Land Bank Annual Report: briefing

AGRICULTURE AND LAND AFFAIRS PORTFOLIO COMMITTEE
10 October 2006
LAND BANK ANNUAL REPORT: BRIEFING
Chairperson: Ms D Hlengethwa (ANC)

Documents handed out:
PowerPoint Presentation: Land Bank
Land Bank Annual Report 2005/2006

SUMMARY
The Land Bank presented the Committee with its Annual Report for 2005/2006. Land Bank faced critical financial challenges, which hampered its ability to drive the transformation of the agricultural sector. National Treasury had extended a R1.5 billion guarantee to meet its liabilities, which would expire in June 2007 and thereafter be replaced by a capital injection. There had been a qualified audit report by the Auditor-General, but the accounting system of the bank had now been improved. It was noted that the commercial activities of the bank would have to be improved in order to deliver on its development mandate, and the Shunduka turnaround strategy had been put in place to achieve this objective. The agricultural sector was faced with significant challenges, which included the deteriorating financial status of farmers, the impact of the depreciating rand on producer prices, and the rise of input costs. Internal structures and capacity, and a risk-management plan had been improved and improvement of branding was under way.
Land Bank would position itself as an important player in the financial services sector as well as improving its capacity to develop the country’s agricultural sector.

Important concerns raised by Members included the access of loans and other related funding to black commercial farmers, the interest rates, the factors determining the granting of applications, and penalties for early repayment. Questions were raised on the impact of the process of globalization on the market access of small-scale farmers, and the land restitution targets and successes in black farming, as well as the statistics of black-owned farms and statistics around the success rates. Repossession was questioned, and it was stressed that the success of agrarian reform would depend upon cooperation of all role players, including food retailers. Further queries related to the subsidiary SAVVEM, the performance bonuses and the discrepancies in the salary structures between management and staff, the qualified report by the Auditor General, the guarantees given by National Treasury and the capacity of the bank to meets its developmental goals.

MINUTES
Annual Report of the Land Bank: Briefing
Mr Xolile Ncame, Chief Financial Officer, Land Bank, presented a comparative overview of  the total budget for 2005/2006 and its forecasted expenditure for the same period. He reported that Land Bank faced significant financial obstacles, exacerbated by the low repayment of loans. It had also written off debts, which further eroded capital reserves.

National Treasury had extended a R1.5 billion guarantee to meet its liabilities. This had been extended by another six months, and would thus expire in June 2007. This would be replaced by a capital injection.

Following a qualified audit report by the Auditor-General, the accounting system of the bank had now been improved. The Internal Financial Reporting Standard (IFRS) was successfully rolled out to replace the South African Generally Accepted Accounting Practices (GAAP). Provisions for loan losses had thus been improved by R317 million. However, the net farm income in the South African Agricultural sector was down by 28.3%.
 
Mr Alan Mukoki, Chief Executive Officer, Land Bank reviewed the activities of the bank in terms of its development mandate. The commercial activities of the bank must be improved in order to deliver on its development mandate. The Shunduka turnaround strategy had been put in place to achieve this objective. The agricultural sector was faced with significant challenges, which included the deteriorating financial status of farmers, the impact of the depreciating rand on producer prices, and the rise of input costs.

The internal structures and capacity of the bank had been improved through the introduction of a SAP Information Technology system that assisted in improved financial management, core banking and debt collection duties. An enterprise-wide risk management system was in place and the revenue and cost models were improved. Plans were also being developed to improve the image of the bank and its brand.

The Shunduka Turnaround Strategy would focus on the development of a stronger recruitment strategy as well as the further development of its skills capacity. Management systems would also be improved through the development of adequate information systems to ensure the production of reliable information and data.

Discussions around a pending capital injection were continuing between the National Treasury and the Department of Land and Agricultural Affairs. The success of the turnaround strategy depended upon this capital injection, as existing capital reserves would not sustain Land Bank’s growth.

Discussion
Mr S Abrams (ANC) wanted to know the ranges of the interest rates charged by Land Bank.

Mr Mukoki replied that its current interest rates were at competitive levels and could be compared to those charged by private sector banks. However, unlike private sector banks, the Land Bank did not have the ability to secure money easily from other financial institutions. Moreover, commercial banks could rely on the capital of strong anchor shareholders and had attractive portfolios on bad debt and more attractive recovery records. These banks could thus secure cheaper as well as larger amounts of capital. The Land Bank was not in a similar position.

He further explained that the Land Bank, like all banks, was subject to the same rigors of the market, faced the similar challenge of increasing profitability and thus also the ability to generate own income. He stressed that currently the Bank could not increase the number of loans issued, and could only lend to a small group of clients. It therefore had to devise means to increase profitability and therefore raise income levels in order to increase its lending rate.

The bank was currently rationalizing the ranges of interest rates for different loan portfolios and the returns on these portfolios were its only sources of income. As in the case of the different account portfolios of commercial banks, the interest rates on the different loan portfolios varied. This was a necessary practice in commercial banking to ensure that those clients who repaid loans could subsidise those who failed to retain instalments. Banks therefore could continue to generate sufficient levels of income without incurring losses.

The Land Bank, when considering the rates of interest on loans, was faced with the twin challenges of improving access to loans for those who were previously denied, as well as making accessibility more affordable. The bank had to balance its commercial interests and responsibilities to ensure it delivered on its developmental mandate.

Mr Mukoki explained that most South Africans were not aware that lower interest rates could be secured through negotiating the terms and conditions of loan agreements White farmers were more skilled and experienced in negotiating loan agreements with banks and therefore were more likely to secure lower interest rates on loans. By contrast, black farmers were less likely to negotiate for lower interest rates, as many were fearful of losing those loans. White farmers were also in a more favourable position to secure funding at commercial banks before applying for funding at the Land Bank. He warned that the dynamics around interest rates could be exaggerated.

The interest rate charge was normally prime based. This meant that, for long term loans, such as bonds of 25 to 30 years, the interest rates would usually encompass the prime rate (currently 9%) minus 2 basis points. This was not a profitable rate, but an increase would result in a decline in its current client base. In contrast, commercial banks could charge less, as various sources of income were guaranteed through other services such as transaction banking and service costs. The Land Bank relied solely on the income generated by the repayment of loans. The range of rates never exceeded the prime rate plus five basis points. The highest interest rate of the bank was prime plus 3 basis points.

The Chairperson requested a clarification of the term “prime rate”.

Mr Mukoki explained that this was the interest rate a financial institution used as a base to calculate interest rates. This rate varied little among banks and adjustments were generally made when the reserve bank decide to increase the repo rate. This was the rate of interest charged by the Reserve Bank when lending money to banks. Banks would then add a margin to this repo rate to establish the prime rate. The prime rate was the lowest rate of interest for commercial borrowing.

Mr Abrams asked what factors were taken into account when reviewing a loan application, and what measures were used to determine value of production or land.

Mr Mukoki replied that the net asset value of farms and not the production values were considered when reviewing the loan application.

Mr Abrams asked whether penalties were enforced in cases of early settlement of loans.

Mr Mukoki answered that it was common banking practice to charge penalties on the early settlement of loans. Timeframes for the repayment of loans ensured continuous profits for banks over the established period over which loans had to be repaid. If settled early, the projected income generated would be lost.  Penalties could be negotiated and banks would only enforce this charge if the client was in a position to pay. Banks aimed to encourage borrowing when prospective clients were in a position to retain instalments on loans. The quick settlement of loans was not desired.

Mr Abrams expressed his concern over the R1.5 letter of comfort extended to the bank by the National Treasury. He asked if Land Bank was convinced of its capacity to deliver on its mandate in light of its financial status.

Mr A Nel (DA) urged Land bank to engage with National Treasury to secure the necessary funding.

Mr Mukoki explained that the financial troubles faced by Land Bank were not recent and dated back to the 1990s. The accumulated debts and the resultant debt bubble had resulted from the lack of skilled and experienced personnel, within the different branches of the bank, to make adequate decisions on loan applications. By the time these huge losses were felt, Land Bank had insufficient capital to stay afloat.

The Auditor-General (AG) had expressed the need for the recapitalisation of Land Bank as a means to continue and strengthen its operation. The AG had also expressed the urgency of the Bank’s recapitalisation by its stakeholders. However, National Treasury could not start the recapitalisation process immediately, and therefore had to extend a guarantee of R1.5 billion. Although this was not the most desirable way of managing the financial woes of Land Bank, it had been in discussion with National Treasury for an extended period of time to secure the capital necessary to cope with the deficiencies. The hyper debt of the bank was equivalent to 6% of Gross Domestic Product and National Treasury could not immediately provide the amount of capital needed to rectify this status. The guarantee was issued with the undertaking to apply for recapitalisation. This application had been finalized, and Land Bank was currently awaiting the necessary capital injection.

Mr Abrams requested details about the historical role and origins of the Bank. He said that later generations of beneficiaries of the Land Bank had inherited strong and sustainable enterprises.

Mr Mukoki answered that the original function of the Bank was to drive development. The former government could subsidize the bank through removing the burden of debt from the Bank’s shoulders in order to continuously provide funding for clients. In this sense, the State had tended to be more interventionist regarding issues around agricultural development. From 1953 the character of the bank had changed towards the development of Afrikaner owned farms. Although a number of these farms failed, the State had the ability to lend sufficient support to Land Bank and its clients. The context of globalization and the characteristic free market system had then constrained the ability of the State to continue this strong tradition of support to Land Bank, and thus the State had altered its policy towards the Bank.

Mr Nel noted the rising annual income of Land Bank’s subsidiary SAVVEM. He asked what accounted for this rise, and whether the premiums charged by this company were in line with those of other insurance companies. He also asked for the reasons for the decline of long-term loans, and queried whether the short term insurance was too high.

Mr Mukoki replied that the growth in the net savings of SAVVEM was due to the return of investments on the stock markets,  and thus was not affected by the rate of premiums charged. These rates were too low and were thus not competitive. The insurance offered was life coverage, and thus assisted on the generational inheritance of property. He stressed that the public had the choice of using insurance companies that best suited their needs.

Mr Nel requested clarity on the qualified audit report of the Auditor-General.

Mr Ncame replied that the Auditor General’s report had stated that the bank’s comparative income statement did not comply with the International Accounting Standard ASI 39, which was concerned with the recognition of financial instruments and measurements to determine the impairments of loan, and interest income on the impaired value of the loans. This meant the loans impaired movement in the income statement and the split between impairment income and interest income for the 2005 financial year did not comply with the requirements of the standard. Adequate accounting systems had to be put in place to remedy this discrepancy in the current and subsequent financial years.
 
Mr B Radebe (ANC) expressed his appreciation for the efforts Land Bank had employed to steer the institution through its debt burden.

Mr J Bici (UCDP) expressed his agreement with Mr Radebe and commended the Land Bank’s efforts to improve its financial status. 

Mr Radebe expressed his concern over the percentage of bursaries awarded to those from Gauteng Province, especially since this was not a rich agricultural development area, unlike provinces such as the Free State and the Western Cape.

Mr Moeketsie, general manager of marketing and communications replied that the table in the report represented the geographic location of the institutions attended by the beneficiaries of the bursaries. Had the origins of bursary holders been used as an indicator, the table would have reflected a bias towards those provinces considered to be agriculturally based.
 
Mr Mukoki added that the bursary scheme of the Land Bank was part of its corporate social responsibility programme. It therefore encompassed areas such as arts and culture and other related fields. The purpose of the bursary scheme was to invest in society.

Mr Radebe asked a question related to the 2014 land restitution target of 30%. He enquired how many black commercial farmers forming part of this scheme had been liquidated? He said that although statistics existed around the total number of black commercial farmers, similar statistics for the numbers of successfully managed farms were not supplied. These statistics were critical to understand the extent to which black commercial farming was progressing.

Mr Mukoki replied that the land restitution process and the 2014 target was one of the most exciting and transformative projects embarked upon by the State. He said that many resources were needed for the success of such a project. The projected amounts had to be accelerated over the next four years as the rising inflation rates and property prices could make objectives unattainable. Land Bank currently had insufficient funds to drive this process and talks were under way with the relevant departments to devise purposeful mechanisms focused on the practical achievements of such targets. Advanced discussions between Land Bank, National Treasury and the Department continued around the formation of specific measures to enhance activities around this project.

He stressed that the questions related to funding remained unresolved. Government was cautious to make public announcements about this aspect of the project as current owners could over-value properties to benefit from this project.

He reiterated that the success of the project could be limited due to the lack of adequate funds the State required to lead this project, and stressed that Land Bank was currently not in a position to drive this project. If the resources and recapitalisation were available, it certainly would be. The project went beyond those stakeholders within the agricultural sector. The land for the restitution process would not necessarily be income generating and therefore a permanent expense item needed to be created. The money for such a measure was not available. However, the National Treasury would devise means to handle this project. The Land Bank could merely offer the use of its infrastructure.

Regarding the liquidation of farms, the Bank had recently supplied the Minister of Agriculture and Land Affairs with statistics about the number of repossessed farms for the 2001 financial year. This information had then been broken into the number of black and white owned farms, as well as giving details of who had bought those farms.
 
Mr Mukoki replied that the current policy of the bank was to provide all clients with an opportunity to repay debts. The Land Bank traditionally took a very long time to repossess assets. This was one of the reasons why Land Bank suffered losses. He said that the sign off by his office was the last stage in repossession, but by that time the land itself would have deteriorated to such an extent that it was of less value.

He added that banks generally repossessed at a loss and were thus more likely to consult with the client on ways and mean to repay debts. Owners of farms usually postponed notifying banks of their financial trouble and thus by the time the bank was notified, the value of the property and the extent of its deterioration were too high for any meaningful recovery.

At a recent meeting of Nasionale Afrika Boere-unie (NABU), it was decided to impose a moratorium on the repossession of black farms. The key question that emerged was “what then?” He said that a culture of non payment should not be promoted and that the bank had to be careful not to increase the levels of debt. It should be accepted that farming was a business and that farmers therefore had to be willing to pay their debts. If they were not in a position to do so, the State had to provide assistance in form of grants and subsidies, which it currently did not provide.

An agreement signed by the then-Chief Executive Officer of the Land Bank, Ms Helena Dolny, had allowed the hand over of land to the State for a period of six months during which the State would decide whether it wanted to buy the land. In most cases the State did not purchase the land. He said the government was very careful to devise means to cope with the problems giving rise to the repossession of land in the first place, and that the problems should be remedied.

Mr Radebe queried whether the challenges of globalization posed serious obstacles for the prospect of small farmers’ efforts to enter into commercial farming. The net scale income of farms had also declined by 28.3%.

Mr Bici asked what the level of net income for farming in South Africa was.

Mr Mukoki replied that the deterioration of the rand resulted in a higher level of income generated by those farmers who could export. Goods were sold in dollars and payment was received in rand and thus this cash inflow boosted the net income of farms. This particularly related to wine farms and meat producers. The 28.3% decline was calculated on an annual basis. However, he added that a significant number of exporters tended to keep money off shore so as to take advantage of the weakening rand. The Bank could only record income that actually flowed into the country rather than take into account that income which remained off shore. Too much volatility of the currency tended to result in lower levels of income as less income flowed into the country.

Mr Bici said that the small, medium and microenterprise (SMME) and Agricultural black economic empowerment (Agri-BEE) tended to be problematic areas, as losses had been incurred. He enquired how much had been loaned to these sectors and programmes. He asked how much, by comparison, had been loaned to commercial farmers. He asked what was the level of financial support loaned to emerging black farmers.
 
Mr Ncame explained that currently 20% of commercial farmers were black owned. Mr Mukoki added that statistics could be problematic, as statistical information did not provide proper insights into particular areas and programmes.  The loans made included some of the big black economic empowerment loans, which skewed the statistical information and measurement of the proportion of both black ownership of farms and financial support loaned. The actual percentage of support loaned to black farmers, excluding big BEE loans, amounted to approximately 10%.

Mr Mukoki continued that small business people were faced with very unique pressures. The style of managing finances was very improvisational, as were their relations with banks. By the time reasons were ascertained why these businesses were not paying their loans, the situation would have deteriorated to such an extent that nothing other than repossession could be done. The Land Bank generally waited for two years before any action was taken, which in itself tended to be problematic as funds were not flowing into the organization. The customers were given an opportunity to repay and if they could not, land had to be voluntarily handed over. If these two areas failed, legal action would be taken. Those who failed to pay could generally afford to settle debts, but were not willing to do so. This was part of the reason why care must be taken in viewing the State owned bank as an institution to be depended upon. Land Bank needed to ensure that 90% of the funds belong to the international capital markets, where the bank was subject to the ratings of international rating agencies, and to ensure that issues such as debt management and risk management processes were regarded as critical.

Mr Bici referred to the comment made by Mr Mukoki regarding the significance of big business to agrarian reform. He queried whether the sustainability role of the turn around strategy was not a contradiction to this former goal.

Mr Mukoki answered that the sustainability of any agrarian reform process, and not merely the future prospects of the Land Bank, depended on the active involvement of critical role players, including agricultural buyers such as supermarket chains. The biggest obstacle faced by black farmers was the accessibility to markets. Significant numbers of black farmers were not yet members of the cooperatives that were able to acquire that production. They remained sole actors struggling to access markets. When dealing with large supermarket chains, the quality and standards of products would be supplied. This made production easier. It was thus important to ensure that all important stakeholders were involved in agrarian reform. It remained problematic that the consumers of products were black, yet the distributors of these goods were not.

Large agricultural firms continued to benefit from the government’s procurement programme. These companies had significant BEE partnerships and this made it difficult to establish who the beneficiaries of such deals were. The awarding of contract to these BEE companies was thus not a reliable indicator of the growth and transformation of the agricultural economy. It was therefore important to include all major buyers of agricultural products, including both government and large businesses, in the process of reforming the agricultural sector.

Mr P Ditshelo (UCDP) requested clarification regarding Land Bank’s policy on the writing off of debts, and asked if the bank could indicate incidences of liquidated clients.

Mr Mukoki replied that the Department of Agriculture and Land Affairs had released statistics regarding the repossession of farms during the 2001/2002 financial year. These statistics were subsequently divided into black and white farms, as well as those who could pay off the debt and those who could not. The customers were given an opportunity to repay and if they could not, land had to be voluntarily handed over. If these two areas failed, legal action would be taken.

Mr Dishetelo said that the bank had not operated profitably, and asked, In this context, that Land Bank should clarify how performance bonuses were awarded to employees.

Mr Lungile Mazwai, Chairman of the Board, Land Bank, replied that three factors were taken into account when considering the rewarding of performance bonuses. These included the identification of the objectives that had to be achieved over a certain period of time, and agreement on what each person at the bank needed to do to achieve these objectives. He stressed that bonuses were performance related, and the awarding was a matter between the employers and employees, based upon performance. In the context of huge losses incurred the ability to improve the situation would be a main criteria of performance. The making of a profit was not the only criterion to the question of performance; but how these losses were managed and the situation improved was also to be taken into account. A major challenge faced by the bank was the recruitment of adequately skilled staff, as most skills were lost to private sector banks. The remuneration packages offered had to be competitive.

Mr Ditshelo said that the two-year waiting period before Land Bank took action to recoup debts exacerbated the debt burden of such clients.

Mr Mukoki acknowledged that the waiting period of the bank could exacerbate the debt burden of clients. However, this was the traditional policy of Lanc Bank. The bank also utilized any means possible within the two-year period to assist clients in the repayment of debts.

Mr Dlali expressed his concern regarding the huge differences in the salaries of members of the Bank, including the differences in income between management and staff. He said that during a meeting between the Select Committee of Public Accounts and the Land Bank the previous year, the Committee expressed concerns regarding both the salary discrepancies as well as the rewarding of performance bonuses. This could impact on the performance of employers.

Mr Mazwai answered that Land Bank followed all requirements of the process of performance assessment and the rewarding of bonuses. Regarding the issues of income disparities, he explained that the income of all members of the board was outlined in the annual report and that isolated discrepancies in income in situations where new appointments were made could be explained by the particularities of each incident. For instance, annual income disparities between a new appointee and existing staff was as a result of the new incumbent having not been in position for a 12 month period

The Chairperson thanked Land Bank for its presentation. Members resolved to consider the Land Bank’s 2005/2006 Annual Report

The meeting was adjourned.