DFIs and their Mandates:
Pitfalls, challenges and possible solutions-Land Bank
Perspective
Type Title
here Hadebe
Phakamani
Land Bank CEO
Growth in SADC and South Africa
• wcqc
Source: IMF Staff Estimates
Growth in World Population
• World ‘population peak’
expected in the next 4
decades;
World Population
10,000,000
9,000,000
Number (million)
8,000,000
– How will the 9bn people be
fed?
7,000,000
6,000,000
5,000,000
• But can the same be said
of ‘meat or protein’ peak?
4,000,000
3,000,000
2,000,000
1,000,000
1961
Source: FAO
1972
1983
1994
2005
2016
2027
2038
2049
• And what are the
implications for land, food
and feed requirements?
Similar Population growth pattern in SA
Arable Land under Pressure
The pressure of farm land
reflected on farm land
prices, which could not even
yield to recession
SA Land Price Index
Source: 250.0
FAO (HLEF-2050), 2009
Index (2000=100)
200.0
150.0
100.0
50.0
0.0
1994
1998
2002
2006
2010
Source: FAO and DAFF
Changes in global area harvested for 7 major crops
(2000- 2010)- a measure of surplus arable land
Hence, the
growth of farm land
acquisitions or leases
in
Sub-Saharan Africa
(former has been
widely reported as
‘Land Grab’
Source: Westhoff, 2011
A possible repeat of 2007/08
Food Price Shock?
FAO Food Price Index
•
High food prices reversing the gains
that have been made over the years
towards the achievement of MDGs,
•
Also constraining the humanitarian
aid in the Horn of Africa, currently
gripped by hunger and famine;
•
Could this be a an indication of
Malthusian crisis lacking in the
shadow or results of political
developments in the region?
•
Indeed Amartya Sen (Nobel
Laureate) is of the view that
‘famine does not happen
democracies’;
•
The tragedy is that small farmers
are missing out on the opportunity
to general windfall that can be
used to reduce gearing.
230
210
190
170
150
130
110
90
70
50
1990
Source: FAO
1993
1996
1999
2002
2005
2008
2011
The number of hungry people worldwide
•
A double whammy for aid
agencies: 1) limited
donations as countries
repair their balance sheet
and 2) limited food
affordability due to high
prices; and
•
Food importing countries
also facing high food
import bills.
Cost of intermediate goods and services
Source: DAFF
Transport and logistics cost
• Fixed cost includes: depreciation, cost of capital, license, insurance and
wages.
• Running cost includes: fuel, oil, maintenance, tyres and incidental cost.
Cost-Price Squeeze
295
Index: 2000=100
245
195
145
95
45
2010
2009
2008
2007
2006
Price index: All farming requisites
2005
2004
2003
2002
2001
2000
1999
1998
1997
Source: DAFF and Statistic South Africa
1996
1995
1994
1993
1992
1991
1990
PPI
Net farm income and total farming debt
Source: DAFF
But positive investment prospects
Total Farming Debt
80,000
Land Bank Debt
70,000
Total Farming Debt
R Million
60,000
50,000
40,000
30,000
20,000
10,000
1994
1998
2002
2006
2010
Leverage (Debt-asset Ratio)
• An indication of prudent
investment on productive
farming assets
Financing Opportunities still exist
35%
30%
25%
20%
15%
10%
1994
1998
2002
2006
• Although total farming debt
increasing, debt-asset ratio
remains favourable;
2010
Job creation in agriculture remains a challenge
• However, commercial farming
continue shedding jobs due to,
among others:
Number ('000)
Total Farm Employment
1600
1400
1200
1000
800
600
400
200
0
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Total Farm Employment as % of Total Employment in in
all sectors of SA Economy
14%
12%
Percent
10%
8%
6%
– Continued loss of commercial
farmers;
– Continuing mechanisation of
commercial farming, which in turn
is also due to;
• Unintended consequences of
Labour Policies;
• Uncertainty w.r.t. tenure security;
• Depreciation allowance for
stimulating Ag investment
• Pressure from global competition
• Thus small-scale farmers offers
immense job creating opportunities
4%
2%
0%
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
– Sitting with huge underutilised assets
Gini Index
Gini Index-SA
1
0.9
•
Making no progress with regards to
inequality.
•
However, as Milanovic stated: “there is
“good” and “bad” inequality, just as
there is good and bad cholesterol.
“Good” inequality is needed to create
incentives for people to study, work
hard, or start risky entrepreneurial
projects…. But “bad” inequality starts
at a point—one not easy to define—
where, rather than providing the
motivation to excel, inequality
provides the means to preserve
acquired positions.
•
Could also be a threat to social
cohesion.
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1991
1994
1996
2000
Source: UNDP & HSRC
2001
2005
2006
2011
Within the above context, what is the role of a
DFI?
The Ideal World of Development Financing
• DFIs require patient capital that can be invested for long term and
possibly at concessionary rates;
• Post-crisis involves more State and more Market sourcing of
investible funds.
– However, market sourcing removes the competitive advantage of a DFI as
pricing converges to that of normal commercial banks and thus impacting on
development funding
• High food inflation highlighting the importance of more and better
jobs.
• DFIs that should be oriented for the long term and are essential
vehicles for development financing.
• To be effective, DFIs must have the necessary means: financing tools,
stable and sufficient resources; technical capabilities; close
relationships with stakeholders.
DFI in Brazil
[The Brazilian Development Bank (BNDES)]
BNDES
Approvals and Disbursements
US$ billion
• A 100% State-owned
company under private
law established in
1952;
• Main provider of longterm financing in Brazil;
100
Source: BNDES
90
Approvals
85.2
Disbursements
88.2
80
66.3
70
60
50.6
68.8
71.1
50.5
50
40
34.1
30
20
10
22.3
13.1
10.9
33.1
23.5
19.3
12.9
13.6
0
2003
2004
2005
2006
2007
2008
2009 2010*
BNDES
Funding Composition
100%
10%
90%
7%
80%
8%
70%
8%
12%
9%
9%
16%
7%
6%
6%
16%
60%
50%
40%
67%
30%
66%
53%
20%
• Of significance is continue
capital allocation from
National Treasury, which
increased during the crisis
period;
• 40% of institutional funding is
from Worker Assistance Fund
(FAT)- the local equivalence of
UIF and is remunerated at long
term interest rate (TJLP);
10%
0%
2006
Intitutional
Source: BNDES
2007
National Treasury
Foreign
2008
Others
Equity
• Combination of National
Treasury grant funding
together with FAT funding
enables BNDES to offer
concessionary funding.
BNDES
Disbursements by Business Sector
100%
7%
90%
7%
80%
70%
12%
12%
14%
8%
6%
5%
39%
35%
40%
43%
46%
2007
2008
2009
33%
60%
40%
50%
40%
30%
53%
20%
10%
0%
2006
Industry
Source: BNDES
Infrastructure
Agriculture
Trade and Services
In line with the company’s
strategic objectives
Impact of BNDES on job creation
Formal Jobs Creation (Million)
45
40
35
Millions
30
26.2
27.2
28.7
29.5
31.4
33.2
35.2
37.6
39.1
Exponential growth in
job created through
BNDES funding
25
20
15
10
5
0
2000
Source: BNDES
2001
2002
2003
2004
2005
2006
2007
2008
Ag DFIs in China and India
National Bank of Agriculture and Agricultural Development Bank
Rural Development
of China
•
•
•
A 100% State-owned Bank
Mandates of facilitating credit flow for
promotion and development of
agriculture and integrated rural
development.
Multiple sources of funding:
–
–
–
–
Deposits;
Borrowing from Government of India;
Capital markets;
Co-operative fund (STCRC) funded by
commercial banks (i.e. NARBARD also act
as an agency for scheduled commercial
banks that are not achieving priority
sector obligations).
•
•
•
A 100% State-owned Bank
Also a policy bank with mandates;
Multiple sources of funding:
–
Generally issues bond, considered as safe as
the Central Bank's bonds, since it is fully
banked by the People's Central Bank of China
(PBOC);
•
The bottom line is that borrowing from government and Central Banks allows these SOEs
to provide concessionary lending for developmental state outcomes
Focus on SA’s DFI
DFIs in SA
• SA has both National and Provincial DFIs, each
with specific mandates
– National DFIs
• Land Bank
• IDC
• DBSA and others
Capital Markets the
primary source of
funding
– Provincial DFIs
•
•
•
•
Mega- Mpumalanga
Limdev- Limpopo
ECDC- Eastern Cape
Ithala- KNZ and others
Government the
primary source of
funding through
provincial treasury
departments
Land Bank is and has always
been mandated to broadly
support the Agricultural
Sector in SA, given the
sector’s specific risks factors
Structure of the
sector
Dual Structure of SA agriculture
• Like South African economy, which is structured
along the formal and informal economy,
agricultural sector is also structured along dual
lines:
1. There is a formal sector populated by commercial
farmers; and
2. informal sector comprised largely of small or
emerging farmers.
• Each facing peculiar challenges and
opportunities.
Focus on Commercial Farming
• There are currently under 40,000 of them- a
decrease from approximately 60,000 in the mid 90s:
– While some became the victims of globalisation,
others grew bigger to benefit from economies of
scale; and
– Indeed, industrial farming calls for scale economies
• A good proportion of them are highly efficient
• However, one of the major challenge is lack of
succession planning, which in some cases lead to
subdivision of farms into uneconomic farming units.
Emerging Farmers
• According to DAFF, there are approximately 1.3 million of them in
SA
• Many with no secure land tenure, suffering from skills deficiency,
lack of market access and many other shortcomings;
• Making them high risks clients and thus to be charged risk-aligned
high pricing;
• And herein lies the problem;
• These are the prime target for development finance (long term and
concessionary rate) and yet difficult given the current funding
model;
• However, Land Bank working with government to address this
challenge.
Land Bank Funding Sources
• Unlike the provincial DFIs and BNDES we saw
earlier, Land Bank is expected to source funding
from the Capital Markets- the same pool used by
commercial banks
• The implication of the above is the convergence of
risk appetite with those of the commercial banks.
• This also means similar pricing structure to the
detriment of emerging farmers and development.
• Even if we want, obligations with capital markets
constrains the Land Bank’s ability to provide
concessionary and long tenor loans.
• Even made more difficult as Land Bank is not a
deposit taking institution.
• In the end, constraints LB’s ability to deliver on the
developmental state outcomes
Hence the birth of REM Segment (ring-fenced)
• Land Bank has launched the Retail Emerging Markets (REM)
for dedicated attention to emerging farmers;
• Working closely with government to ensure concessionary
loans to this target market;
• Some of the programs involving collaboration with
government:
– Value Chain Financing;
– Curatorship Model; and
– Collateral Guarantee Fund
Learning from the past
• Looking the past, we do learn the Land Settlement Act,
among others, was instrumental in the development of
commercial farming sector in South Africa as we know it
today;
• In line with Settlement Act, Lease with option to buy is what
we recommended on our Emerging Farmer Report 2011
• With the exercise of the option to buy farm land,
repayments as per the Act could be extended for up to 65
years;
•
This is only possible with regular government capitalisation program.
•
Private investors have no such long term paticience.
Several initiatives to implement
• Implementation of the Cabinet approved Emerging Farmer
Support Facility;
• Disburse R1bn over next 2 years to emerging farmers via a
new business unit focussing on emerging farmers
• Targeting 30% of market share in the next 12-18 months
Funding Model
Government
funding
Land Bank
Retail Emerging
Markets
(REM)
BCB and
RCB
Land Bank
Insurance Company
(LBIC)
% profit for development
Multilateral
Funding
% profit for development
Lending Model
Retail Commercial Banking (RCB) – Previously
:Retail
Retail Emerging
Markets
to be funded by a
combination of
Government support
and Value Chain
Model
Business and Corporate and Banking (B&CB),
Previously : CFU
The combined NPL’s for RCB and
B&CB are 6.2%.
Land Bank
Retail Emerging Market
Loan book =R1.0 Bn
NPL =58 %
Retail Commercial
Banking
Loan book =2.8 RBn
NPL = 14%
Borrowing for the purpose of
funding commercial business
Business and Corporate
Banking
Loan book = R11.4 Bn
NPL = 5.8%
Sustainable business model: Developing Farmers
Support Facility
Collateral (50% - 90% of loan value)
Supplementary or
Collateral Guarantee
Fund
Credit
assesment
Land Bank
LB to negotiate
partnership
Additional support (Offtake agreement SCF, ARC,
NAMC, Univ, DAFF,
Insurance)
Lending through
LB branches,
municipalities &
Ext offices
LB to negotiate
partnership
Eligible Borrowers
(Farmers & agribusiness)
Agric cooperatives
(+intermediaries)
Technical Support
Sustainable business model: Wholesale Funding
Facility
CURRENT FUNDING MODEL
Estimated cost
to lend of 8%
Financial markets
Land Bank
Intermediaries
On-lend to
intermediaries at 8%+
Lending from FM
at 6%+
Pays approximately Prime +7%
Emerging Farmers
Cost of direct lending = 8% based on:
* Assesment,
*Operational cost,
* Disbursement admin,
* Provision of technical support
* Bad debt provision
* Own profit margin
2.75-3.75%
2.25%
2-3%
GOVERNMENT SUPPORT MODEL: WHOLESALE FUNDING FACILITY
Lending from FM
at 6%+
Financial markets
Farmers pays
Prime minus 5%
On-lend to
intermediaries at 0%
Land Bank
On-lend to farmers at a 4% cap
Intermediaries
Reimburse 4%
DAFF
Reimburse 4%
Emerging Farmers
Meanwhile in the commercial farming space…
Conclusion
• Agriculture entering what could be regarded as the
‘golden age’ of agriculture;
• Characterised by high agricultural commodity prices;
• The tragedy is that emerging farmers are once again
likely going to miss out on the opportunity to generate
windfalls;
• Having realised the important of concessionary and long
tenor loans, Land Bank working with government to
ensure effective delivery of development mandates as
contained in the Land Bank Act 2002.
THANK YOU