Portfolio Committee on Agriculture, Forestry & Fisheries. Land Bank: CEO. Transformation and Inclusive Growth in the Agricultural Sector

Transcription

1 Portfolio Committee on Agriculture, Forestry & Fisheries DATE: 24 April 2018 Transformation and Inclusive Growth in the Agricultural Sector Presentation by: TP Nchocho Land Bank: CEO

2 CONTENT 1. Introduction 2. Mandate of the Land Bank 3. Historical Perspective on the financing activities of the Land Bank 4. The period The period since 2015, to date and Forward looking 6. Products and Mechanisms being deployed: Land Bank s Distribution Channels 7. Conceptual Framework for Sustainable Land Reform & Agricultural Development 8. Delivery Models / Structures 9. DAFF Funding Programmes under Administration 10. Chronological Sequence of the Agri-BEE Fund 11. Funding Matters 12. Key Constraining Factors 13. In Conclusion: Strategic Enablers 2

3 Introduction The invitation letter requested Land Bank to provide a briefing on: 1. Financial Support products, particularly to support new entrants from historically disadvantaged backgrounds; 2. Related development programmes and their sources of funding; 3. Funding of Land Bank 4. Funding received from DAFF for developing farmers since 2014, and the utilisation thereof; and 5. Report on the AgriBEE Fund. 3

4 Mandate of the Land Bank The Mandate of the Land Bank, the Constitution and the National Development Plan highlights the importance of the agriculture sector to the country s development and transformation agenda Mandate The objects, as per the Land Bank Act, No. 15 of 2002, are the promotion, facilitation and support of: Equitable ownership of agricultural land, in particular increasing ownership of agricultural land by HDI s Agrarian reform, land redistribution or development programmes aimed at HDI persons; Land access for agricultural purposes; Agricultural entrepreneurship; Removal of the legacy of racial and gender discrimination in agriculture; Enhancing productivity, profitability, investment and innovation; Growth of the agricultural sector and better use of land; Environmental sustainability of land and related natural resources; Rural development and job creation; Commercial agriculture; and Food security. 4

5 Historical Perspective on the financing activities of the Land Bank In the Book titled, HISTORY OF LAND BANK: Financing Agriculture for 100 years it is stated that: In 1996, the Land Bank started introducing financial products, supplemented by government incentives, to help establish emerging farmers in agriculture. Extending credit to emerging farmers changed the Bank s funding profile after 1996, increasing its credit risk and forcing it to pay a slight premium on its funding from financial instruments with market-related interest rates. 5

6 Historical Perspective on the financing activities of the Land Bank continues However, there is no reliable data available in the Bank to show clearly how much was disbursed to the Emerging sector during the period 1996 to Commercial vs. Development Lending R billion Development Commercial FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018/Q3 6

7 The period : Creation of the REM Unit FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Ensuring that development is at the core of the Land Bank s operations, the Bank launched its then Retail Emerging Markets ( REM ) unit in FY2012. This unit catered for emerging farmers that would ordinarily not be able to secure access to funds from conventional financial markets. REM Gross Loans % In order to mitigate the risk associated with this market segment, the Land Bank adopted a Wholesale Financing model which saw various controls and support mechanisms put in place in order to advance the success rate of this target market WFF model is summarised on next slide DAFF provided a R150m Wholesale Financing Support Facility (R50m from Mafisa; R100m DAFF) that was used to subsidise lending rates to emerging farmers/ beneficiaries at 4% The R100m WFF Support fund has since been depleted (July 2017) and Land Bank has carried this cost on balance sheet for FY2017 and FY2018 cumulatively at ca. R130m. Retail Emerging Markets ( REM ) FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Gross Loans (R m) Wholesale Funding (WFF) Direct Lending

8 Same period : Total Bank Portfolio In addition to the financing through the REM Unit, further loans and investments were undertaken through other Divisions within the Bank Development / Transformation Commercial Commercial vs. Development/Transformation Financing R billion The Bank broadly defines Development as loans to HDI s, commercial/ corporate operations where Black Ownership is > 50%, and/ or BBBEE Level 4 or better contributors FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018/Q3 8

9 The period since FY2015, to date & Forward looking R billion The Bank has made progress to transform the loan book, however this requires aggressive acceleration in a risk-responsible manner. The projection going forward is shown in the graph below: 60 Loan Book Composition Transformation projected to grow by 190% ±30 % of portfolio FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 Commercial Transformation / Development Loan book grew steeply from FY2012. The transformational component of the loan book grew by 430% from a very low base in FY2012 compared to the remainder of the loan book which grew by 81% over the same period. Projected growth would increase % of loan book devoted to development / transformation assets from 11% to approximately 30% over four years. 9

10 Products and Mechanisms being deployed: Land Bank s Distribution Channels Distribution Channels Direct Indirect Branches (x25) Business Banking Team (Head Office) Corporate Banking & Structured Investments Team (Head Office) Corporate Intermediaries ( SLA Partners ) e.g. AFGRI GWK Suidwes Obaro Value Chain WFF Intermediaries e.g. Akwandze Humans-Dorp Sernick R 20.3bn R 22.1bn R 0.9bn 10

11 Conceptual Framework for Sustainable Land Reform & Agricultural Development 1. Land Availability 2. Project Research & Planning 3. Investment (Funding) 6. Market Access & Logistics 5. Technical Support (Ongoing Operations) 4. Implementation 7. Monitoring & Evaluation 11

12 Delivery Models / Structures: Financial Intermediaries Overview Corporate Structure The company provides financial services to Community Property Associations and Strategic Partners as well as to Small Scale Growers in the sugarcane production industry. 9% of processed sugar, packed in a well-known brand comes from these farms. Shareholders 38 including Strategic Partners and communities Land Bank 1 Other Funders Beneficiaries (Land owners, community trust, employees, etc) 5 Co-operative 3 Technical Assistance Partner 50% 2 Service provider 4 50% Funding Technical Assistance Off-taker 6 Development Impact permanent employees 210 Seasonal employees 17 New business created (along the agri-value chain) All employees formalised (Registered for UIF, etc.) Change in profitability after assistance R22m Change in value of assets R73m 646 on-the-job training (farming business related training) 88 social & life skills training Key Points 1. Land Bank and other institutions finance Service Provider 2. It is owned by Co-op (50%) and Off-taker (50%) 3. Technical Assistance partner provides technical assistance to farmers 4. Farmers receive technical assistance and financing 5. Farmers buy into Co-op 6. Off-taker guarantees offtake Technical Assistance Provided Soil analysis, Irrigation management, Crop management, Fertiliser and chemical management, Ratoon management, On field support and training, Yield analysis for financial projections Region Malelane, Mpumalanga 12

13 Delivery Models / Structures: Value Chain Financing Overview A listed sugar company and Ingonyama Trust Board jointly developed a leasehold model which aims to revitalise areas that have fallen out of agriculture and / or bring new areas into cultivation. Corporate Structure 3 4 Lease 1 2 Public Company Ltd Collaboration Agreement Management Agreement Beneficiaries Co-op Traditional Authority Structures Service Provider Key Points 1. Beneficiaries (80-125) 2. Approx. 250ha 3. 10% of gross proceeds paid directly to individual 4. Approx. R2150 / ha / annum Significant Employment Opportunities Skills transfer & training Rural Development Social upliftment Access to Banking services Sustainable income streams Best agricultural practices Beneficiaries Development Impact Region Mbongolwane Mvuzane Vuma Kholweni Demographics of primary cooperatives formed in project areas: Total members planted: 942 Male: 38% Female: 62% Development highlights: ha of new sugarcane, with production projected to reach tons pa. > individuals employed annually. Total community benefit streams are projected to increase to R28.0 million pa Empower black farmers and equip them with skills Develop catalytic sugarcane development programmes that have a positive impact on socio-economic development Invest in rural communities and high agricultural potential areas in order to increase sugarcane production in the KZN region Create sustainable job opportunities with strong economic multiplier effects 13

14 Delivery Models / Structures: Partnerships / Joint Ventures Overview Corporate Structure A Community Trust in Badplaas acquired 29 farms through land claims in 2003 (+9800ha); After the transfer of the properties, there was infighting amongst the family groups which resulted in a High Court ruling in that the 12 Trustees be replaced by an interim Board of Trustees which were given same powers as the previous trustees according to the initial Deed of Trust; The project will be phased for production input costs and the construction of silo and storage units; First phase includes production of 340ha maize; 110ha Soya beans and 55ha Dry beans; A total of 555 hectares to be planted, of which 125ha is new land to plant maize. Beneficiaries 14 Families Beneficiaries Mentor Technical Assistance Development Impact New land brought under production Financing through the value chain (beneficiation) Increased employment Increase production yield Land ownership by HDIs Productive use of land from restitution Key Points 1. Land Bank and other institutions finance Community Trust 2. Community Trust 100% owned by beneficiaries 3. Commercial Farmer leasing some of the land and provides technical assistance and skills to the community Technical Assistance Region Mpumalanga Technical and farming knowledge to the family groups 14

15 Delivery Models / Structures: Transformation Empowerment Financing Overview A privately owned, fully integrated producer, packer, marketer and exporter of fresh fruit owns 14 farms and a pack house, all situated in the Citrusdal valley in the Western Cape. The business has demonstrated consistent growth in revenues and net profits over the past few years. The sale of a 50% share in the company by an international shareholder created an opportunity to bring in a new Black investor as well as create a farm worker equity scheme. Corporate Structure Beneficiaries Farm workers, Black investor, community Black investor Holdings (Pty) Ltd Family Trust 81% Black investor SPV 35% 53% 12% HoldCo 100% 19% Land Bank Private Company Development Impact BBBEE shareholding of 35% Farm worker shareholding of 12% Development projects that are ongoing include: Community facilities (sports field, community centre) Education (early childhood development, school support) Health care (full time nurse, mobile clinic) Community development through music Private Company (Pty) Ltd Key Points 1. Land Bank has a minority share in Black Investor SPV 2. Hold Co is owned by Workers Company (12%). Family Trust (53%) and BBBEE SPV (35%) 3. Land Bank finances acquisition of 35% stake by SPV Region Western Cape 15

16 DAFF Funding Programmes under Administration Name of Fund Status of Fund Purpose of Contract Funds received from DAFF Financial year 2014 (R m) Funds received from DAFF Financial year 2015 (R m) Funds received from DAFF Financial year 2016 (R m) Funds received from DAFF Financial year 2017 (R m) Funds received from DAFF Financial year 2018 (R m) Comment DAFF: Poverty Fund Inactive Food Emergency Scheme by procuring/ purchasing Agricultural implements and starter packs due to the food security crises of June Agreement expired DAFF: AgriBEE Provide grant funding for the acquisition of equity in existing commercial agricultural enterprises Refer to separate slide on structure of Fund. Money received was paid to beneficiaries as per instructions received from DAFF DAFF: MAFISA Fund - Deposit Account DAFF: MAFISA Fund - Call Account Inactive To provide micro & retail agrifinancial services on a large, accessible, cost effective & sustainable basis in rural areas for agricultural economic activities Agreement expired DAFF: WFF Active To provide support to black emerging farmers Further support is needed to continue providing affordable financing DAFF: Interest Subsidy Active To provide support to black emerging farmers Under discussion to utilise this funding for WFF already committed Total

17 Chronological Sequence of the Agri-BEE Fund : 1 st Agreement signed (Amount R47m) 2011: 2 nd Agreement signed for a period of 5 years 2013: Repatriation of Funds to National Treasury (Amount R ) 2014: New draft agreement and operations manual sent to DAFF. Solly's Boerdery 01/2017: Suspension Letter from DAFF to Land Bank 11/2017: Upliftment of Suspension 2018: Currently busy with MOU finalisation with DAFF AgriBEE: Payment made by Land Bank May Nov 2016 Thokozani Cortina Farms Valley Farms Tropical Mushroom Millions R- R 1 R 2 R 3 R 4 R 5 R 6 R 7 R 8 R 9 Tropical Mushroom Valley Farms Cortina Farms Thokozani Solly's Boerdery Amount R R R R R

18 Funding Matters: Background and Overview The Land Bank as a Development Finance Institution (DFI) that has limited sources of capital (only one shareholder, the Government) and limited sources of funding (as the Bank is not a deposit-taking institution) is heavily dependent on accessing the volatile debt and capital markets to fund its asset growth, as well as on-going support from Government to strengthen its capital base. Land Bank procures funding for two distinct business purposes: Credit Rating: Commercial Operations Development Operations Land Bank is rated by Moody s GSIR: Baa3 NSIR: Aa1.za Development Finance Institutions Rating Land Bank DBSA IDC GSIR Baa3 Baa3 Baa3 NSIR Aa1.za Aa1.za - Commercial Banks Rating ABSA First Rand Investec Nedbank SBSA GSIR Baa3 Baa3 Baa3 Baa3 Baa3 NSIR Aa1.za Aaa.za Aa1.za Aa1.za Aa1.za Commercial Funding: Funding is raised from Institutional Investors and Commercial Banks from the local Debt and Capital Markets. Funding is generally unguaranteed Funding is applied for: Corporate/ wholesale on-lending Corporate and Commercial Agribusiness Financing primary agriculture Financing secondary agriculture through the value chain General working capital Development Funding is used to fund: Funding is raised from Multilateral Institutions Funding often requires Government Guarantees Funding is applied for: Agricultural Sector Growth Sector transformation in terms of ownership Emerging farmers Development funding is ring-fenced and have strict disbursement conditions and reporting requirements. The next slide detailing the Land Bank s Multilateral funding lines. 18

19 Funding Matters: Sources of Development Funding Over the last months the Land Bank has significantly diversified its sources of funding and raised extensive sources of Development funding from Mutlilateral institutions. The following table summarises the Bank s current Development Funding Lines: Institution Purpose Tenor Guaranteed Indicative Pricing Total Pipeline AfDB Development 10YR Y 3m Jibar + 68bps R0.43bn World Bank Development 25YR Y 3m Jibar + 201bps R0.960bn EIB KFW Development/ Climate Adaption Development/ SMME s 12YR N 6m Jibar + 132bps or Fixed: 9.35% R0.743bn 10YR N 9.88% R0.899bn PIC Development 6YR N 3m Jibar + 190bps R5.0bn Total R8.32bn Planned Disbursement Cash readily available for disbursement to qualifying projects USD R12.00:USD1 Cash readily available for disbursement to qualifying projects EUR R14.86:EUR1 Facility readily available for disbursement to qualifying climate action projects EUR 55m or R0.899bn 30 March 2018: R327m 30 Sep 2018: R327m 30 Mar 2019: 245m Facility currently unutilised due to stringent conditions. The facility is in process of being renegotiated. The Land Bank has also just started negotiations with the AFD (French Development Agency) for possible assistance and the relevant due diligence processes are currently underway. 19

20 Funding Matters: Investor base 20

21 Funding Matters: Loan Asset Pricing and Cost of Funding The Land Bank uses a Internal Risk Based ratings model to assess its Credit Risk across 24 risk rating bands Loan asset pricing is determined by the following formula: Loan Asset Pricing Pricing Component Notes Cost of Funding COF determined based on where the Bank can fund currently + Liquidity Premium As loan tenor increases so does the Liquidity Premium, as longer dated monies are more expensive than short-dated + Risk Premium Credit Risk premium in relation to 24 grade risk rating model. The higher the Risk Grade the higher the rate + Operating Expense Recovery Charge for OPEX recovery based on actual underlying loan service costs = Break-even +Cost of Equity = Sustainable Break-even + Profit Margin Profit margin = Loan Asset Price Charge for expected return on capital Land Bank s cost of funding ( COF ) is influenced by (including but not limited to) point in time macro-economic factors; investor appetite and yield expectations; political environment; and policy related matters The following is a summary of the Land Bank s average COF over the last 5 years: Cost of Funding Trends (Last 5 years) FY2014 FY2015 FY2016 FY2017 FY2018 Average COF rate 5.79% 6.75% 7.35% 8.46% 8.72% 21

22 Key Constraining Factors 1. Capital adequacy The risk-bearing capacity of the Bank 2. Limitation on Borrowings (Gearing limit) Implications for the Bank's Funding 3. Cost of Capital from the Markets Weighted cost of capital is High (Bank cannot provide cheap/concessionary funding, unless subsidised by Government) 4. Insurance Risk : Subsidy proposal Proposal submitted to both DAFF and NT 5. Sector Departments (DRDLR, DAFF, DWS): Areas of Cooperation Blended Financing: DAFF Unutilised Farms: DRDLR Water licencing process: DWS 22

23 In Conclusion: Strategic Enablers 1. Land Availability Department of Land Reform 2. Technical Advisory / Extension Services DAFF and the Coop s / Private Sector 3. Market Access Support Post liberalisation, but value chains are difficult to penetrate by new entrants 4. Financial Equity Contributions by New Entrants Often lacking own equity, difficult to finance 100% debt Government grants could be repurposed for Equity Fund Support 5. Dispensation regarding Water Licensing Complete overhaul required 23

24