The Committee’s next meetings would Tuesday 26 and Wednesday 27 May 2020.
The meeting was adjourned.
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