Land Bank, Bala and Ncera Farms: Budget briefings

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Meeting report

AGRICULTURE AND LAND AFFAIRS PORTFOLIO COMMITTEE
11 March 2005
LAND BANK, BALA AND NCERA FARMS: BUDGET BRIEFINGS

Chairperson:

Mr H Masithela (ANC)

Documents handed out:

Land Bank Corporate: Plan PowerPoint presentation
Ncera Farms Budget 2004/05
Ncera Farms: Creation of a Service Centre on Welcome Home Farm

SUMMARY
The Land Bank outlined its budget planning, corporate plan, turnaround strategy, financial objectives and strength and threats in the Bank’s sphere of operation. They proposed a turnaround strategy that would improve liquidity, efficiency and their becoming a driving force behind emerging farmers.

Members were concerned that the turnaround strategy was lacking timeframes. The Bank also lacked capacity to meet challenges posed by other commercial banks. In order to bolster its competitive edge, it had to develop and better train its staff.

Ncera Farms then gave a briefing on the services provided by Service Centres established last year. The local youth had been trained and given experience in stock managing and land preparation.

MINUTES

Land Bank briefing
Mr George Oricha, General Manager of the CEO’s Office, outlined the turnaround strategy for the Land Bank, as had been given to Treasury and the Minister for approval. He gave a detailed account on the corporate plan, turnaround strategy, and the close corporation shared with the Micro Agricultural Finance Scheme for South Africa (MAFISA) in facilitating access to finance for small farmers.

In accordance with the Public Finances Management Act (PFMA), the corporate plan had been submitted to the Minister. To ensure the Bank was efficient, they needed to comply with accounting standards and were thus working closely with the Auditor-General’s Office. The Bank aimed to develop small farmers, and would thus continue to finance Agricultural Black Economic Empowerment (Agri-BEE) transactions. They were engaging the Department in an effort to help start a programme addressing food safety. The Bank was already working with MAFISA to provide finance to emerging farmers.

Mr Oricha explained that the latest drought and late rains had affected farm production. The situation had required the Bank to intervene to assist farmers with finance. The strong Rand also continued to weaken the capability of farmers to pay back their loans. Certain debts had had to be written off by the Bank. However, the sugar industry was currently enjoying a boom and exports were looking good

It was necessary to improve the Bank’s image among the farming community, and to maintain good relations with the Department and government in general. The range of products offered by the Bank needed to be affordable compared to other commercial banks. They also needed to shorten the length of time for processing loan applications. They were faced with the challenge of recruiting clients from MAFISA and turning these clients into commercial farmers.

The Bank also had to improve expertise by training current staff and recruiting appropriate people in the interests of equity. They were determined to employ women at management level.

The information technology (IT) at the Bank needs to be revamped, so they had started to install new systems. The management information system would help them communicate better with clients and attract new business.

In relation to the development of small farmers, the Bank’s loan book was increasing. This meant that the targets set by government were gradually being achieved. The arrears of loans were moderately increasing. Therefore the no-performance balance of the Bank showed a downward trend.

The Bank was experiencing an efficiency ratio of below 60% as compared with other commercial banks. However, the Bank was still doing relatively well. Since 1998, the capital adequacy of the Bank had significantly declined. In the banking sector, capital adequacy had to be kept at 10%. The Bank borrowed money locally at high interest rates.

The Bank was experiencing shocks in some areas. The farming communities were experiencing prolonged and severe drought, especially in the Western Cape. Extra loans resulted in capital reserves of the Bank being strained. The continued strong value of the Rand was positively affecting the export industry. Over the past two years, capital adequacy had fallen by 15%. This needed to be maintained to allow the Bank to offer loans at affordable rates, and assist the black economic empowerment strategy. The Bank needed to improve its management capacity, so skills development was critical.

The Bank also needed to look at improving and changing the pricing model. If the revenue model was enhanced, it would create stable capital reserves. It had also implemented a risk management plan as part of the turnaround strategy, and this would be presented to the board in July 2005.

The Committee was informed that they had recruited salespersons who visit the clients in different branches. The Bank was also faced with the challenge of improving and developing Agri-BEE transactions. They were often not earning huge profit returns from the loans. They were also interested in the non-financial aspects of banking, such as client and employee relations. They wished to increase access to finance for women and rural people.

Discussion
Mr M Mbogwa (Department Acting Director-General) commented that Section 38 of the Land Bank Act provided for the Minister to assist the board. MAFISA should also play a leading role, as its system could assist the Bank in extending its outreach through post offices with lower costs. It was critical that the relationship between MAFISA and the Bank be consolidated.

Mr Nel (NNP) said it appeared that the Bank was a financial crisis. He asked if the Bank was asking for a capital injection from the Treasury. Mr Oricho answered that the Bank’s turnaround strategy had yet to be submitted to Treasury, but it did need funding to maintain capital adequacy. The Treasury was evaluating the Bank's operations

Mr Nel wanted to know why the Bank was lowering its interest rates far below the current rate used by most commercial banks. The Chairperson added that over the past three years, the Land Bank had consistently done so. He suggested that this question be deferred to a closed session due to its sensitivity and complexity.

Mr Oricha responded that they had had discussions with Agric-Bank around the interest rates. Since April 2004, the board had decided to change the interest rate without compromising the financial position of the Bank. However, this change was effected at a time when interest rates were stable. Interest rates were also influenced by supply and demand - stocks such as maize had a low demand, whereas sugar had experienced a boom. The strong rand was also impacting on the ability of farmers to earn good returns from their investments.

Ms Ntuli (ANC) asked if the Bank had a programme to reach out to rural communities. He also wanted to know if the Bank lacked capacity to deliver on its statutory mandate.

Mr Oricho replied that the Bank had good working environment and staff morale. As the Bank dealt with transactions amounting to over R500 million, they needed management with corporate finance skills. However, they did not intend going into structured corporate banking. The Bank was making efforts to reach out to rural farmers. The post office outreach programme was carried out the through MAFISA system.

Mr Bici (UDP) asked if the Bank was borrowing money, knowing that farmers were not able to profit owing to the strong Rand. He further wanted to know if the Bank made efforts to empower and educate rural and small farmers who lacked expertise. Mr Oricho replied that the Bank looked at various financing models before it provided loans, one of which was whether the farmer was able to repay the loan. In cases where farmers were unable to recover their losses, the Bank was often forced to write off the debts. The Bank offered loans at 10% and this was huge risk under current money market conditions.

Ms Ngaleka (ANC) expressed concern over the lack of women management. The Committee had resolved that the Bank should provide them with its equity plan. Mr Oricho replied that the Bank had an equity plan with annual benchmarks, that had been submitted to the Department of Labour. He promised that an equity plan would be tabled before the Committee in due course.

Mr Bici asked if there was a repayment strategy designed to encourage farmers to repay their loans. Mr Oricha replied that the Bank was working closely with the Department of Agriculture to provide extended structural assistance. The Department was constantly liasing with provinces to assist its clients. The Bank had also established development desks in various provinces to cater for non-financial client needs. Furthermore, the Bank had worked with Ithala and Vimba development schemes in the Eastern Cape to assist emerging rural farmers. The Bank also had satellite branches within its structure to facilitate access to rural farmers. The Post-Bank facility was also being used. Although the Bank focussed on commercial transactions, its still did development work to serve rural farmers.

Mr Dlali wanted to know what had caused the collapse in the value of farmland. Mr Oricho replied that if, for instance, there was huge supply of maize in the market, the value of such a commodity went down, and this tended to impact negatively on the land value itself. The Bank would provide assistance in such circumstances to sustain maize farming.

Mr Ramphele (ANC) commented that there had been huge write-offs of bad debts recently. He questioned if this how contributed to capital inadequacy. He also requested the Bank to circulate information on the availability of land for constituency offices. Mr Oricho welcomed the suggestion as the idea would improve transparency and promote the image of the Bank

Mr Mbogwa commented that the Bank needed to initiate a business review process in order to fulfil its legislative role. The Strauss Commission had recommended that the Bank be capitalised to maintain essential capital adequacy.

The Chairperson commended the Bank for its satisfactory presentation as compared to its previous one to the Committee. The modus operandi at the Bank did not provide for equity funding. In addition, commercial banks were providing such funding and enjoyed leverage over the Land Bank. He appealed to the Bank’s board to consider equity funding to boost its competitive edge.

Bala and Ncera Farms budget briefing
The presentation was given by Mr K Geldenhuis, National Department of Agriculture, Mr A Stylianou and Mr G van den Heever, Management Agents.

The Committee was told that the farms were presently managed by Ncera Farms (Pty) Ltd on behalf of previously disadvantaged farmers. The Department was the sole shareholder in the company. The portion of the land of these farms earmarked for settlement of communities and was called Welcome Home farm. The creation of service centre on the farmers has already commenced. Boreholes had already been sunk and had cost R660 000.

A strategic plan for the farms had been drawn up to assist previously disadvantaged farmers. The process of establishing people on land was in progress. In the Eastern Cape, land was being leased to farmers with an option to buy. An application of R15 000 had been processed before the cut-off date. The applications were being processed by the Departments of Land Affairs and Public Works. Successful applicants would be given land and finance would be granted by the Land Bank.

The service centres in these communities would provide various facilities, such as legal advice, marketing, training, land valuations and help in the preparation of land. The Centre would also have reservoir to supply farmers with water. Therefore the company was on the road to settlement of farmers on Bala and Ncera. The advertisement for the lease of these farms had received a tremendous response. Most potential farmers had expressed a huge interest in the initiative to lease farms with the option of later buying them.

Discussion
Mr Radebe (ANC) wanted to know how many people had been retrenched by the Trust in 2004. Mr Stylianou replied that 24 people had been retrenched as farms were prepared for occupation by new farmers. A Steering Committee had been formed to consider whether some of the workers layed off could benefit under the new farming trust.

Ms Ntuli (ANC) asked if training was provided at the centre was free. She also wanted to know how many school leavers had been trained, and if the centre was accredited. Mr Stylianou replied that they were unable to provide figures of people trained. Students who completed the training were given certificates, and training and development was always free.

Ms Ntuli then asked why some farmworkers were not given a chance to manage the dairy. Mr Geldenhuys replied that the dairy was a joint venture with Idoshane Trust. The land belongs to Idoshane Trust and the equipment and livestock belonged to NAD.

Ms Ntuli also asked if the board of directors had women representatives. Mr Geldenhuys replied that the board of the company was very small. The board was composed of two men and two women, and women were fairly represented in the company.

The Chairperson asked about the remuneration of previous workers and current remuneration structures. He urged the company representatives to provide the Committee with information on remuneration at their next briefing.

Mr Stylianou explained that the board had been given a five-year term to ensure that the service centre and farms were self-supporting financially. They further had to ensure that the farms and centre were managed by the people placed there. This initiative would enable the farms to survive without funding from the Department.

The meeting was adjourned.

 

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