Land Bank Turnaround strategy: briefing by Land Bank & Minister’s comment

Meeting report

Land Bank (the Bank): Status, Strategy and turnaround plan as at 30 September 2008
Mr Mohlaloga chaired the meeting in its entirety (the Chairperson)
Prof Herman van Schalkwyk, Acting Chairperson, Land Bank, briefed the joint sitting of the Portfolio Committee on Agriculture and Land Affairs and the Portfolio Committee of Finance on the salient points of the current status of the Land Bank, the clean up strategy, turnaround plan and financial statements for the period ended 30 September 2008. He noted that the situation at the Land Bank had led to a crisis point, which now had to be managed. The Land Bank had reached a turnaround point and had survived up to this point with the support of government. The Bank was still facing challenges, which had been ongoing for the past four years.  Certain commitments had been made that were not needed. The appropriate point of departure was therefore to accept this, and he asked for Parliament's indulgence as the Bank implemented its turnaround strategy.

Prof van Schalkwyk highlighted a few recent successes. The turn around strategy had been completed and had been approved by the Board and had been sent to the shareholders and the Minister of Finance for approval. The strategy focused on development as core to the Land Bank's business. It was divided into the short to medium term (0-7 Years) and the medium to long term (7years and longer) plans. This was the first time the Land Bank adopted such a strategy.

Mr Phakami Hadebe, Interim CEO: Land Bank, reported that the previous turnaround strategies had not been put into action until now. The operating model had been uncompetitive as there was a high cost attached to competing with better-positioned commercial banks. There was substantial evidence that core business and management processes were not in place, leading to a qualified audit. There was a need for the Land Bank to effect a turnaround across the board to respond to this context. Early progress on getting to a policy framework had been made and in addition there had been identification of some principles and early ideas around initiatives that would begin to move the Bank in the right direction. 

Ms Delanie Lamprecht, Head of Clean-up Team: Land Bank, presented the overall approach and the nature of the clean up. The immediate priorities of the clean up were the audit report matters. The objective was to achieve a cleaner audit report for the 2008/09 year end. There had been qualifications on the Land for Development Finance Unit (LDFU), the capitalisation of the new system costs, procurement, payments, payroll and funds under administration. Qualifications had also been received on non-compliance with legislation. This referred to the Public Finance Management Act (PFMA) regulation against irregular, fruitless and wasteful expenditure. Other matters for attention were Ineffective governance, the manual work created by an inappropriate banking module, and non-compliance with legislation. The Bank would also address the late submission of corporate plans and shareholder compact, declaration of interests, the moratorium on development loans and the payments to the former Chief Executive Officers. She reported that there had been ineffective performance management of strategic objectives. Forensic investigations that had already been completed and those in progress were detailed to the Committee.

A brief overview was given of payroll projects status, and procurement projects status. Stabilisation was discussed according to developments in the fields of Human Resources (HR), Information Technology (IT), cost to income considerations, the Land for Development Finance Unit (LDFU), funding and balance sheet issues.

Mr Vincent Potloane, Treasurer: Land Bank discussed the cost to income ratio regarding the increasing net income, plans to enhance existing revenue streams, reducing the cost of funds and Operational Expenses. This also covered the assessment of critical cost increases, the enhancement of the product offering, improving service delivery and approaches to additional income.

Mr Jaco Du Plessis, Interim CFO: Land Bank, discussed funding dynamics, which covered the initiatives to improve liquidity position, lengthen the maturity profile of investments, minimise short term refinancing risk, an increase in roll-overs and the issue of new funding. The context and progress of non performing loans relating to the balance sheet was explained under the action areas of the Corporate Finance Unit (CFU), Land Development Financing Unit (LDFU), Retail and Legal. The six strategic imperatives guiding sustainability were outlined. 
The financial results for the last six months were discussed according to the income statement for the period ended 30 September 2008 and the and the Balance sheet as at 30 September 2008. On the income statement for 2008, the net interest income had decreased from R 508,368 million in March to R 321,454 million in September as a consequence of the increase in the net interest margin. The best-improved item on the income statement was the impairment of loans which was a reversal of provisions previously made. This was a direct consequence of the follow up of unrecoverable loans. On non-interest income there was very little fee income in comparison with commercial banks, as the Land Bank did not charge its clients fees. It was noted that the drop was symptomatic of the current economic environment since the Land Bank’s investments had declined, as they included derivative instruments.

Looking at the balance sheet the cash in the bank was in a very healthy position (nearly R 2 billion). The biggest concern was the declining loan book – a decline from R14,1 billion to R 12,4 billion. One of the biggest challenges facing the bank was the expansion of the loan book. Equity (retained earnings) sat at a healthy R1,8 billion excluding the government guarantee of R 1,5 billion. The decrease in funds and administration was mainly due to MAFISA fund remaining flat because the Bank had stopped disbursing funds. Proper procedures and controls had to be put in place to ensure that irregularities could be avoided in future.
 
Discussion
Mr M Bici (UDM) noted that he sincerely hoped that this was a sign of a turnaround. He pointed that the figure for vacancies was 70%. He asked why 70% of management positions were vacant, what was being done to fill them and what impact this had on the Land Bank.

Mr Hadebe responded that it had become difficult to entice people to join the Land Bank, in part due to negative media coverage and concerns about the sustainability of the Land Bank. People who had other options open to them had also decided rather to leave. The structure of the Land Bank was incorrect. It was not based on a set strategy, but was rather informed by people and had a convoluted structure. The turnaround strategy outlined the process. The  50 positions vacant had not really had a substantial impact, because there was cross subsidisation to ensure that the Bank survived. The Bank had previously wasted money in employing people in a structure that was not aligned with government policy.

Mr Bici recalled that there had been reference to the fraud cases being handed over to the relevant authorities. He asked who those relevant authorities were and what had the fraud involved.

Mr Hadebe responded that the Land Bank had been the subject of four forensic audits over the past four years. The first was the work done by Deloitte on the Land For Development Unit (LFDU). The Land Bank had taken the decision that it should be reported to the police, had done so and a case number was assigned. The second concerned the Information Technology staff who had made certain dubious decisions. They had spent R 140 million and had very little to show for it. The main failure and waste of funds concerned the IT banking service and this matter was being investigated by the Directorate of Special Operations (Scorpions), and a case number had been allocated. The third involved Agri BEE. The   investigation arose due to whistle blowing from staff. The Land Bank brought in a private company to investigate that, who felt that there was a need for further investigation. The Land Bank was now working with the police and were close to concluding the investigation. The fourth one concerned the Micro-Agricultural Finance Initiative of South Africa (MAFISA). This case was also handed to the Scorpions and they had indicated that they would be issuing summons on 24 November 2008 to all the people implicated. There were, in addition, smaller  cases that came up from time to time and the Bank had resolved to employ a private investigator to handle the more substantial cases.

Mr S Abram (ANC) commented that the Bank was in process of foreclosing on loans, and was particularly concerned about the land reform beneficiaries who had these loans. He asked how the Land Bank intended to conduct the foreclosures, and whether there were any funds appropriated to help cushion the blow, as also whether there was some sort of rescue package, since the Committee did not want to see people losing their farms.
Mr Hadebe responded that the Members had raised that concern before, regarding small farmers. The Land Bank had equity of approximately R 3,6 billion three years ago. That capital had since depreciated to about R 1,4 billion by this financial year end. Part of that money was money that was owed to insurance. This left the Land Bank with equity of around R 800 million. If the government guarantee of R 700 million was deducted, that left the Bank with R100 million in equity. The Bank have a total debt of R 12 billion. This illustrated that the Bank did not have the capital necessary to service the debt, except for collecting on the non-performing loans. The Bank had requested the National Treasury to assist it.

Mr Hadebe explained that when a client did not service a debt the Land Bank would negotiate and try to help the client. This could take time and involved mechanisms like extending the maturity of the loan or restructuring the interest repayments. The second level was reached when the Bank could no longer help. Section 54 of the Public Finance Management Act  (PFMA) compelled the Land Bank to raise all revenues owed to the government. The Bank could at this stage go the legal route and try to resuscitate and get loans back. There had been problems in the interaction with the Department of Agriculture and the Department of Land Affairs and it was difficult to oblige policy, as it was an open market. The only way the Bank would be able to deal with struggling farmers without calling up the loans would be if government were to intervene. The credit environment also made it difficult for the Land Bank to service their debt.

Mr Abram stated that he had written many letters to the Land Bank, without response, on the subject of many farmers having a seasonal income. The Land Bank had previously had a arrangement where farmers could deposit their income with the Bank and withdraw smaller amounts over the year. He asked if this facility could be brought back.

Mr Hadebe replied that the Land Bank was looking at seasonal income as a point of concern, but to date the problem had been that the Land Bank was not a deposit-taking bank.

Mr Abram asked if the Bank believed that a corrupt estate could be turned around and if it had looked at the possibility of bringing back the arrangement that had pertained in 1912, when the Bank had been established. The loans to farmers at that time had been very soft. A one-year allowance had even been given to first-time farmers. He asked if such an approach would not be useful in light of development aims.

Mr Hadebe responded that the officials were aware of the 1912 arrangements, and to that end, government was putting money in and the Land Bank was borrowing

Mr Abram referred to Mafisa and the agreement with Khula Enterprises. He asked in what ways these resources would assist people.

Mr Abram referred to the comments on the Bank’s lack of competitiveness. He asked if the State should make more resources available and if there had been discussions with the National Treasury on this.

Mr Abram referred to the transfers mentioned and said that they were outside the mandate of the Bank. He was curious as to the total figure. He stated that he hoped that these would recovered by March of 2010. He asked if it was believed that the amount could be recovered. 

Mr B Mnguni (ANC) stated that the presentation had mentioned hat Development Finance Institutions (DFIs) only provided 3% of the core business of the Bank. He noted that historically disadvantaged entrepreneurs were being forced to get much of their finance from loan sharks. He asked why, if the amount was limited to 3%, the Bank wanted to compete with the commercial banks. He also asked what could be done to improve this situation.

Mr Hadebe responded that he agreed with the comment. It was not just the officials that created the environment, but also the communities. Since 1994, the Land Bank had never worked on development. This was not new information. He referred to the Strauss report (released in 1997) that found that people in rural areas were left in bad situations. The foundation for the development was created with the passing of the Land Bank Act. Everyone could be accused of turning a blind eye to this. He added that in terms of food security, the Land Bank should be the key institution.

Mr Mnguni referred to the figures on medical aid. Nearly all of this had been invested in the equities market. He asked how much of the value of the investments would be lost in the credit crisis.

Mr Jaco Du Plessis, Acting CFO, Land Bank, responded that the Bank was indeed exposed in terms of the equities. The Bank was not yet sure of the decrease, but it followed that the investments would lose value. Part of this was shown in the fair value gains.

Mr S Marais (DA) commented that the presentation and the turnaround strategy were very encouraging. He added that only time would tell if had been successful. The current results were a disappointment and an embarrassment. The best thing he had heard was the relationship between Land Bank and the National Treasury.

Mr Hadebe noted that by the end of this and the following financial year, although there might still be qualifications on the audit report, the Bank would be doing a far better job. The Bank’s good relationship with the National Treasury extended to the building of all relationships.

Mr Marais asked what would happen with the outcomes and the recommendations in the A-G report and what would happen to the individuals implicated in the investigations.

Ms Lamprecht responded that the Bank had to address those comments that referred to the immediate priority of cleanup. The presentation had explained the move away from development. There had not been enough done to ensure that Development Finance Institutions (DFIs) followed the Land Bank Act. Because there was not an appropriate strategy in terms of appointments, therefore the Land Bank did not grow in line with its mandate. Only 4% of loans had gone to development projects

Ms B Ntuli (ANC) noted an interest in the mention of limited progression development objectives, in the first few lines of the presentation. She had thought that the Land Bank had moved away from the mandate of development and now did other things to be sustainable. She asked the delegates to clarify the statements of failure in terms of organisational structure and a lack of accountability.

Ms Ntuli commented on the Land Bank not competing with commercial banks and said that this had already been noted some seven years earlier. This was a legacy issue. However, having realised this, the Bank had continued to work in that fashion. She asked why this had not been rectified earlier.

Ms Ntuli referred to the comment that staff had ignored the policies in place in the Land Bank. She asked which staff this referred to - old or new - and what had been done about it.

Mr Hadebe responded that the majority of staff that had been ignoring policies had since left the Bank.

Ms Ntuli asked how long the clean up would take and what strategies were in place. She noted concern about the branches of the Land Bank and their provincial structure. She asked if there was monitoring of the support structures and other institutions working with them on the turnaround strategy.

Mr Hadebe responded that the date envisaged for completion was the end of September 2009. The process was currently unfolding in a way where new issues were being picked up. As a result, the clean-up might take longer as the Bank attended to the new issues. The Bank had strategies in place. The branches did have a guide and they were also conducting branch visits. The turnaround strategy would start from the branches. Once this was finished, they would have to look at the overall structure of the Bank to synchronise the head office and branches. The turnaround strategy had different financial imperatives. The information presented showed that the Bank had turned a corner. In the past three months the liquidity had improved, investors had returned, and there had been collection on non-performing loans. The strategy was beginning to reap benefits and the numbers spoke for themselves.

Ms Ntuli referred to an amount of R100 million in Black Economic Empowerment (BEE) funding, and asked what had happened to it as she could not locate it.

Dr D George (DA) referred to the derivative assets and liabilities on the balance sheet that made reference to interest rate swaps and the fair values of the transactions were recorded. He asked what assumptions were made about interest rates that informed these swap arrangements. He also asked, given the interest rate movement after March 2008, what the Bank's exposure now amounted to at current market value. Noting from the balance sheet that the derivatives liabilities had fallen, he asked if the Bank had the necessary expertise to operate in the derivatives market.

Mr Potloane gave the Committee assurance that the Bank had the expertise to trade in the derivatives market. The assumptions that informed the swaps were usually hedged against interim savings. Secondly the National Treasury had a policy that required the Bank to maintain fixed and floating assets. Where they needed to adhere to those policies, derivative transactions had been entered into. The derivative balance in the total portfolio had been in the black.

Dr George noted that the insurance contract mechanism appeared to be that the Land Bank insurance company assessed the risk, whereupon they would then determine the premium. They then entered into reinsurance contracts for some or all of the liabilities. The financials showed that the present value of the policy holders’ liabilities had fallen, together with the present value of the future premium – and this made sense. The present value of the future expenses, however, had increased. He enquired whether the insurance book was decreasing while the expenses were increasing.

Mr Hadebe responded that it was correct that the insurance book was declining while expenses were increasing.  This had to do with the average age of the clients and had consequences for the balance sheet. There was a need to review the whole long book and try to attract new clients. In order to compete with the packages of commercial banks, the Land Bank needed new products like crop insurance.

Adv M Malahlele (ANC) asked if there were any lacunae in the Land Bank Act or related Acts.

Mr Hadebe responded that there had been very slow interaction with the DoA to get to a position where they could disperse funding. DFIs were supposed to go where there was a market failure. As to the total amount owing, it was hoped that the total amount could be received back through repeated interaction with the DFU, and interaction was promising, although it must be borne in mind that the market was under tight conditions.

The Minister added that he thought it a good idea to re-look at the Land Bank Act and properly locate the Minister in terms of the Land Bank.

Ms Lulu Xingwana, Minister of Agriculture and Land Affairs, thanked the Chairperson and the Board for their hard work on the strategic plan since their appointment in 2007. She referred to the vacancy rate of 70% and commented that when these officials had come into the Bank, there had been much corruption. Many of the people who left were involved in that corruption, including board members and top management.  Much has been achieved by way of the continued investigation in the previously mentioned matters.

She noted that Land Bank now had new management. There was co-ordination of the programmes and some progress. In working with the CEO and management, the Departments of Agriculture and Land Affairs would do whatever they could to assist farmers, within the constraints of a limited budget.  The Board would have to look at transformation at the provincial level as a matter of urgency. The outcome of the Department's own investigation into the AgriBEE matter had led to the suspension of the Deputy Director General who was responsible for Agri-BEE matters and the hearing would be held at the end of November 2008. Responsibility had to be taken at all levels. She referred to the controversy around the Amazulu club and uShukela. She specifically asked that Deloitte must look into the issue as auditors of the Land Bank and there had, as yet, been no response. Questions had been asked as to exactly what had happened, and why. At the end of the day, it was the poor rural emerging farmers who suffered when these properties had to be repossessed. It was critical that these investigations were taken forward by the relevant authorities. The Department was ready to assist to ensure more access for black farmers. She hoped that at last a development strategy and plan that would be able to take forward the Land Bank and agriculture had been found.

The Chairperson asked the delegation for copies of the detailed development plan and turnaround strategy. He added that it was refreshing to have an honest reflection. The Land Bank could count on the support of Parliament. He referred to the number of representatives present in an acting capacity and felt the lack of permanent appointees was a matter of concern.

Prof van Schalkwyk remarked that the Bank was actually addressing some of the issues raised. In response to the comment on the many "acting" appointments, he said that the Bank was in the process of conducting interviews for the CEO position, and that issue would be resolved. Consistency would be retained in the Board.

The meeting was adjourned.