Ingonyama Trust Board; Land Bank: hearings

Public Accounts (SCOPA)

13 April 2005
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report


13 April 2005

Mr F Beukman (ANC)

Documents handed out:
Ingonyama Trust Board Annual Report 2004
Land Bank Annual Report 2004
Auditor-General’s Report: Ingonyama Trust Board (Appendix 1)
Auditor-General’s Report: Land Bank Annual (Appendix 2)

The Ingonyama Trust Board has received disclaimer audit reports every year since 1999. Its Accounting Officer appeared before the Committee to account for the qualified Auditor General’s 2003/04 Report on the Board. Issues that had led to a qualified report were the inadequacy of the debtors system, accounts payable and provision. Other problem areas involved arrear rates, the budget, expired contracts, land holdings, the Audit Committee, credit control policy, employment contracts and the segregation of duties.

The Committee questioned the Land Bank on its poor performance causing sizeable losses, liquidity problems, over exposure, reductions in income and increases in staff and other operating expenditure. The Chief Executive Officer handled questions relating to six specific areas: non-compliance with accounting standard AC 133, the accounting and information technology systems utilised by the bank, the capital adequacy of the bank, corporate governance, debtors and performance information. General questions also raised issues pertaining to executive and non-executive remuneration.


Ingonyama Trust Board
Mr P Gerber (Convener) stated that the Ingonyama Trust Board was a significant landowner in South Africa. It presided over three million hectares of land in KwaZulu-Natal, which included 39 townships and several mines. He expressed disappointment that the Board had received disclaimer audit reports from 1999 until 2004. He said that the situation could not continue and sought commitment from the Board to ensure that necessary improvements would result.

Distribution of Revenue
Ms A Dreyer (DA) referred to the core business of the Trust, which had been to manage the land for the "material benefit and social well-being of the individual members of the tribes". She said that the Trust had stated that it had a revenue distribution policy, but that it had been frustrated in the distribution of money due to factors beyond their control. She referred to the eleven programmes of the Trust outlined in the Annual Report and said that not one dealt with the distribution of funds. She asked what factors had prevented the Trust from performing its core function and what would be done to rectify it. She also asked what the Trust had done to offer guidance to the communities in connection with these development projects, as well as the development of business plans.

Justice S Ngwenya (Accounting Officer: Ingonyama Trust Board) said that there had been certain constraints to the effective distribution of funds. The Traditional Authorities in place had been required to have traditional authority accounts. The Board had been advised that these accounts should be frozen, as they had not been in a good state. Assistance to the traditional authorities had been the primary responsibility of the KZN Department of Traditional Affairs. If the Board were to implement similar strategies, it would lead to the duplication of strategies. Justice Ngwenya said that in terms of their policies and practices, they had required the traditional authorities to provide business plans before financial assistance could be given. Their distribution policy had been demand driven. Even if a business plan had been approved, money could not be released if the traditional authority's accounts had not been in a proper state.

Ms Dreyer referred to the Introduction of the Annual Report that stated that the Board should play an important role in ensuring that the various communities benefited when land-related transactions had been concluded. She noted that King Goodwill Zwelithini (Chairperson: Ingonyama Trust) had expressed his delight at the presentation of R22 800 000 to four Traditional Authorities - but this had not happened in reality. This money is earmarked to be used by the communities for community-based projects. She referred to the photograph on page five of a cheque presentation ceremony. She said that the picture had given the wrong impression since no money had actually been paid over. She asked if such a ceremony would not create a legitimate expectation of delivery at the communities.

Justice Ngwenya replied that it had created an expectation. Money had been paid, as the projects had been demand driven. Meetings with the traditional communities had taken place and money had been used for bursaries. It had not been the Trust that had delayed the delivery of the money; the communities had not been ready to receive the money.

Ms Dreyer asked if money had been paid to contractors who had provided services after the relevant business plans had been approved, should this money not have been reflected in the budget? She asked from where this money would come, since it had not been provided for in the budget.

Adv W Raubenheimer (Member: Ingonyama Trust Board) said that projects had been implemented in terms of the handing over of money. Certificates would be provided to the Tribal Councils that would state that the services had been delivered. He said in terms of the R5,7 million in the photograph, R4 million had gone through. The Trust had pushed for leases, instead of the PTO (Permission to Occupy) option and that 32 leases had been put in place. Income generated from these leases to the communities had amounted to R1.25 million, whilst income generated from the PTO option only amounted to R5 040 per year.

He said that there had been a budget for the Board to run itself, but the money that they had administered had been business money, which had been generated from different areas within the land and had been held in the Trust account. This money had been used for the benefit of the people of a certain area. If a person from a specific area came to the Board with a project, and that project had been approved, the Board would tell such a person how much money would be available. The Board had written to all the Traditional Authorities and indicated how much credit had been available to them. The Board did not have an appropriated budget.

Mr K Hoosain (Auditor-General's Office) asked for clarification on money that had been spent after the financial year.

Mr A Mia (Financial Manager: Ingonyama Trust Board) gave clarification on the total amount of money that had been spent. In 2004/2005, R648 000 had been spent, in 2005/2006 actual cash payments had amounted to R3.8 million. In total, about R4 million had been spent.

Inadequate debtors system, Accounts payable, Provision
Dr Woods (IFP) indicated concern about these three issues which had led to the disclaimer by the Auditor-General. The main issue had been debt related. The Auditor-General had indicated that there had been a number of instances where record keeping, the completeness and accuracy of the records and the overseeing of these records had made these records unreliable and produced a number of risks. He asked what had been done to rectify the inadequate debtor system and what its current status was.

Justice Ngwenya replied that the debt was now managed internally by the Board. The invoicing of debtors had commenced on 1 December 2004. Debtors had been questioned and the Board had been able to monitor the situation on a monthly basis. Legal action had been taken against long outstanding debtors. Debtor reconciliation could be reviewed by the Auditor-General.

Dr Woods said that as the system had been taken over by the Board, it could be expected that previous problems would not be repeated. These problems included inaccurate debtors’ ledgers and individual debtors had been asked for incorrect amounts.

Justice Ngwenya replied that they had asked for these files from the Department of Minerals and Energy, which had performed the debt collection function for the Board. It should be noted that there had been continual reference to PTOs throughout the files. People that were supposed to pay the PTO rates should not be considered debtors to the Trust. When reference had been made to debtors, they had referred to royalty and commercial debtors. The Department of Minerals and Energy had administered the royalty debt, but these functions would now be performed by the Trust itself.

Mr Mia noted that they have been running a Pastel debtor system.

Dr Woods asked whether there had been any losses to the Trust Board.

Adv Raubenheimer said that there could be losses and leases had not been followed up in certain cases. The Auditor-General had indicated that the Trust should handle this by themselves and therefore the Board had decided to do so. The Board needed to ascertain whether all the mining lease owners had made their payments. Letters had been sent to debtors that had invited them to pay, and some had been referred to lawyers. He gave the assurance that the Board was committed to rectify the problems of the past.

Dr Woods asked why that remedial action had not been taken earlier.

Adv Raubenheimer replied that the Board had been worried about its capacity. The Trust Board had been established when the KZN Ingonyama Trust Act had been amended in 1997 and an injunction by the then Minister of Land Affairs and the Portfolio Committee had been that the Board should not build a bureaucracy. The Board had found that no additional staff had been given to them. This had led to a series of meetings between himself, Mr Miya as a representative from the Secretariat, the Auditor-General as well as representatives of the Department of Minerals and Energy. Outcomes of these meetings led to subtle changes in the role of the Department of Minerals and Energy which would play a referee role in the exploitation of the nation's mineral resources. This role could not be performed. This had given the Board the opportunity to adhere to the Auditor-General’s recommendation and perform these functions themselves. He admitted that the Board could have done this earlier.

Dr Woods referred to the Auditor-General's Report where it stated that there had not been sufficient information with regards to debtors in arrears, debtors paid in advance or the rolling forward of debtor balances of previous financial years. He asked for reasons why there had not been sufficient supporting documentation to substantiate the R55 800 of Surface restoration deposits, as referred to in the balance sheet.

Mr Miya said that in 2003/2004 they had picked up that there had not been sufficient supporting documentation. The Auditor-General had previously mentioned this in the 2002/2003 Report. The matter had been investigated, but supporting documentation could not be found. The Board could not establish the origin of the money. The Board had been asked to transfer this money to the income statement. He said that this money had come in to the books in 2000 for the last time. If prescriptive legislation were applied by the Board, this money would be transferred to the income statement.

Dr Woods referred to the Auditor-General's Report where it stated that no provision had been created in the financial statements in terms of Accounting Standard AC 130. He said that a provision should have been made, but that the Trust had chosen not to make the provision. He asked for clarification why the provision had not been made.

Adv Raubenheimer agreed that the provision should have been made.

Dr Woods noted that agreement had been reached that in future, the balance sheet would reflect all expenditures. This would ensure a clearer picture on the financial affairs of the Trust.

Arrear Rates
Mr R Mafokeng referred to the Auditor-General's Report dealing with Arrear Rates. He asked what steps had been taken by the Board to resolve this potential liability to the municipalities and what was the present situation.

Justice Ngwenya replied that according to the municipalities, the alleged liabilities had gone from R88 million to R23 million. Previously, such property had not been subjected to rates. Steps had been taken to reduce the rates and discussions with the municipalities had taken place. The Board had raised the alarm in 2000 with the governments of the councils. Meetings had taken place with the then Ministers of Land Affairs, Agriculture, Housing, Local Affairs and Constitutional Development. Proposals had been made to correct the situation. Discussions had taken place and the Board believed that the rates once substantiated would not be alarmingly inflated.

Mr Mapokeng asked for clarification on the relationship between the Board and the eThekwini Municipality, as well as the other municipalities. He also asked exactly how much money had been owed by the Board and whether the Board had an intervention in place to settle the question of the legal liability of property rates.

Justice Ngwenya replied that the Board allegedly owed R23 million and the Board as a collective entity would be responsible for the payments. As soon as the Board was satisfied that all legal requirements for levying rates on Board land had been met by all the municipalities, the money owed to the relevant municipalities would be paid.

Adv Raubenheimer added that a meeting with the Chief Financial Officer of Land Affairs had taken place. It had been suggested that a task team should be appointed to reach finality on this issue, as well as to make suggestions to the Minister. This issue would only be resolved once previous and current laws had been analysed. This would ensure clarification on who would be responsible.

Mr Mafokeng asked for an outline of the impact of money owed for service delivery. He also asked for a timeframe for the resolution of this problem.

Justice Ngwenya replied that delays in payment to the Traditional Authorities had led to delays in the implementation of their progammes. A timeframe could not be given. He said that the municipalities and other government departments should come to the table. He indicated that the life span of the Board needed extension.

Adv Raubenheimer said that the Board had not yet acknowledged the money that the Trust allegedly owed. If the Trust should owe the money, service delivery on projects already launched would not be stopped. The money owed had not been the money of the Trust itself, it only referred to money that had been held in the Trust. The Trust had been in the possession of money not labelled to specific communities, as the Trust did not know from where the money had come. This money would preferably be used for capital for certain projects.

Expired Contracts
Mr Mafokeng asked for clarification on the relationship between the Trust and the Department of Minerals and Energy, as well as any other ministries on the matter of mining operations. He asked who had been responsible for the contracts as well as the legal implications of the insufficient documentation.

The Chairperson indicated that detailed responses could be given in writing.

Mr Mafokeng asked how many of the contractors affected by the expired contracts, had been huge mining companies, and what percentage had been small scale miners. Had the Trust ensured that some of the contractors had Black Economic Empowerment practices in place?

Justice Ngwenya replied that a written response would be given.

Mr P Gerber referred to the Department of Land Affairs’ Annual Report where it showed the statement of transfers to its public entities and institutions. An amount of R849 000 had been budgeted for the Ingonyama Trust, but only R219 000 had been spent. He asked for a short explanation.

Adv Raubenheimer responded that the R219 000 had been used to pay for the meetings of the Board which included meetings with His Majesty the King. The money had been spent on transport for the King and his bodyguards. The Board did not try to spend all the money. The expenditure would increase as at least two more board members would be remunerated. As soon as the Board had been transformed to a Land Rights Board by CLARA, the size of the Board would double and the budgeted amount would be needed.

Mr Gerber said that he had received a print-out of their meeting costs. He needed clarity on how the figures had been accounted.

Mr Mia said that the figures referred to the travelling, accommodation and meal costs of His Majesty the King and his bodyguards when His Majesty the King attended the Board meetings.

Mr Gerber said that these figures were quite heavy if His Majesty the King only attended the meetings for one day.

Justice Ngwenya agreed with Mr Gerber and said that he had been surprised by the high figures.

Land Holdings
Mr Gerber referred to the Auditor-General's Report dealing with Land Holdings. Supporting documentation for an increase of R30 524 700 in the land holdings had not been submitted for audit purposes to substantiate the increase, the land holdings register had not agreed with the financial statements as there had been an unexplained difference of R188 008 170. Title deeds for land amounting to R177 135 684 had not been submitted for audit purposes and title deeds for land amounting to R398 092 165 had been verified on uncertified copies of title deeds. He asked for the Board to comment.

Justice Ngwenya replied that at this stage land had been going out of the Trust to the municipalities. At the same time, there had been land in transit to the Ingonyama Trust from the Department of Land Affairs. This process had begun in 1998, but had taken longer than expected. When property had been in the process of being transferred, the original documents had been at the conveyancers or in the deeds office. Therefore, records had not been kept as copies had not been retained.

On the matter of the uncertified copies, he said that the originals had not been lost. With regard to the unaccounted land holdings, the Board could not tell the Committee how much land could be expected from the Government.

Mr Gerber was concerned with some of these answers. He said that the Trust had more than 4 700 title deeds. If a title deed had been lost, a new one could not be simply asked for. A specific process, which would include an advertisement, had to be followed. Each process would cost more than R1000 which could amount to more than R1 million. He suggested that the Trust improve its filing administration.

Mr Gerber noted that there had been nine land claims against the Trust. He asked for the financial implications of these claims and whether strategic plans had been put in place to deal with this.

Justice Ngwenya replied that the Board had not obstructed the claims. Some of the land claims had been purely of academic interest as the Trust would still be liable to manage the land. The communities whose land had been administered by the Trust, had been the claimants. It would be unlikely for the Trust to suffer any losses. The Communal Land Rights Act (CLARA) had instructed the Trust to stay the landowner as much as possible, in order for CLARA to achieve its main objectives.

Internal Audit and Audit Committee
Mr Madikiza said the Board, as a public entity, should have an internal audit function and Audit Committee. He asked the Board to explain why this had not been done.

Justice Ngwenya replied that the lack of an Audit Committee was due largely to an oversight by the Board.

Mr Madikiza asked what had been done to alleviate this unhealthy state of affairs.

Justice Ngwenya replied that the Board had searched for suitably qualified members of the public. Responses have been received and the Board had appointed a committee to conduct interviews and make recommendations to the Board to appoint an Audit Committee.

Mr Madikiza asked when the Audit Committee would be put in place.

Justice Ngwenya replied that a Board meeting had been scheduled for 6 May 2005, after which a date would be set for the appointment of the Committee.

Segregation of duties
Mr Madikiza referred to the poor internal controls. He noted that the Board had been limited to 10% of the trust fund to use for their administrative operations. This had resulted in the chief accountant performing incompatible functions due to a limited staff complement. He sympathized with the Board, but asked what had been done about this situation, and whether they had sought external assistance.

Justice S Ngwenya explained that the Department of Land Affairs had always provided seconded human resources to provide certain functions for the Board. The Trust Board had the problem that there had been no career mobility which caused employees to continually look for better jobs. The Board had appointed people on a contractual basis until permanent staff could be employed. The best situation would be where the Board could appoint permanent staff in concurrence with the Department. As soon as it was possible for the Board to appoint staff of their own, the weaknesses in internal controls would be addressed.

Credit control policy
Mr Madikiza asked why the Board had not implemented a credit control policy.

Justice Ngwenya replied that a credit control policy had been implemented in response to the Auditor-General's Report and that they had started to address the problems.

Mr Madikize referred to PTO and why certain recommendations had not been submitted.

Justice S Ngwenya replied that the Board was not responsible for the issuing of the PTOs according to the statute.

Contracts of Employment
Mr Madikiza (UDM) asked why contracts for service providers had not been produced. How would the Board respond to a service dispute with an employee who had been without a service contract.

Justice Ngwenya replied that the Department of Land Affairs had provided the personnel. Some employees were contracted by personnel agencies and when the contracts expired, the employees had been employed on a month to month basis. He agreed that in the absence of contracts, disputes would be multiplied. This had been an unfortunate way in which to handle the issue. The contracts with the employees ended in March when the Board’s term of office would have ended. The new contracts for the extension starting from 1 April 2005 had been signed or they were in the process of being signed.

Mr Madikiza noted that most of these problems had already been identified in the 2002/03 Auditor-General's Report and asked why these issues had not been addressed earlier.

Justice Ngwenya agreed that the similar problems had been raised. He said that now the Board’s life span had been extended, corrective measures would be put in place to address the problems. The Board had been committed to the provision of solutions, but they had been constrained by their capacity.

General Questions
Ms B Ntuli (ANC) asked how much money had been lost due to expired contracts and how long it had taken to rectify the situation

Justice Ngwenya replied that he could not quantify the losses or the time frame. He would need to go back and respond in writing.

Ms B Ntuli (ANC) referred to the amount of R22 million which had been transferred to the Board, which had been kept in the trust. She asked for how long, and on whose behalf, the Board would keep the money.

Justice Ngwenya replied that the money in the trust, as well as the interest that would be generated had been identified and accredited to the relevant Traditional Authorities where the mining activities had taken place. The money would be kept in the trust and therefore there would be no losses to the Traditional Authorities. These authorities would be updated on an annual basis on the state of their accounts. The money could be claimed once a business plan had been presented.

Ms B Ntuli (ANC) asked, in relation to its core business strategy, whether the Board could present the Committee with any full detailed community driven projects that had been successful.

Justice Ngwenya said that the Board does not have any community driven projects that had been driven on the Board’s initiative. Due to the cloud of the rates liability, there had not been sufficient resources for community driven projects.

Mr V Smith (ANC and APAC Chair) outlined what responses were unacceptable and gave deadlines to the Board. He said that the Accounting Officer needed to quantify the losses of the expired contracts by the end of the month. Similarly the employment contracts would need to be issued by the end of the month. He said that the argument that the tenure of the Board was uncertain and thus the Board had been semi-paralysed was not valid. The Trust was going to continue regardless of whether the Board remained and the infrastructure of the organisation needed to be in place for it to continue. It was a contravention of the law not to have an Audit Committee. This needed to be in place before the 6 May board meeting and not after it.

Mr N Masithela (ANC) asked when the employment contracts would be signed.

Justice Ngwenya said that the contracts would be signed by the end of April 2005.

In response to Mr Masithela asking when the Community Land Rights Act had been passed, Justice Ngwenya said that it happened during 2004.

Mr N Masithela (ANC) said that the excuse had been that the Board could not proceed with their work as there had been a chance that the Board would be dissolved. However the Board had known that it would not happen since 2004. He said that the Board could not escape their responsibility to sign the contracts on time. As soon as a person had been employed, a contract should be signed immediately. He made an appeal to the Board to handle the issue speedily. He said that the Board had good legal brains and had done good work and it should not be undermined by the small mistakes that had been made.

Ms T Tobias emphasised that the matter of the arrear rates needed to be followed up and finalised even if it need ministerial intervention.

The Board response was that the eThikini Municipality had the figure owing as R23 million. The Board believed that this was still a highly inflated figure. Before seeking ministerial intervention, it was believed that a solution should be found by the Board and the municipalities.

Mr Gerber concluded and said that the Committee c

Land Bank
Mr P Gerber (Convenor) recognised the Land Bank’s history as a proud developmental institution. He noted the collective concern of Parliament over certain issues pertaining to the recent performance of the Land Bank. Amongst these, he mentioned the sizeable losses reported, liquidity problems, over exposure, reductions in income and increases in staff and other operating expenditure.

Mr Gerber expressed the opinion that because government cash bailouts was an option to public enterprises, the unhealthy practice resulted that these institutions were often "engineered" to take advantage of such rescue packages. He further noted the desire for the Land Bank to regain its institutional health and -pride, and to come into its own as a developmental institution servicing all the peoples of South Africa.

Non-compliance with AC133
Dr G Woods (IFP) said that he was alarmed at the explanations offered in the Land Bank’s Annual Report for its non-compliance with accounting statement AC 133. He asked why the Land Bank was not able to anticipate, plan and prepare for the requirements that the achievement of AC 133 would pose to its administration.

Mr A Mukoki (CEO: Land Bank) qualified his response by noting that the delegation representing the Land Bank were all fairly recent appointees who could offer but only their own analysis of what information they have been able to gather. Firstly, he mentioned the inappropriateness of the accounting systems utilised by the Land Bank at the time. As an example, he put forward the IT system (PeopleSoft), which was more suitable for use by a human resources type firm, rather than a financial institution. Secondly, Mr Mukoki mentioned the historical under-investment of resources in negotiating the achievement of AC133 comparative to the efforts of commercial banks, which had reportedly struggled with it themselves.

Corrective action in these particular areas were paramount as the achievement of AC133 would require the Land Bank to keep record of much more qualitative data on the action history on loan accounts. He further noted the general lack of skills and experience amongst the staff of the Land Bank to anticipate and plan for the implementation of the new requirements of the complexity of AC133. He stated that these issues were currently being addressed within the bank.

Dr Woods underlined the importance of statement AC 133 as a requirement for institutions that specialise in loan provision. While acknowledging the validity of the difficulties raised by Mr Mukoki, Dr Woods noted that none of the commercial banks have been reported to have struggled too much with their adjustment to AC133. He asked what progress the bank had made towards its readiness for the achievement of AC133 and what the Standing Committee on Public Accounts (SCOPA) could expect upon the release of the Land Bank’s next set of financial results.

Mr Mukoki explained that the bank took an integrated approach as it involved changes in a number of areas. The bank needed a very serious turnaround strategy. Here the first focus area was bringing the right skills and experience into management. This would also limit dependence on external consultants and the tremendous costs that it would involve. Steps already taken include the recent appointment of a new General Manager: Credit, and the appointment of a new Chief Financial Officer (CFO), Mr X Ncame. Prior to the latter appointment, the Land Bank’s finances had been run entirely without the skills of trained Chartered Accountants.

The second focus was on the Land Bank’s systems. Mr Mukoki noted that it was very difficult to change systems in a bank and related that the board and management of the Land Bank had already started to look at the changes needed in this area before his appointment in November 2004. The tendering process for this was completed recently and the Land Bank would now use SAP as its IT system. The implementation of the new system was a careful process as many of the Land Bank’s employees would have to go for training to minimise the risks involved in the switchover.

Other areas of focus include new business development, modifications to the Land Bank’s revenue model and its costs, and its general credit administration and monitoring. The Bank was in various stages of implementation in these focus areas. The prevalence of the AC 133 issue made improvements in the areas of human resources and systems most important.

Dr Woods expressed his surprise at the late stage at which changes to the systems were addressed, especially since the Land Bank knew that it would have to take on statement AC 133 for well over a year. He acknowledged that taking on AC 133 was a technical issue, but that it was not complex enough to warrant the delays. More could have been done by the Land Bank’s head office. Dr Woods requested that the Land Bank’s CEO furnish the Committee with a date-linked implementation plan of the various changes.

Dr Woods noted that the Auditor-General had expressed some doubts about the veracity of the model that the Land Bank utilised in order to improvise in the making of the necessary provision in its accounting system, particularly in the face of its non-compliance with AC133. He expressed his discomfort at this, especially there was an overprovision during 2003/4 to the tune of 50%, and requested further expansion on the matter.

Mr Mukoki explained that prior to AC 133 there was no standard methodology for debt provisioning across the banking sector. Prior to his November 2004 arrival at the Land Bank, making provision for debt was largely a conservative and subjective process that needed to be justified to accountants only. This process would in the future be much more objective as the Land Bank would now have the necessary quantitative data upon which to base decisions relating to debt provisioning.

Dr Woods was concerned that the corrective actions to ensure an unqualified report from the A-G at the end of the next financial year were not at a conclusive stage. The Land Bank had laboured much longer on compliance with AC 133 than private financial institutions and urged its management to assess themselves.

Ms N Marik (Office of the Auditor-General) drew the Committee’s attention to the Audit Committee’s Report in the Land Bank’s Annual Report. It stated that there were policy and system shortcomings in dealing with loan repayments. She said the Committee should be informed on the process to deal with these problems.

Mr Mukoki replied that Deloitte had been appointed as external consultant to work with the Land Bank on resolving the debt provisioning issues. The A-G was also kept close to the process, so that compliance could be ensured for the March 2005 assessment. Substantial improvements have been made. If there were going to be problems, they were going to be much less substantial than in the past. An enterprise-wide risk management framework was implemented to articulate the risks in the bank in an integrated way, including issues of interest rate risk, market risk and credit risk. However, while the policies have been approved, the necessary human resources and systems still needed to be developed to complete the process.

Ms A Dreyer (DA) expressed her concern at the serious credit risk and the lack of proper credit risk management to which the Land Bank was exposed. She placed emphasis on the risk resulting from the lack of precision and reliability of internal systems and processes. She questioned if this were because the Land Bank was not required to maintain minimal capital levels as prescribed by the Banks Act of South Africa. She also asked if the Land Bank was not more prone to liquidity problems because of the option of government cash bailouts.

Mr Mukoki replied that while the Land Bank was not subject to the provisions of the Banks Act, the idea would be to see the Act not only as the standard, but to meet the best practices of the industry. The Land Bank did not want to fall below the 10% capital adequacy ratio of the bank compared to risk-weighted assets. He noted that the investor community and the Land Bank board would probably like to see a ratio of somewhere around 20%, even though the risk that the bank would carry would be typically higher, as it was a developmental institution.

Mr Mukoki further assured the bank that there was no intention to run the bank with the idea that it could be bailed out by government if necessary, and that proper care and control was maintained.

In light of Mr Mukoki’s response, Ms Dreyer questioned the persistent deficiencies in the PeopleSoft lone module as it had been reported for three consecutive years (2001/2, 2002/3, 2003/5).

Mr Mukoki replied that while he did not want to escape the question, it was difficult to speculate about decisions that were made before his arrival. In his understanding, the problem lay largely with the lack of skilled and experienced human resources.

Ms Dreyer said that she was glad to hear that it was not only the "system" that was being blamed, but also the people operating the system. She asked how the bank would address the inefficiencies of the PeopleSoft system, pending the full roll out of the new system. She specifically referred to the examples of insufficient security around password resetting, lack of logging and monitoring, passwords that could be easily guessed and user accounts of ex-employees that were not disabled.

Mr Mukoki identified two things that were being done to address these issues. Firstly, management deficiencies were identified, starting from the top of the organisation. This was, however, still in process as it was difficult to attract talent and skill from the private sector into development institutions. Progress was being made and over the next three months the majority of the executive Committee vacancies would be filled. Secondly, a proper enterprise-wide risk management process was instituted to provide clear policy guidelines for the employees of the Land Bank.

Ms Manik noted that from the A-G’s findings, many of the problems emanated from attitudinal problems from staff with regards to policies and procedures. She asked whether this had been addressed.

Mr Mukoki replied in terms of the Land Bank’s human resources focus the selection, recruitment and retention of key staff was high priority. The values and the culture of the organisation were also important. This was identified even prior to the assessment by the A-G and it was a key issue in the turnaround of the company.

Ms Dreyer requested confirmation that the Land Bank’s performance would significantly improve pending the implementation of the new system, the appointment of new management, and the instilment of a new organisational culture.

Mr Mukoki provided the assurance, but stated that it was a question of time. It would be futile to provide assurances that were too optimistic. The problems that the Land Bank was currently experiencing have been there in excess of a decade and that they were not going to be solved that easily. Sustainability was also a key concern. The general turnaround time for organisations of the Land Bank’s size and shape stood at about two to three years. He provided the assurance that great year on year improvements would be observable from now on and that turnaround at the Land Bank would conform to the two to three year norm.

Capital Adequacy
Mr G Madikiza (UDM) asked that the decreased liquidity and the deterioration of the bank’s cash reserves be explained.

Mr Mukoki acknowledged that the Land Bank was experiencing problems with regards to liquidity and the deterioration of its cash reserves. He explained that this had been the result of the Land Bank’s lacklustre performance in its role as a wealth creator, specifically because of the provisions and the bad debts that had been raised in the past. There had also been no capital injection from the shareholder to replenish the reserves of the Land Bank. Discussions with the Minister and the Treasury were afoot as there were huge projects coming up to effect the turnaround of the Land Bank. The Land Bank’s current situation was not completely precarious. The issue of capital reserves would also become much less critical as soon as the Land Bank could be returned to profitability. He believed that the levels of loss-making experienced up until recently would not be repeated going forward. The idea was to build the capital reserves to 20% of risk-weighted assets.

Mr Madikiza asked when an observable improvement in the current situation would be likely.

Mr Mukoki explained that it was a question of building confidence amongst the investor community. He stated that once the perception was achieved of the Land Bank as an institution built on sound fundamentals, credit risk rating agencies would change their assessments and the investor community would follow suit. The turnaround strategy is not the big problem, as that would be finalised within the next three months. The problem is the implementation, and that would take in the order of two to three years. During this time significant improvements will be observable. A significant turnaround would be visible within a year, but not a complete one.

Corporate Governance
Mr R Mofokeng (ANC) asked whether the Land Bank presided over the necessary capacity to deal with all the areas of financial accountability that it had to address. He also asked whether the Land Bank had made sufficient provision for financial resources.

Mr Mukoki responded that capacity within the organisation was currently inadequate, but that the management cadre would be built up over the next period. The appointment of a CFO was thus paramount and that was done already.

Mr Mofokeng asked whether the bank wanted to go the commercial bank route, and what lessons were learnt in the process.

Mr G Oricho (former acting CEO) responded that at no stage during his six year tenure did the Land Bank want to pursue the route of a commercial bank.

Mr Mofokeng asked whether the historical outsourcing of the internal audit function of the bank had not constricted capacity building within the bank.

Mr Mukoki had acknowledged that this was a priority as the Land Bank currently only had four staff members in its internal audit department. More people needed to be appointed as the low number of employees was not conducive to skill transfer and retention.

Mr Mofokeng noted that the contracts of the board members all expired at the same time and asked whether this was not going to affect continuity in the organisation negatively.

Mr Mukoki replied that it was outside of his jurisdiction, and that it is a question that should rather be posed to the Ministry. He did, however, express his belief that the issue of continuity was taken into account.

Ms Manik stated that the A-G required close alliance with the work of an internal audit function. She noted that currently that was the case with the Land Bank, and requested from the CEO that this be kept in mind with the instalment of a proper in-house internal audit function at the Land Bank.

In response to Mr Gerber asking if the bank made use of debt collectors, Mr Mukoki said that it did.

Mr Gerber noted that the Land Bank had placed a tender through KPMG to collect arrears totalling more than R100 million. He asked whether the contract had been awarded, and what the terms and the value of the contract were. He indicated that a written response would be in order should the information not be at hand.

Mr Mukoki indicated that a written reply would be preferable.

Mr Gerber expressed concern over the escalation in the annual remuneration packages of the last four successive CEOs of the Land Bank. He also questioned the size of the board and their remuneration and maintenance costs.

Mr Mukoki stated that it would probably be best if these questions were responded to in written format as many of the issues relied on having the correct historical information at hand. He did emphadise that attracting the right skills and experience did require that the Land Bank had to compete with the private sector in terms of remuneration packages. That is also why it took some time to fill the current vacancies in the organisation.

Mr Gerber noted that government had put R1.3 billion aside for the development of new farmers. He asked how the Land Bank was going to use these funds, in particular with respect to the redistribution of land.

Mr Oricho asserted that the funds were going to be administered by the Department of Agriculture, and that they were currently still crafting the way in which these funds would be packaged for distribution to emerging farmers. The role that the Land Bank would play is still under discussion. The most likely role that the Land Bank would play is that of a distribution network.

Mr Gerber requested that this information be provided in written format upon the completion of the planning and the negotiations.

Mr Gerber noted that the bank had disbursed R800 million to a new loan at the beginning of 2005. He asked if this was a single loan to a single entity.

Mr Mukoki acknowledged that the funds were disbursed, but in accordance with approved procedures. He explained that it was for more than one applicant.

Mr Gerber noted that the board of directors had set a number of risk management policies and had delegated the responsibilities for their implementation to two committees: the Finance, Economic and Credit (FEC) Committee, and the Audit Committee. The FEC Committee approved parameters and policies regarding risk management. During the year 2003/4 the FEC Committee had met five times only. Mr Gerber asserted that this was too infrequent to manage credit risk of the magnitude the Land Bank had to deal with. He asked if there are plans afoot to reduce the discretionary limits at the level of the CEO, the head office credit committee and the General Manager. He believed that the responsibilities of the board needed to be significantly increased if they were to fulfil their oversight role effectively.

Mr Mukoki replied that the way in which credit risk is conducted within the Land Bank would be an articulation of the resources that it presides over. Credit risk management tended to be an executive responsibility, whereas the oversight of it was a non-executive responsibility. Therefore, the management of the Land Bank would provide the operational service, while the board would provide the oversight function. He acknowledged the placement of responsibility for the approvals of loans was tricky, but disagreed that the FEC Committee meetings were infrequent. Even the FEC Committee had referred each and every loan to the full board. Therefore, the granting of loans and credit facilities were the subject of each board meeting and was not discussed exclusively during FEC Committee meetings. Also, where loans have been urgent, they have been scrutinised and approved via ad hoc discussions by the appropriate board members. One of the things that management was unhappy about was that the FEC Committee did not have powers to approve. It only had powers to make recommendations. This also delayed the process. In other words the credit risk issue also had to be balanced with issues relating to business efficiency and the turnaround time of applications.

Mr Gerber accepted the response, but believed that when it comes to amounts of R500 million and more, the board should be closely involved. The Committee was concerned over the reported 11% exposure of the Land Bank to one single creditor, and 25% exposure to three other counter parties. He asked how it happened that the Land Bank was so overexposed to so few clients, and what would be done to rectify this.

Mr Mukoki replied that he shared the Committee’s concern. One of the causes of this situation was a series of consolidations amongst big agricultural co-operatives. Closer inspection would actually reveal that what would simply appear to be massive exposure to one single entity was actually constituted by a number of smaller loans to its different divisions. However, mistakes were also made where loans were advanced to a single entity without subsidiaries, where money had been lent to have direct access to assets. These mistakes were due to a lack of proper risk management, adequate policies and experience. Discussions are afoot to resolve the problem. One of the options is that sister companies of the Land Bank such as the Industrial Development Corporation take over part of the exposure.

Mr Mukoki emphasised that the Land and Agricultural Bank Act does restrict the Land Bank in terms of where it is going to lend. Eventually it was going to end up in agriculture and agriculture-related businesses anyway. There is a lot of activity around the consolidation of businesses across the value chain. Thus, while better management of the problem will provide a large part of the answer, the problem also emanated from the changing external environment to which the Land Bank was limited to by the act that governs it. There were legal considerations as well, and these must also be circumvented. The focus was on guiding creditors to a better offering by syndicating some of these large loans.

Mr Gerber noted that in 2004 there was a R312 million deposit made by the Suid-Afrikaanse Verbandversekeringsmaatskappy (SAVVEM). He asked whether this was all SAVVEM funds, as the figures in 2003/4 on page 55 reflects R273 million. He also noted that there were reserves in SAVVEM on 31 March 2004 of R542 million. He wanted to know what this amount consisted of and what is in SAVVEM in terms of assets and how it was being managed. Mr Mukoki requested to respond in writing to these questions.

Mr Gerber asked whether the bank was considering instituting a multiple valuation process for properties used as security for loans above a certain threshold.

Mr Mukoki stated that it was one of the issues that would be receiving attention in terms of credit policy. Historically, the Land Bank relied mostly on its own internal valuers. Mr Mukoki acknowledged the need for the inclusion of independent valuation reports in the future.

Performance Information
Ms Tobias (ANC) expressed her dissatisfaction with the answers provided by Mr Mukoki as the Accounting Officer in answer to the questions of the Committee. She particularly pointed to the response pertaining to the Emphasis of Matter section of the A-G’s report, as well as the Land Bank’s response to issues pertaining to the achievement of AC 133. She asked the A-G’s representatives whether it was true that the Land Bank had submitted incomplete financial statements for auditing.

Mr Manik responded that it was so and that the A-G’s ability to report in line with their mandate had been impacted on. Mr Mukoki concurred.

Ms Tobias asked Mr Mukoki whether the Land Bank recognised the importance and function of external audits by the A-G. Mr Mukoki answered in the affirmative.

Ms Tobias asked why the Land Bank had failed to submit complete statements to the A-G nor had complied with section 55(2)(a) of the Public Finance Management Act (PFMA).

Mr Mukoki replied that since he was only appointed subsequent to the audit, he could only speculate rather than offer a true assessment. He attributed both these failures to inadequate skill and experience within the organisation, and inadequate performance management.

Ms Tobias expressed her dissatisfaction with the general manner in which the questions were answered, and that the relevant former officials were not present to provide the necessary information.

Mr Mukoki suggested that Mr Oricho respond in his capacity as the former acting CEO.

Mr Oricho suggested that the reasons behind the non-compliance of the Land Bank with the Treasury regulations and the PFMA would be best dealt with in written format.

Ms Tobias accepted Mr Oricho’s undertaking to do this within seven working days.She asked whether the disclosure notes were incomplete and, if so, how the situation would be improved.

Mr Oricho requested guidance with regards to the areas where the disclosure notes were supposedly not provided for fear of providing a response that is too general.

Ms Tobias referred to the Auditor-General’s Report where it stated that disclosure notes in terms of the Statements of Generally Accepted Accounting Practice were not complete.

Mr Oricho accepted that the disclosures were incomplete. The then CFO of the Land Bank had left the institution at the time that the audit was conducted. This had caused a significant hindrance to the successful and smooth completion of the auditing process.

Ms Tobias replied that she would raise the issue with the Minister as it could not be allowed to recur.

General Questions
Ms Dreyer (DA) questioned how the CEO could receive an annual salary and bonus collectively amounting to over R2 million in an environment of declining liquidity during 2004. She recognised the competition presented by the private sector, but wanted to know whether the remuneration is performance-based or not.

Mr Mukoki said that the performance of executives is measured both according to criteria set out in performance contracts, as well as in their employment contracts. He denied knowledge of the content of the employment contract of his predecessor. His employment contract had two components: the basic salary and the bonus paid on performance. The performance contract articulates both financial, as well as non-financial objectives. The bonus is then paid out according to which objectives were met.

Mr Masithela (ANC) commented it might be good for the Committee to know the contractual obligations of board members and executives of state enterprises if it is to assess issues related to the size of remuneration packages. This would prevent a perception that the Committee does not condone the payment of bonuses to those who earn them. Some of the questions that were posed also required response from the board, rather than from executives.

Mr Beukman (Chairperson) agreed and said that some follow-up was necessary.

Mr Dlali (ANC) commented that the core business of the Land Bank and the payment of market related salaries are linked and need to be seen as such. He referred to page 78 of the Annual Report where mention is made of litigation against the bank. It states that the bank cannot estimate the full potential loss of the claim. He asked for clarity on this. He noted with concern the lack of necessary transitional arrangements for the current CEO to be properly briefed by his predecessor. He hoped this would be planned for in the future.

Mr Mukoki acknowledged that he had not had enough opportunity to be briefed by former officials of the bank, as most of them had already left the Land Bank by the time that he arrived. He also noted that many of the questions related to performance. As performance, or lack of performance, was largely a behavioural attribute, it made it difficult for him to explain it, especially with regards to his predecessor who left the organisation five months before his arrival. He acknowledged the lack of institutional memory at the Land Bank but pledged his co-operation in drafting the necessary written submissions after proper investigation.

Mr Oricho responded that the amount for which the bank was sued (R22 million) was stated in the report. The potential loss was unknown as the judge might impose additional penalties for reasons such as interest, should the bank lose.

Mr Trent (DA) noted that from the February 2005 statement it would appear that for 2004/5 there were twenty directors, two CFOs, one acting CFO, two CEOs and an acting CEO. He asked if the bank was reaching a position where it would experience more stability in terms of its executive and non-executive staff.

Mr Mukoki answered in the affirmative. The restructuring of the executive team had commenced in July 2004 already.

Mr X Ncame (CFO)added that two the CFOs that preceded him were both there in acting capacity, at different times during the same year.

Ms Mashiane (ANC) expressed her dissatisfaction with the CEO for volunteering to answer questions relating to an audit report that was concluded before his appointment, if there were officials present that had been at the Land Bank for longer. She referred to Mr Oricho in his capacity as the former acting CEO in particular.

Mr Phule (ANC) commented that the CEO seemed non-committal when it came to implementation and outcomes time frames. It appeared that the Land Bank would flout regulations in the interests of certain "good methodologies". He asked for a response on both these issues.

Mr Mukoki replied that there were six priority issues in the turnaround of the Land Bank. Of these, management, systems and risk management were of the most immediate importance. An enterprise-wide risk management framework was already in place and could now be implemented. In terms of management, two people had been brought in where skills and experience were lacking the most: credit management and finance. Other executive positions would be filled within the next three months. The board was currently considering the appointment of external consultants to assist with the drafting of a turnaround strategy which was to be completed in two months. What followed on that would depend on the recommendations emanating from the imminent strategic plan. This process would take the rest of year. While year-on-year improvements would be observable in the interim, it was expected that the turnaround of the Land Bank would conform to similar processes at similar organisations. That is to say, in the order of two to three years.

Mr Gerber noted that the previous CEO had also been requested to attend, but that he was currently in Angola and therefore unable to attend. He asserted that as long as taxpayers’ money was involved, the issue of salaries needed to be probed by the Committee. He believed that the Land Bank was reckless in its approach to AC 133. Its implementation would also assist with the packaging of media reports on losses as figure exercises rather than being true losses that should truly alarm the public. He expressed his hope for the continued improvement of the situation at the Land Bank.

The meeting was adjourned.


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