Financial Matters Amendment Bill: Matters concerning the Land Bank, with the Deputy Minister

Meeting report

Introductory remarks by the Deputy Minister
Dr David Masondo, Deputy Minister of Finance, said that the purpose of the presentation was to brief the Committee on the policy direction for the Land Bank, as well as to request the Committee to support the amendment of Section 45 of the Land Bank Act as presented previously by National Treasury. The presentation by National Treasury would also provide an update on the recent improvements in the performance of the Land Bank, under the leadership of the new board. [Please see the Deputy Minister’s ‘speaking notes’ attached for accurate details.]

He said there is a need for government and the Committee – as the legislative arm, to clarify what is wanted out of the Land Bank. The Executive would want the Lank Bank to make a positive contribution to the growth and transformation of the agricultural sector. The restructuring of the Lank Bank is crucial for it to be re-established as an effective and efficient development finance institution that will contribute towards the growth and transformation of the sector.

The Land Bank needs to prioritise its developmental impact and improve its support of development or emerging farmers, more importantly, black farmers in the agricultural sector. In doing so, the Land Bank must work closely with the Department of Agriculture, Land Reform and Rural Development.

The last three years have been challenging for government and the Lank Bank. The current situation at the Land Bank should be remedied so that the Bank can return to its full operation as soon as possible. It is known that the Land Bank has experienced liquidity challenges and defaulted on its debt obligations on 1 April 2020. Through a series of cross-default provisions, this meant that all of the Land Bank’s debt became payable at that point. To remedy the situation, the Land Bank started the process of negotiations with its lenders to restructure the outstanding debt and craft a workable repayment plan; this process of debt restructuring is termed “liability solution”. Over the last three years, the Land Bank and its lenders have worked on a number of possible solutions; however, due to the complexity of the Lank Bank’s strategic structure and the large number of lenders involved, to date, the Bank has not been able to find a solution that enjoys the consensus of all its members.

National Treasury continues to support the Land Bank in its data restructuring process. It is working with the entity to ensure that it continues to play its vital role in the agricultural sector, whilst working on the liability solution. Government also provided fiscal support to the Bank; since the default, the Land Bank has been recapitalised with a total of R10 billion. R3 billion of the recapitalisation was transferred in 2020, which assisted the Bank in doing the following: (a) continue paying interest on all outstanding debt; (b) start paying down capital on its outstanding debt; (c) undertake limited disbursement on its performing clients. The remaining R7 billion is still available to be transferred to the Land Bank subject to the Land Bank concluding the liability solution, which will cure the default position of the Land Bank.

There have been improvements so far as the Land Bank is concerned. While the Bank remains in default, it has managed to repay 43% of the debt that was outstanding in 2020; and only R1.5 billion of guaranteed that remains. The Bank has significantly improved its governance, financial reporting and internal control mechanisms; this resulted in the Bank achieving a clean audit opinion in the last financial year, against a qualified audit opinion in the 2021 financial year, and a disclaimer in the 2020 financial year. The financial performance has also improved; the Bank is in healthy liquidity and solvency position, and it reported a net profit of R1.4 billion. While recovery efforts continue, there is encouragement from the Bank's effort to close its mandate gaps and implement its developmental finance programme.

In terms of High Court Rule 45(12), creditors of the Bank may institute proceedings to obtain a judgment against the Land Bank and execute against its assets; including its debt book, through the usual execution process set out in the rules of court. This process may lead to unstructured liquidation or disorderly wind-down of the Bank. Although the process will be extremely cumbersome, time-consuming and expensive for the lenders to invoke, there is no guarantee that the lenders may not resort to it and invoke it.

National Treasury and government view the Land Bank as an important institution given its role in protecting food security and providing vital financial assistance to developing farmers. Therefore, the Bank has to be protected from an unorderly wind-down or litigation by limiting the ability of third parties to place the Bank in liquidation. It is against this background that there is a request for the Committee to support the amendment of Section 45 of the Land Bank Act. The amendments provide an important safety net for the Land Bank and will ensure that the entity receives the protections afforded by the Companies Act.

Briefing by National Treasury – Policy directive for the Land Bank
Ms Rudzani Mandiwana, Director: Corporate Governance, ALM Division, National Treasury, presented the following [Please see the PowerPoint slides for full details]:

Land Bank’s debt challenges
• Land Bank experienced liquidity challenges and its credit rating was downgraded from investment grade by Moody’s in January 2020.
• Land Bank defaulted on its debt obligations on 1 April 2020, and has remained in default since.
• Land Bank is in a de-facto debt standstill with lenders and has been engaging various lenders’ groups to find a solution.

Efforts to save the Bank
• The Bank received approval to utilise R5.7 billion of guarantees.
• Co-ordinated groups have been formed to support Land Bank’s debt standstill and the restructuring of debt.
• The Land Bank received recapitalisation of R3 billion in 2020; the Bank received further recapitalisation of R7 billion in 2021 which is yet to be transferred. The funds are meant to (a) cure the default position; and (b) re-establish the development and transformation mandate of the Land Bank.

Repurposing of the Land Bank
• Short term: The Land Bank is expected to cure its default position as soon as possible and service all interest, repay client deposits and service critical disbursements to allow the Bank to become operational again.
• Medium to long term: There will be a full review of the Land Bank’s operating and funding model; and a review of the entire Land Bank Act to align it to government policy on agriculture and rural development.

See presentation attached for further details

Briefing by the Land Bank

Ms Thabi Nkosi, Chairperson, Land Bank, provided an update on the performance of the Land Bank. [Please see the slides for full details]

She outlined a three-phase approach to the recovery of the Bank - stabilisation, consolidation and growth. There will be a focus on stabilising the entity in the immediate term. The stabilisation phase will be the basis for sustainable consolidation and growth.

See presentation attached for further details

Additional input from National Treasury
Deputy Minister Masondo asked that Adv van Schoor comment on the request of government for the Committee to support the amendment of Section 45 of the Land Bank Act.

Adv Empie van Schoor, Chief Director: Legislation, National Treasury, said that the amendment is to replace the current provision that provides for judicial management. The amendment is to align it with the Companies Act to provide for business rescue. This can only be by means of a court application, either by the Minister or the Board of the Land Bank. The other important provision is that in terms of the Companies Act, the business rescue may result in liquidation. However, the provision proposed in the Bill excludes the application of the liquidation procedures under the Companies Act. The provision in the current Act states that only an act of Parliament may liquidate the Land Bank, so there is no risk of liquidation of the Land Bank under the Companies Act. This aligns with what is under the current Companies Act, where certain provisions of the Act are applied, but not all of the provisions.

She said that apart from the amendments to the Land Bank Act, the Committee made a call that there are also amendments to other laws in the Bill. Some of these amendments pertain to pension laws, which impact individuals. There are also amendments to the Auditing Profession Act to assist with disciplinary hearings urrently in abeyance, and awaiting these amendments.

Discussion
The Chairperson said that on 21 April, the Committee had an oversight visit to the Land Bank in Pretoria. The Committee had very constructive engagements with the Board and management of the Land Bank, as well as officials from National Treasury. A number of issues were raised and the Committee made specific proposals. The Committee adopted its oversight visit report in June. It outlines what the Committee had observed, discussed and proposed.

Mr A Sarupen (DA) welcomed the effort that the Land Bank is making in its turnaround. It was said that the Land Bank is losing critical staff in the absence of a liability solution. He asked what the scale of this was and what interventions were being made to deal with it. It was said that the Land Bank would resume some of its lending activities. He recalled that the Land Bank were unable to do so in the past because of its default status, meaning that it could not source any new funding. He asked what source of funding the Land Bank has, since it is now able to resume some of its lending activities. Is the liability solution on track to be in place by the end of the year, as planned? And if not, why not?

Mr K Morolong (ANC) asked what strategy was in place to address staff retention, given the fact that the Land Bank has experienced a growing loss of staff and skill. He asked what strategy was in place to deal with the non-performing loans. He said that during the oversight visit to the Land Bank, there was concern about the role played by intermediaries which were not very constructive. He asked for an update on this matter, and whether the Land Bank had completely terminated the mandate of these intermediaries. He said it was encouraging to hear that the Land Bank revised its funding model. It was also encouraging to hear of the Land Bank’s collaboration with the Department of Agriculture, Land Reform and Rural Development. In future, he would be interested in the Land Bank providing more detail on the launch of its Blended Financial Scheme, particularly on how it would benefit emerging black farmers. 

Response by the Land Bank
Ms Nkosi referred to Mr Sarupen’s questions. The resumption of new lending would use the existing cash on the Land Bank’s balance sheet. The Land Bank had very extensive discussions with its lenders around the need for it to curtail the negative impact that the Land Bank’s absence had on the market. The Land Bank made an agreement with its lenders that it would use a proportion of the cash available to resume new lending activities. So, the source is the cash on the balance sheet, and the Land Bank currently has a healthy cash balance from which to draw. This is clearly with the support of the lenders, because the Land Bank is using cash that was ultimately earmarked for the repayment of debt. The lenders have agreed that it is important to retain the presence of the Land Bank for the greater good of the country and for the sector.

The Land Bank had initially set itself a target of 30 September for the conclusion of the liability solution, but unfortunately, it had some challenges with a few lenders on some points concerning the debt restructuring agreements. The Land Bank is still hoping that it would have this liability solution concluded by the end of this calendar year, and if not, then definitely by the end of the financial year. This involves complicated discussions with a number of different lenders, including multilateral organisations with jurisdictions in a number of countries. These discussions took a bit longer than anticipated, but the Land Bank intends to conclude this by the end of the financial year.

The Land Bank currently has a critical staff vacancy in excess of about 10%. These staff are regarded as critical to the operations of the Bank. The Land Bank has started to fill some of these vacancies and also ensure that it does not have further attrition in these critical areas. The Board had recently concluded a programme and are still in discussion with the union on retention initiatives. There have been encouraging discussions of the type of things that the Land Bank would need to put in place to retain its staff; as well as an awareness that it is not all about the salary when it comes to employee happiness and satisfaction. This also depends on the broader issues around working conditions, employee value propositions, development of staff and whether they see a future for themselves in the organisation. The staff have been encouraged to put their development plans forward. The Land Bank has started performance contracting in line with the new targets it communicated with National Treasury, so that employees understand what is expected of them, how they will be measured and how they will be incentivised.

Ms Nkosi referred to Mr Morolong’s question on non-performing loans. The Land Bank’s non-performing ratio currently sits at about 47%, which is incredibly high. Unfortunately, a big proportion of this is from the loans the Land Band had insourced from its intermediaries. There were some credit management practices that the Land Bank was not happy with and is trying to rectify. There have been engagements with clients that are in financial distress. It was found that some clients were unable to pay the Bank due to drought conditions, or due to the fact that they did not understand the terms of the agreements that had been reached with the intermediaries versus the Land Bank et cetera. There have been engagements with clients where it was felt that intervention was necessary.

The Land Bank has terminated its agreements with most of the intermediaries. There are two remaining intermediaries that the Land Bank also plans to conclude or do away with. The purpose of this is so the Land Bank can exercise better credit oversight over its book. The Land Bank has learnt very difficult lessons from the past and sees the need to have more control over the book and to direct the portfolio where it is needed, so that it can allocate capital in a way that really speaks to the mandate of the Bank and the objectives it set for itself.

She said that more detail would be provided at the launch of the Blended Financial Scheme, on 24 October 2022. This launch will be held together with the Minister of Agriculture, Land Reform and Rural Development. All the details will be provided, so that farmers can hear how to apply for these funds.

Concluding remarks by the Deputy Minister
Dr Masondo thanked the Committee for the opportunity to present the progress made with the Land Bank. He said the Land Bank is a very important finance institution in growing and transforming the agricultural sector. The guidance, support and critical feedback of the Committee are always appreciated, as it helps the Executive and the entity to deal with certain blind spots that may exist. The Executive look forward to fast-tracking the amendments to the Land Bank Act, as it would go a long way in ensuring that the Bank operates within a sound, legal framework.

Concluding remarks by the Chairperson
The Chairperson said the Committee had its oversight visit to the Land Bank on 21 April 2022. On 1 June 2022, the Committee adopted its oversight report, which outlined its observations and the specific recommendations it made.

The Committee had first contemplated coming up with a Private Member’s Bill, but since the proposed amendments were brought forward, he thought that the critical issues that were adopted in the oversight report would guide the amendment being sought by National Treasury.

The Chairperson read out the following recommendations:

9.6. The Committee believes that the current negotiations on the liability solution should be finalised during this financial year, in order to enable the Land Bank to resume with its lending activities during the current financial year. The Land Bank has not been supporting its clients’ funding needs, as there has been no loans dispersed since the event of default.

9.7. The Committee believes that the outsourcing of work that the Land Bank can perform through its employees should be reviewed and curtailed. This talks specifically to issues of its SLA [service level agreement] partnerships, where the Land Bank has outsourced its loan book to intermediaries, which then expose the Land Bank to what can be viewed as duplicate fees. In this regard, the Committee knows that some SLAs have been cancelled or not renewed, and the work has been insourced. The Committee strongly believes that the Bank should not outsource its primary activities to intermediaries, as this exposes it to a number of risks.

9.8. The Land Bank received a disclaimer of audit for 2019/2020; and a qualified audit outcome in 2020/2021. The latter was as a result of the refusal of an SLA intermediary partner to provide information required for the verification of disbursement and the repayments on the loan book of about R31 billion. This is a cause for concern for the Committee; the Committee urges the Board and the Minister to ensure that such instances do not recur and that audit action plans are implemented. The Committee will continue to exercise closer scrutiny on the implementation of the audit action plans across the financial portfolio, including at the Land Bank.

9.9. The Committee calls upon the Minister of Finance and National Treasury to ensure that the business/funding model of the Land Bank is reviewed in order to ensure its sustainability. Amongst others, the Committee will request to be briefed by the Land Bank and National Treasury on the implementation of the recommendations of the Strauss Commission of Inquiry into the Provision of Rural Financial Services report, 1996. The Committee believes that the development and transformation mandate of the Bank needs some blended financing strategy, which will be favourable to upcoming farmers. This financing should include grants sourced from the capital markets.

9.10. The development and transformation mandate of the Bank is very crucial in ensuring that there is transformation and development of black farmers, and that there is food security. In this regard, the Committee requires the Land Bank to supply its plans to support transformation and development of upcoming black farmers.

9.11. The Committee is therefore concerned that the loan book of the Land Bank is not representative of the demographics of South Africa. Women and youth constitute less than 17% of the Bank's loan book and Africans are not adequately and reflectively represented. This means that the larger number of the Land Bank’s loan recipients remains white males. This is a cause for concern and calls for a loan book that is reflective of the demographics of South Africa.

9.12. The Committee, in consultation with the leadership of the Land Bank, the National Treasury and the Ministry and Department of Agriculture, Land Reform and Rural Development, will consider the legislative reconstruction of the Land Bank in order to position it as a development finance institution that will play a leading and meaningful role in the financing and support of small-scale farmers, developmental agriculture and food production. The Committee believes that this will help realise some of the objectives of the Land Bank, which according to the Land and Agricultural Development Bank Act include (a) promotion, facilitation, and support of equitable ownership of agricultural land, in particular, the increase of ownership of agricultural land by historically disadvantaged persons; (b) agrarian reform, land redistribution or development programmes aimed at historically disadvantaged persons or groups of such persons for the development of farming enterprises and agricultural purposes; (c) the removal of the legacy of past racial and gender discrimination in the agricultural sector; (d) programmes that contribute to agricultural aspects of rural development and job creation; and (e) food security.

9.13. The legislative reconstruction of the Land Bank should, among other options, include its repositioning into a development finance institution which will equitably provide agricultural finance and grants to all people in a manner that is representative of South Africa’s racial, gender and age demographics. It should also necessarily include an alteration of the Land Bank’s financing model in a manner that will make it not wholly dependent on capital markets, but additionally on the National Revenue Fund to finance, support, harness and enhance inclusive agricultural development for all the people of South Africa and in all areas.

9.14. The Committee knows that between December 2018 and February 2020, there were acting Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) at the Land Bank. The Land Bank’s CEO resigned in April 2022 and this will again result in another acting stint in that critical portfolio, as the recruitment processes are often delayed. The Committee calls upon the Board and the Minister of Finance to ensure that critical positions at the Land Bank are filled expeditiously, in order to ensure stability.

9.15. The Committee engaged with Sasbo, which is the recognised union of the employees of the Bank. The Committee knows the concern raised by the union on issues of staff morale, lack of salary increases and incentives; as well as the dispute that the union has referred to the Commission for Conciliation, Mediation and Arbitration (CCMA). The Committee believes that Sasbo, the Board and the executive management of the Land Bank need to find each other and seek to resolve this dispute amicably, before resorting to the courts.

The meeting was adjourned.