The agricultural industry says an alternative agricultural financing institution to the Land Bank could be established within a year.
According to the president of the World Farmers’ Organisation and chairperson of the Southern African Agri Initiative, Theo de Jager: “An independently owned and financed bank could be up and running in around a year from now if discussions go well. Remember we did not start these discussions now. We started with the late Mohammad Karaan in 2017.”
Karaan, a respected agriculturalist locally and internationally, died of Covid-19 complications in mid-January.
Agricultural groups have suggested the part-privatisation of the Land Bank to ensure that farmers have a reliable financing source.
The proposals for a restructured or an alternative to the Land Bank comes on the back of the bank’s announcement of a R2.8-billion loss in the financial year with R8.18-billion in nonperforming loans.
The auditor general’s report highlighted several key matters that have led to the bank’s poor performance and a significant proportion of nonperforming loans. These included poor management controls, credit models not being maintained and not having the right credit models.
The Land Bank has also been badly affected by a squeeze on access to financing from capital markets as a result of the devaluation of its credit rating and South Africa’s sovereign rating, which meant that it was borrowing at higher rates than commercial institutions.
Restructuring the Land Bank will need to take account of, among other things, the balance sheet, providing enhanced support to emerging farmers on a financially sustainable basis and providing support to commercial agriculture, the treasury says.
De Jager says three options are being pursued as an alternative source of financing for farmers.
These include raising capital from foreign investors and making an offer for the Land Bank; establishing a farmer-owned co-operative bank or establishing a structure to partner with international agricultural commodities futures traders.
“At the moment, we are in discussions with various potential investors from overseas. We have Zoom meetings every week to raise capital to make the government an offer,” says De Jager.
He says that there is a lot of interest from foreign investors, but some are put off by political uncertainty regarding land expropriation policies.
There has also been strong interest in establishing a co-operative bank similar to Rabobank, the Dutch co-operative bank. Discussions are ongoing with various parties, including foreign investors, farmers’ organisations in South Africa, and former co-operatives intermediaries.
Kees Verbeek, chief representative of Rabobank Kenya, says: “Yes, we are aware of the opportunity at the Land Bank. We are in Africa and we are an agricultural bank. We also find Africa to be an interesting place to operate in general. We see a future in agricultural banking in Africa, especially considering technological advancements in the digitalisation of value chains.”
Faans Roos, joint chief executive officer of Capital Harvest, says there is big interest in the private equity markets for investing in the agricultural sector, especially when looking at the numbers.
“So, if they were to go out for tender and you could buy 40% of the Land Bank, I think there would be a lot of interest from the private equity side and investment funds. Even the four main commercial banks in South Africa” says Roos.
The African Development Bank and the New Development Bank could also be tapped to help finance either a public-private partnership or help fund the Land Bank purchase.
The treasury says it welcomes private sector involvement in the Land Bank, but this would need to be guided by the 2016 Private Sector Participation framework.
The agricultural sector has made progress in establishing a platform for accessing production capital from international agricultural commodities traders in Europe and North America.
Mark Barnes, an investment banker and former chief executive of the South African Post Office, says there are established agricultural future traders and discussions are already happening. If all goes well, they could have a structure in place within six months.
“We are now in discussions, and the real challenge is how we aggregate future agricultural supply in South Africa so that we benefit from diversified risk and efficient pricing. The financial failure of the Land Bank and uncertainty of the national treasury guarantees is a catalyst for the creation of such a body, whereas previously the Land Bank owned the game,” says Barnes.
He argues that markets are calling for a restructuring of food security funding, which is likely to result in the disintermediation of classic bank funding.
There have also been investigations into establishing a new co-operative bank, which would be a partnership between foreign investors, local farmers and agribusinesses such as co-operatives and international insurance or agricultural businesses.
Agri SA says the Land Bank should be overhauled and a public-private partnership established, where 40% of the bank would be owned by the government and 60% by the private sector.
Christo van der Rheede, executive director of Agri SA, says this partnership split would extend to board level, management appointments and credit committees at the bank including a critical role in overseeing bank operations.
“We are not proposing the takeover of the function of the state. If I know I’ve put in an investment based on that ratio of 40 to 60% I can claim 60% of the profits. That’s the kind of incentive that the private sector will go for,” says Van der Rheede.
John Purchase, chief executive officer of the Agricultural Business Chamber of South Africa, disagrees with Agri SA regarding the restructuring of the Land Bank. He says he cannot see how investors will want to invest in the Land Bank given its dire financial situation and government’s unwillingness, as a sole shareholder, to provide 100% guarantees.
“The Land Bank holds approximately 29% of South Africa’s primary agricultural debt. Now that’s a big number. So, if the Land Bank were to collapse then it would pose a significant systemic risk to the whole agricultural sector in the country,” says Purchase.
The Land Bank’s loan book is worth about R45-billion, with roughly R35-billion being the commercial book. It is anticipated that this will see a considerable reduction as borrowers move to commercial lenders that offer better loan rates and additional services.
Purchase says that, in the commercial sense, the Land Bank will shrink as clients seek alternative financing sources and in the future it will focus more on development finance, which tends to be riskier because of the applicants’ credit profile, among other issues.
“You can see now that nonperforming loans are massive at the moment; well over 10% of loans,” says Purchase. “But if they want to go down the development route then the government is going to have to support them, and considerably more so than they do at the moment.”
The Land Bank did not respond to the Mail & Guardian’s requests for interviews and information.
But a spokesperson did note that chief executive Ayanda Kanana has been involved in negotiations with local funders as well as international development finance institutions.