Land Bank financial challenges

Meeting report

The Chairperson welcomed the representatives from the Land Bank. The Bank briefed the Committee on issues in its 2018/19 Annual Report, timelines for the finalisation of the 2019/20 Annual Report, and strategic issues which arose for the Bank because of COVID-19. COVID-19 has debilitating consequences for the agricultural sector.

Mr Arthur Moloto, Land and Agricultural Development Bank Board Chairperson, said the Bank experienced downgrades. It happened in rapid succession and this has major implications for the bank. The Bank could not raise capital, and is currently financing loans from repayments from lenders. It has essentially been recycling loans. The Board of the Bank meets weekly to try and find solutions for the bank's liabilities, and to ensure the Bank manages to shrink its loan book. The Board is grateful to its shareholder who recently gave the bank R3 billion.

Land Bank Presentation

Mr Ayanda Kanana, Chief Executive Officer, Land and Agricultural Development Bank, presented the Land Bank’s report.  As a State-Owned Enterprise (SOE), the Bank must be commercially viable and able to focus on its development mandate. However, the Bank is currently in a default position and unable to focus on its development.

Given the Bank’s distressed position there is no new funding coming to the Bank. There are persistent non-performing loans, and high borrowing levels with low short-term maturities. The cost of funding started to increase, and the Bank downgraded to non-investment grade. Coming back from this is going to require support from shareholders and clients.

The Bank increased its support for development and transformation. It also acknowledges more can be done. In 2008 it made zero contribution to development and transformation, and from 2012 it started to fund development and transformation to the 20% contribution it currently has. It has an aspirational target of 60%. It hopes with the support needed, it will be able to do this.

The Bank has large exposures in grain, livestock, and sugarcane. With grain, it hopes to de-concentrate its exposures. It has a lot of short-term maturities it must service against an asset book which is consistently hungry and being fed. It is recycling money. If lenders do not advance money to the bank or rollover maturities immediately, the bank will be at risk of default.

Annual report of 2018/2019 Financial year: highlights and challenges:  

• The bank increased its transformation disbursements
• Irregular expenditure reduced
• There is an increase in non-performing loans
• Declining net margin
• Cost to income ratio: though not high, has become worse and is probably the biggest proportion to date
• Many insurance claims paid
• Sinking funds because of liquidity issues
• On development and transformation: the bank has supported women and youth, corporate social investment (CSI), procurement, and drought relief.

The Bank’s key issues from the 2018/2019 financial year are the increase in non-performing loans, reduced net interest margins, and mute growth in the loan book. At the end of the 2018/2019 financial year, the bank was in a strong liquidity position.

Recent developments and liquidity challenges

• In 2015-2018 the country experienced drought, erratic rain, and diseases affecting livestock
• In 2019 Moody’s flagged some dangers the Land Bank would face, including pickiness of the shareholder to invest, environmental issues, and the prolonged appointment of the Chief Executive Officer (CEO).
• In 2020 a downgrade took place and investors started reviewing investment policies. Funds started to dry up. There were guarantees to the bank from the government.
• In 2020 COVID-19 hit and there were three more downgrades for the Bank.
• There were liquidity issues and an inability of the Bank to come out of its default position quicker. The Bank did not anticipate the default would take this long to cure.
• It was in contact with Moody’s, and Moody’s is continuously reviewing its position.

  Bank in financial distress:  

• The Bank has great problems now in planting season. Farmers expect the Bank to be able to fund this.  
• The Bank is in default on its liabilities since April 2020, and cannot service its current debts in its current form and terms. The going concern of the Bank is at risk.
• The Bank employed solutions such as de facto standstill while debts are being restructured, funders will recommit facilities on the back of state guarantees, otherwise the default status will not be cured.
• It expects financial losses for the 2019/20 financial year, and projects a turnaround in three years.
• The Bank’s credit rating declined. Its ability to attract funding is compromised. Investors require a particular credit rating to be able to advance money to an organisation. Given the bank’s posture, it is not able to do this.
• It needs further shareholder support to be financially sustainable.

Corrective measures taken:

• It applied for recapitalisation of R5 billion from the shareholder. These funds will be ring-fenced for development projects or smallholder farmers.
• The appointment of the CEO and Chief Financial Officer (CFO) was confirmed in March 2020.
• In February 2020, the Bank received a Bank guarantee of R5.7 billion.
• The Board formed a Restructuring Committee to respond to its liquidity issues.  
• The Bank appointed the legal services of ENS Africa and Rand Merchant Bank (RMB) as its corporate finance advisor.
• It prepared a financial stabilisation and sustainability plan which includes solutions such as the asset solution, liability solution, and equity solution.
• The Ministry of Finance and National Treasury are an integral part of the process to support the Land Bank

Status:  

• The Bank cannot access new funding until its default status is cured.
• The Bank’s liquidity constraints harm the agricultural sector
• The Bank is only able to recycle loan repayments from its clients towards the financing requirements of its existing clients
• It closed new applications to avoid reckless lending
• Clients are encouraged to seek financing from other financial institutions and Development Finance Institutions
• Transformation and development is compromised by the bank’s inability to support it.

COVID-19 implications:

The Bank’s liquidity challenge remains a key challenge for the sector given the bank’s constrained financial disbursements to support production.

While most of the agricultural sector can continue with production activities, challenges remain for several agribusinesses within the value chain.

Vision25:  

In 2025 the Land Bank should be a one stop shop, to be able to completely look after the farmer.

Strategic direction:

The Bank is aiming to be sustainable, focus on development, client service, and improve its internal controls.

Timelines for finalisation of 2019/2020 Annual Report:  

The Bank expects its report to be tabled in Parliament in November 2020.

Discussion

The Chairperson thanked Mr Kanana and asked National Treasury if it would like to provide brief input. The Committee supported National Treasury’s allocation of R3 billion to the Land Bank, in the Committee’s Special COVID adjustments budget. However, the Committee expressed concern about the Land Bank being nowhere near as efficient and effective as it could be, acknowledging some issues are beyond the bank’s control. The Committee said if the money was given to the bank, Treasury should exercise more effective oversight.

The Chairperson asked National Treasury if it would like to provide input.

Mr Lefentse Radikeledi, Director: Development Finance Institutions (DFI), National Treasury, confirmed National Treasury provided R3 billion to the Land Bank to assist with its recapitalisations. The Bank is aware conditions for utilisation of the money for the Bank’s recapitalisations were indicated by Treasury. National Treasury participates in the Land Bank’s restructuring committee meetings every week.

Treasury is involved in the process of the Land Bank’s discussions with its lenders regarding how the Land Bank will be restructured, and how it should reform its debt book. National Treasury is in close collaboration and contact with the Bank and with what happens daily. The Bank started to feel Treasury interfered too much with its operational matters, which it is not doing. Treasury is ensuring it stays close to what happens, to avoid any surprises.

The Chairperson said National Treasury’s full involvement with the Bank is expected, as Treasury is meant to defend the public first. However, this does not entail an interference with the Bank’s operational issues, unless there are issues which undermine the Land Bank’s role, its legislative mandate, and the responsibilities it must fulfil.

The Chairperson opened the floor for questions.

Mr D Ryder (DA, Gauteng) said it is difficult to interrogate such a complex issue, given the presentation was sent the night before.

Mr S Du Toit (FF+, North West) appreciated the Land Bank’s honesty about its current financial situation, acknowledging it is in a critically financially unstable position. Currently, the Land Bank only receives reinvestments and sureties from the government to ensure it has more money to spend. The Bank confirmed its bad debt from the non-performing loans by lenders is quite tremendous – R6.4 billion, if not mistaken – and the Bank intends to borrow another R5 billion from government. This still leaves the Bank with a loss.

The Bank alluded to its possible consideration of non-insurance in the future. This means not making insurance a prerequisite for a loan but only an encouragement for lenders to make use of it. The question is how many months have gone by with lenders not paying loans with loan insurance not as part of the loan package. It is reckless to provide money without loan insurance knowing this is a high-risk area.

In its presentation, the Land Bank gave a few solutions to ensure more funding is available. However, there are no concrete plans on the table illustrating how more funds will be generated by the Bank itself. It seems the Bank is a distribution entity as funds are coming in and funds are going out. It is circulating funds without generating more money, to assist more farmers to enter the agricultural sector.

The Land Bank said a recycling loan is taking place. It confirmed at the beginning of the year, it borrows money at a higher interest rate, and it lends those funds at a lower interest rate to farmers. This way it makes a loss for itself. This is a wasteful expenditure. The Bank is looking at implementing a new structure in the future. To date, this is not rectified.

Mr Ryder said this is a complex issue. The Committee is asked to support a request for additional funding. The late receipt of the presentation makes it difficult to ask any real, tough questions. The introductory remarks by the bank seem to blame Moody’s for some of its woes.

Mr Kanana put it in a better context afterward, but Moody’s actions are the direct consequence of the circumstances. It is not Moody’s fault this happened. Moody’s responds to a particular set of circumstances and raised the flag on liquidity issues in early 2019.

There was an inadequate response to this, and this is why there is a liquidity problem, and commitments which are not met. He asked what the causes of those liquidity issues are. The cost to income ratio was mentioned and highlighted. It is not totally out of line with most commercial banks, for example, it is two to three percentage points higher than Nedbank, and maybe five percent above First National Bank. He asked what the bank’s staff costs are, how many staff the bank has, and what is causing the liquidity issues.

The Bank’s nonperforming assets are around eight percent again. This is possibly high, but in the current environment unsure. He asked if the move to the bigger focus on the developmental mandate caused the issue, or as was referred to by Mr Du Toit, it was the interest margins.

He asked the bank to unpack the real issues of the liquidity crisis, because until the cause of the situation is identified, it may not be able to come up with a solution.

The Land Bank discussed the mix between the self-funded and the state-funded developmental mandate, the fact the bank should be self-funding, and discussed the state needing to fund some of the developmental issues. The Land Bank should be self-funding entirely. The developmental mandate should be funded by the profits or the margins generated through the Land Bank’s normal commercial business. Treasury’s guidance is needed regarding the original mandate and where the developmental funding is supposed to come from. If there is a developmental mandate it should be budgeted for. This will deal with it and ring-fence it to know what exactly is being dealt with and ensure there are no surprises, such as the sudden request for the R3 billion.

Regarding being grain heavy, grain is a staple and a base feed for livestock. It is possibly the largest sector within the agricultural market from a layman’s point of view. It is expected to be reasonably grain heavy as this reflects the agricultural market in South Africa.

The following was said regarding the ability to leverage off the land as collateral for developing farmers: At a media conference President Cyril Ramaphosa said land is being released to farmers, however, this will be on a lease basis. This does not give these farmers any scope to put this land up for collateral. The question is how this will work for the Bank’s model going forward, if farmers are provided with access to land. Support needs to be given in other areas as well.

Regarding the transactional bank aspirational strategy going forward, generally, with commercial banks, it is known the transactional side of things is where these banks make the least money with the highest concentration of costs.

There is less money to lend out. The Committee discussed food security, and there is a need to keep food costs down in the post-COVID recovery of the South African economy. It looks like the amount of money given to farmers will be decreased. The available funding to lend out is decreasing. The country had reasonably good early rains in the maize triangle, and there is the potential of a bumper harvest. Maize is a staple and base product in animal feed. Having a bumper product will keep prices down. Going forward, this will be wonderful for food security and the cost of food for the average South African. If there is insufficient funding for farmers, it will create a problem. The Bank may end up with a situation where it has underfunded farmers and food costs soar because the crops do not meet quotas. Perhaps it does not produce enough crops. It may have to import, and on a basis of supply and demand, prices will increase.

Mr Ryder asked if Treasury has experienced any resistance by the Land Bank. The result of oversight resistance with other State-Owned Enterprises (SOEs) such as Eskom has been seen. He asked if Mr Lefentse felt any resistance, and what the real situation on the ground is.  

Responses

Mr Moloto listed the questions and asked the panel who would reply to it. The CEO would reply to Mr Du Toit’s question on Non-Performing Loans (NPL’s), and trends observed; concrete plans on generating funds instead of recycling loans; causes of the liquidity crisis; and shifting blame to Moody’s; Mr Ryder’s comments on being grain heavy; the issue of the land released as announced and used as collateral; transactional banking and economies of scale; food scale and costing; the view which restricts funding to commercial farmers and heavy rain and bumper crops.  

Ms Dudu Hlatshwayo, Land Bank Deputy Chairperson, would respond to the question on loan insurance to farmers. Ms Khensani Mukhari, Land Bank CFO, would reply to the cost of funding and pricing. Mr Sydney Soundy, Land Bank Executive Manager, would reply to the issue of the Bank’s dual mandate.

On the cooperation between the Land Bank and National Treasury, Mr Moloto said the Land Bank, upon realising the liquidity crisis, immediately formed the restructuring committee. It sought the services of ENS Africa to become its corporate legal advisor and RMB as its corporate finance advisor to deal with some of the challenges. A letter was sent to the Director-General (DG) of National Treasury asking the DG to send a person from Treasury to sit in the Committee of the Bank. This was to ensure Treasury has a clear line of sight on everything the Bank does, and nothing is hidden. The Bank cooperated well with Treasury and Mr Lefentse can attest to it.

Mr Kanana said he would start with the questions. The Bank has done its best to give an honest account of its situation. Given the time worked on the presentation, everything could not be included in it but there are details and plans which reply to the problems of the bank as it has them.

On the Non-Performing Loans (NPLs), using a number as at the end of June, there is a good split of the bank’s corporate and development book. It is just over R2 billion out of the mentioned R6 billion. There is a mixed bag of clients. Concerns were raised internally with the team to try and stratify this population of loans, which can be salvaged.

Some of these loans are re-advanced money, even to a point where it can no longer afford to pay it back. If these conditions persist then the loans will be unable to be serviced completely. The Bank is looking at the debt book and considering what it can do to try and put business rescue principles around these farms. Where farmers are old and frail and unable to continue farming, the question is who is running the farm. The Bank goes to the extent of trying to understand what exactly is happening with these assets, and if the posture suggests the bank is going to have to liquidate or take over these farms and start to uncover development.

The Bank is in the analysis stage of establishing an understanding of what is causing huge NPLs. Ever since the 18/19 financial year, it rises to the point it is currently at. Given, one of the books is in-sourced, the Bank is seeing some unhappy trends taking place.

Some of the loss is historical, where the cost of funding does not include operational costs incurred by the bank to run or manage the book. The Bank moves money across to its intermediaries or to direct clients at a cost of funding which does not include operational costs.

The intermediaries move these funds to farmers on behalf of the Bank and are paid over R400 million per annum by the bank for service fees. Another big cost is the Bank’s salary bill. The bank has over 400 employees, which costs.

Mr Kanana apologised for the late submission of the presentation. When the team got the notice to appear before the Committee, the Bank started working on the presentation, and could only finalise it over the weekend. The Bank will do better next time.

To amplify what Mr Moloto said, the Bank is not blaming Moody’s. The Bank is trying to give an account of what took place. It works well with Moody’s and supports Moody’s analysis and findings. Moody’s provides a prognosis of what went wrong and gave the Bank a fair warning. It is not Moody’s problem at all, and the Bank is not blaming it.

On the value of liquidity, there is a balance sheet mismatch. The Bank borrows short term money, and it has over 40% of its maturities to be repaid. The asset book has money lying longer within agriculture, and the Bank has revolving production facilities which keep coming up. If farmers are paying loans these are immediately brought down. The only way to pay lenders is through refinancing or getting new money into the Bank to be able to pay the other lender. If funding dries up there is no money to pay the lenders. This model has a big contribution to the way the liability issues come about.

The Bank anticipated the development mandate will be funded by its profits. However, with R6.4 billion of the book being non-performing, under-costed assets, and being unable to cater to operational costs, there is no way profits can be expected to fund development. The development needs of the country are bigger than the profits of the Land Bank. It had a turnover of R1.2 billion in one of the years. The Bank will not be able to do justice. It needs to be more intentional about funding development.

In the current corporate plan, the Bank showed Treasury how the R1 billion annual injections for development is arrived at. It is not enough. The Bank is working with 400 grain farmers it intends to support, and if any of those farmers do not have land, land must be bought for the farmers by the Bank. The land repayment alone is too high, and those farmers will not be able to afford it. If a production facility which gets recycled every year is added to this, there is no anticipation the profits of such a farmer will fund another farmer. The Bank must be stronger in supporting its development mandate. This was shown to Treasury.

On the book being grain heavy, there is no problem with this except where it is concentrated on one or more clients. If something happens to these clients the going concern of the Bank is threatened. There is room to transform and add more developed farmers in the grain space.  The Bank is addressing the de-concentrating of single exposures and allowing other players to come into the space.

Leasing land is a good step going forward. If these funds are funded by the Land Bank this land may still be exposed to state risk but not private sector risk. If the bank buys a farm for R13 million, which is a 500-hectare farm, to farm maize which is a single product, with one cycle dependent on rain, the farmer will not make it if there is any disease or a lack of rain. To the extent some land is available, the Bank is closer to an off-take model where it can bring a food producer to say an entire farm is available for production. If it is given an off-take, the Bank will be able to fund it. It is the de-risking model the Bank is looking at.

On transactional banking, the Bank has been warned by its advisors this model tends to attract more costs than it is worth. The Bank is to submit a white labelling strategy to see how it will be implemented.  It is not ready for this and the Board still needs to be convinced. It must decide if this is the way to go or not.  The Bank will be back to account to the Committee on how the solutions are envisaged to be able to make this viable for the Bank. If it is not, time will not be invested in trying to make it work when others are doing good transactional banking already.

Mr Ryder is correct on the economies of scale and sizing. The Bank is looking to support a developing farmer, and there are enough of these farmers to choose an aggregators posture as opposed to an individualistic posture. Imagine, if ten individual farmers are looking for a pack house, it makes sense to have one pack house all those farmers can support. The Bank is not trying to choose a scale of 6000 hectares alone, but rather looking at aggregating a smaller number of farmers to the economies of aggregation. This has pros and cons, but the Bank believes it to be de-risking, instead of funding one farmer with 6 000 hectares alone.

On disbursements, food prices are at risk of increasing. Given the early rains it is a good season to support the grain sector but the Bank is in a critical state. It is unable to access funding as it normally could. It may be worth going back and speaking to lenders. The Bank does not want to increase the loan book beyond where it currently is. It needs to create comfort, and the lenders need to see the corporate plan. The funding lines may open again. Once the funding lines are open lenders will have an appreciation for the problems the Bank has. Those conversations are critical to have with lenders to see how the Bank can assist the sector through this very rainy season the country is having. If the Bank does not get new funding it will not be able to support the sector, food prices will increase, and the supply will be low.

On loan insurance to farmers, Ms Hlatshwayo said the Land Bank has been around for 100 plus years, and for maybe 95 of those years the Bank mandated each issued loan to be coupled with insurance. However, in 2015, when the two insurance companies of the Bank came into being, the Regulator said each client must have the choice of where it receives insurance coverage. This is to encourage competition. Consequently, the Bank had to stop, by regulation, mandating each loan issued be covered with insurance by the Bank, as this would go against the encouragement of competition. This means the responsibility lies with the client to choose to receive cover from any other insurer even though it has a loan from the Bank.

Mr Kanana said the Land Bank is working closely with the Land Bank insurance companies, the short term insurance company, and the life insurance company. Through the bank insurance model, it ensures the Bank provides a one stop solution at a point of sale whenever a client seeks a loan from the Bank. The Bank is providing solutions which include the insurance cover, so the loans are also covered. It is the client’s choice. Regulations mandate the Bank not to force the client, but in providing a total package of solutions at the same time, the Bank ensures the loans are covered by the two insurance companies of the Land Bank.

The Chairperson asked for the next response.

Mr Soundy said, as a DFI or bank, the cost of doing business relates to funding. The way the Bank is funded is crucial to how it can progress and advance its developmental mandate. The extent the Bank is highly financed through debt capital markets, means the cost of funding is high. If the Bank is lending funding to clients it must be at a profitable level. If the cost of funding is at levels which the bank is at, there are two potential issues: it is either priced very highly in a way in which pricing is outside of the mandate it is supposed to provide, particularly for development. Development funding is expensive. There are three aspects concerning this:

• There is a risk to the development segment, meaning the clients the Bank has are starting in farming and therefore do not have the track record commercially established farmers do. From a risk and potential debt view, this must be accommodated for.
• Because these farmers do not have the track record, the farmers are not generating sufficient revenues and income at the outset. This affects the affordability of financing and is related to the issues of blended finance. These clients cannot be priced at levels like commercial institutions which already have a sufficient track record and capabilities to develop sufficient revenues itself.
• Given these are new participants in the sector, a lot of support is related to financing and preparation of the business plans to ensure the project can stand the test of financial viability. Without a track record, this support is required upfront and this comes at a cost. These farmers do not have a level of equity to invest in ensuring these plans are appropriately thought through and documented.

With this support for new farmers, once the farmers have finance, there is a need for extension services to ensure operations are supported technically. Most of the farmers do not have the technical skills which come with having an established track record. This also comes at a cost. When all these aspects are considered the cost is the profits generated by the Bank are not sufficient to cater to all the requirements for development.

The Bank does partially subsidise those services, but it cannot do it fully. This is so even where the Bank gets multilateral funding, for example, from the likes of the World Bank. It does not come at cheap levels. Aspects of blended finance come in here, and the loan component must be coupled with grant funding to assist with the aspects mentioned.

The Bank has a dual mandate to ensure it generates sufficient income from its commercial activities, and partially subsidises the development mandate. As indicated, it is not sufficient. Therefore, the cost of the mandate and the need for capital to be allocated to the Bank is important.

On the issue of the Bank loaning at higher interest rates, Ms Mukhari said the Bank is an organ which strives and continues to strive to be financially stable. The core part of being a lender is to generate positive margins of the money lent to clients. However, the Bank has seen margin compression over the years. It currently has a massive funding mismatch between the assets – which are the loans given to clients – and funding liabilities. This means this gap must be closed. The funding model is at 40% short term funding versus 60% long term funding. At one point the bank was at over 80% in short term funding, meaning long term assets are funded with short term funding which continuously has to be refinanced to strive to match the bank’s funding to its loans.

The Bank took a strategic decision to lengthen the tenure of its funding. Short term money is cheaper than long term money. As the tenure is lengthened, the bank saw its margin slowly eroding. The nature of the Bank’s contracts means it was not able to immediately pass on the increased cost of funding to its clients. The Bank has seen its margins become smaller and smaller.

Moody’s downgrades resulted in the Bank’s increased cost of funding. The Bank’s default position would have worsened. It borrows high and tries to recover on how it lends to its clients. Operationally, pricing models are being reviewed to make sure the cost of funding is recovered. Whatever is borrowed must at least be able to be recovered. The Bank is also looking at how it contracts with clients.

Mr Lefentse apologised for giving the impression there could be resistance from the Bank to work with National Treasury. This is not the case. The Bank works well with Treasury and it participates in everything. It shares all information Treasury may require from it.  The relationship is very cordial, and the bank and Treasury work well together.

On the real reasons for the liquidity crisis, Mr Moloto said Moody’s observed several things.

• Climate risks. Moody’s observed persistent drought and uncharacteristic hail in usually hail free areas
• A frequency of disease outbursts
• An increase in the Bank’s non-performing loans
• And the Bank agreed on a basal capital adequacy ratio of 15% with lenders, when its actual capital adequacy ratio at the time was around 16.4%

Moody’s believed there was not sufficient cushion, and anticipated losses would arise because of these factors. Moody’s was not certain the fiscals would be able to support the Bank, if it faced a major crisis. These are the key reasons Moody’s mentioned, and continued to downgrade the Land Bank. Moody’s also said the Bank’s delay in appointing its CEO compounded the problem.

The critical issue is most funders and lenders are prohibited by investment policies to lend to an entity with a sub-investment grade. Once the Bank has been downgraded to sub-investment grade, there are investment policies which would prohibit lenders from continuing to lend to these entities, and the Bank could be in default. The entity would want the Bank to pay back all of the money. The Bank would not be able to honour all its liabilities at once. It does not have money, and this gave rise to the liquidity crisis as explained by the CEO.

Further questions

The Chairperson asked for further questions.

Mr Z Mkiva (ANC, Eastern Cape) left the meeting and sent the Chairperson his input. He said he would like the Bank to have a dedicated percentage allocated specifically to fund subsistence farmers and traditional authorities.

The Chairperson said a major plank of the government’s overall economic transformation program is rural and agricultural transformation. This cannot be done by the Bank alone and the Bank works with the relevant departments particularly, the agricultural department. He asked to what extent the bank played a role in this regard and how it relates with the department.

Women and youth were mentioned in the presentation. The Bank dealt with the overall challenges in finding the necessary resources for transformation and this remains its goal. He asked if the bank wants to say something related to this.

The Bank previously asked for R5 billion and it received R3 billion. It is still hoping to get more. He asked, as important as the Bank’s role is, if this is realistic. Overall, the Bank plays an important role and it must play an important role, but it must be more effective and efficient with the country’s limited resources. There is no money. Not enough was said about how the Bank will be managing things more efficiently and effectively.

He asked Mr Moloto what the level of productivity is between this wonderfully clear and eloquent stuff, and the Board the Bank has.

The Chairperson said Mr Ryder complained the presentation was received late, but he should be held to account. Originally the National Assembly (NA) and he were going to meet with a different programme, but the NA’s programme was changed because it decided to focus on Budget Review and Recommendations Reports (BRRR). Things eased now, and the country is not under the same pressures with Covid-19. There is a need for Members to sit in BRRR.

He said the previous Tuesday he contacted Cindy August, Ministry of Finance, Parliament liaison Officer (PLO) and Mr Moloto, and engaged with them to have the bank present to the Committee today. Notice was given a week ago but often even if institutions, entities, and departments, are notified five weeks in advance presentations still arrive the night before.

Regarding Mr Ryder’s comment on the developmental mandate, he said when government says an SOE or public entity has a developmental role this usually means the SOE or public entity must be commercially viable and play a development role at the same time. The one is not seen as mutually exclusive to the other. Often when the SOEs or public entities have its backs against the wall, a common defence by it to government and parliament is it is expected to play a developmental role. This costs money. The SOE and public entity cannot compete with other entities in the private sector in its field, or closely related to its field, because these entities are profit seeking.

The SOE and public entity are expected to secure a surplus, but it operates under different criteria from the private sector. The SOE and public entity also has a development role. Sometimes the SOE and public entity are right to tell the government about this onerous developmental task with the expectation to secure a dividend, profit, or a surplus. Often, it is wrong because this is used as a rationalising defence for inefficiencies. Mr Moloto might have an independent take as a Board member.

On the issue of Moody’s, the Chairperson said the world is a capitalist world, but one cannot be subordinate to the powers that be internationally, for example the International Monetary Fund (IMF), the World Bank, and so forth. The right balance between the two considerations must be found. One must engage in the real world and do what is necessary to meet the needs of the rating agencies. On the other hand, the rating agency may not have some form of objective measure for criteria. Moody’s is not God, but also cannot be ignored.

Considering the jobs fund, there is a lot of argument within the Committee regarding the Bank and the government tending to undermine or not take seriously enough the needs of established farmers. One is constantly reminded there cannot be a coincidence of racial identity between the established and emerging farmers. There are now established farmers who are African and people of colour generally, and there are emerging farmers who could be people of a previously advantaged community, but there is always this idea everybody in government and its related entities is supporting emerging farmers. The subtext is African farmers most times, and ignoring established farmers, the subtext being white farmers. He asked to what extent this is true about how the Land Bank operates. Food security is necessary for everyone including the person with the darkest hue and the lightest hue. The two are interrelated.

He asked if there are partnerships the bank is trying to foster. Not enough is being said in practice about ensuring new emerging farmers link up with established farmers, and there are many established farmers. These established farmers, being white, have no interest in undermining African farmers. There is a common goal for all of us as South Africans. He said he knows someone very well who works with a former Member of Parliament, Member of Executive Council, and there is a Unit which does work with the Presidency and various Ministers on bringing established and emerging farmers together. There is a lot of goodwill amongst white farmers to work with African farmers and other people of colour. He asked if there is enough being done there.

The Chairperson handed over to Mr Moloto and the rest of the Board to reply.  

Responses

The Chairperson said the Bank must deliver its Annual Report by the end of November for its credibility, for the government’s credibility, and for the fact Parliament must hold the Bank to account. Once the final report is presented, the National Assembly Committee and the NCOP Finance Committee will look at the Annual Report.

The Appropriations Committee looks at the Bank’s operational issues. This means it will look at how much money the bank allocated and where. The Annual Report falls under the Finance Committee, the rest of what the bank said overlaps with the Appropriations Committee. This Committee raised a relevant discussion of all relevant parties and Ministers on what is being done about the farming sector. There is ongoing engagement with the bank, not to harass it but to help, and because the bank must be held to account.

Mr Moloto thanked the Chairperson. The Bank itself was first to admit its inefficiencies in its system. For example, there was a consistent complaint from farmers, emerging farmers in particular, about the bank’s turnaround time for applications being long.

The Board met with the Bank’s provincial managers to discuss this and find the root of the problem. The Board met with provincial managers because of the turnaround time concern. One application for example took more than six months. In a normal banking environment this application should have taken a month or two.

The new CEO, Mr Kanana, is looking at this to ensure the system is modernised. It is currently archaic and outdated. The bank’s information technology (IT) system and IT platform must be modernised to become efficient and responsive.

Many decisions were taken at head office and very little at the provinces. The provinces were just becoming post boxes, and sending things to the national head office .The decisions taken now, spearheaded by the new CEO, are to ensure the Board’s decision making powers are devolved to provinces. This is so it can take decisions and approve or decline applications of clients. There must be a quicker turnaround time.

Regarding the Bank’s partnership with established farmers, the Bank worked with the jobs fund to ensure it finances an emerging farmer tied to an established farmer. Those programmes are in place to ensure the established farmer can hold the hand of the emerging farmer and ensure the offtake agreements are in place. This is so the emerging farmer does not have to worry much about the sale of fresh produce from the farm. The Bank is in partnership with established farmers and the Bank must scale up on those kinds of operations. Valuable lessons were learned in those partnerships and the bank did a lot of work in this space with the jobs fund.

On the dual mandate, the Bank is not chasing super profits. It wants to be financially stable and ensure it can finance farmers at the least cost, where possible, and where it can ensure it meets costs.

Mr Soundy said the challenges faced with emerging farmers involve being unable to provide 100% loans, as these farmers will not be able to absolve all the debt, and it takes long to recover those costs. The Bank is trying its best in a challenging environment.

Before Mr Kanana joined the Board as the new CEO, the Board signed a Memorandum of Understanding agreement. It was signed with the Department of Rural Development, and the Department of Agriculture, to ensure there is oversight of the Bank’s work, as directed by Cabinet. Cabinet decided there must be an arrangement with National Treasury, the Department of Rural Development, and Department of Agriculture, to coordinate its activities. Collaboration with these departments was in line with the instruction from Cabinet.

Mr Kanana said when he started in March, it was not only the relationship with the departments which needed a boost, but also the Bank’s provincial and national relationships. The Bank built a closer working relationship with the Director-General (DG). Mr Kanana has fortnightly meetings with the DG, where they look for synergies between the entity and the department. The DG and Mr Kanana agreed if the Department is going to support the sector as a policy driver, the Land Bank must be an implementing agent. There is a tried and tested solution which the Department was extremely unhappy about, and Mr Kanana’s role for the past few months was to get the Bank out of this mud, and move the Bank to a space of collaboration. Issues of offtakes were discussed, and how the Department and the Land Bank can support each other to ensure it pushes the right level of development, so the money the Bank spent or repurposed is spent appropriately.

The Bank collaborated well on the issue of the money from the COVID Fund. The Bank will account to the Department as soon as those monies are utilised. The Department is viewed as a policy driver and the bank as the implementers of any policy decisions. This approach will assist the Bank to deliver on its mandate. The relationship is more cordial and there are past issues to be fixed but the entities are working well together now.

Mr Moloto pointed out there are questions in the chat.

Mr Du Toit asked if the government provides the requested financial support, and by when does the Land Bank anticipate being in a positive financial position, in which year.

Mr Moloto asked the CEO to reply to Mr Du Toit’s question. There are losses the Bank suffered. It expects to have more losses within the coming two years. A turnaround is expected within the third or fourth year.  

Mr Kanana said Mr Moloto is right.

The Chairperson said there is a question from Mr Ryder in the chat.

Mr Ryder said Ms Mukhari gave a nice analysis, and asked if a bonds issue is a better option.  He asked how the funding mix looks.

Treasury was asked to provide clarity on the Bank’s development mandate, and if the 60/40 aspirational split is supported by Treasury.

The Chairperson said there are no further questions, and said responses can go ahead.

Mr Kanana said the corporate plan has several scenarios. The Bank has a lot of losses in the current financial year and it will have more in the 2020/21 financial year. A breakeven point and profitability is expected in the third year. This depends on the scenario given to the Bank regarding funding it requires. The Bank anticipates its cost of funding will be high, but this is when the breakeven is expected.

On Mr Ryder’s bonds issuing solution, Ms Mukhari said the Bank has a Domestic Medium-Term Note (DMTN) programme, registered with the Johannesburg Stock Exchange. Funding is currently made of a mix of the capital market. This is the bank issuing bonds, institutional investors banking, and multilateral funding. The Bank already issues bonds, but given the Bank is in default position, this came to a standstill. The Bank currently issues bonds, but it is not able to do so given it is in default.

The Chairperson asked National Treasury for its reply.

Mr Lefentse said when Treasury took over the Bank in 2008, there were several issues to address. One of these issues is the Bank’s development mandate. The challenge of the Bank is a bigger chunk of its funding came from the private sector. Treasury had to align the development objective of the bank to the funding of the Bank. The Bank transformed into a better institution over the years. At some point, it allocated 10% for development issues. The Bank has evolved, and it is doing better. For now, Treasury is happy with how the Bank defined its development mandate, and the current 60/40 split. This will not be easy considering the Bank’s debt book, but over time the Bank should be able to achieve this, and more.

The Chairperson noted there are no other questions.

If the Annual Report is tabled reasonably soon, before the end of November the NA Committee may call the Bank. However, the Committee will negotiate with the NA to see the Bank early next year.

The Chairperson thanked the Land Bank for its presentation and hoped the Bank will implement more of what it said. The Bank’s role is important. The Chairperson wished the Board well and said he thinks the appointment of Mr Moloto as Board chairperson is a good choice. He hopes the team will deliver.

The Chairperson said his question asking if established farmers are marginalised, and emerging farmers are overemphasised by the bank, was not answered.

The Bank must implement, and act on the needs of emerging farmers. It must do so in a way which balances the needs of established farmers, whose food security objectives serve the country as well. He asked if this is a reasonable summary of where the Bank is, and Mr Moloto and Mr Kanana said yes.

The meeting was adjourned.