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DFIs and their Mandates: Pitfalls, challenges and possible solutions-Land Bank Perspective Phakamani Hadebe 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;
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DFIs and their Mandates: Pitfalls, challenges and possible solutions-Land Bank Perspective Phakamani Hadebe 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; • How will the 9bn people be fed? • But can the same be said of ‘meat or protein’ peak? • And what are the implications for land, food and feed requirements? Source: FAO
Arable Land under Pressure The pressure of farm land reflected on farm land prices, which could not even yield to recession Source: FAO (HLEF-2050), 2009 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? • 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. Source: FAO
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 Source: DAFF and Statistic South Africa
Net farm income and total farming debt Source: DAFF
But positive investment prospects • Although total farming debt increasing, debt-asset ratio remains favourable; • An indication of prudent investment on productive farming assets
Job creation in agriculture remains a challenge • However, commercial farming continue shedding jobs due to, among others: • 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 • Sitting with huge underutilised assets
Gini Index • 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. Source: UNDP & HSRC
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.
BNDES • A 100% State-owned company under private law established in 1952; • Main provider of long-term financing in Brazil; Source: BNDES
BNDES • 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); • Combination of National Treasury grant funding together with FAT funding enables BNDES to offer concessionary funding. Source: BNDES
BNDES In line with the company’s strategic objectives Source: BNDES
Impact of BNDES on job creation Exponential growth in job created through BNDES funding Source: BNDES
Ag DFIs in China and India National Bank of Agriculture and Rural Development Agricultural Development Bank of China 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); • 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). The bottom line is that borrowing from government and Central Banks allows these SOEs to provide concessionary lending for developmental state outcomes
DFIs in SA • SA has both National and Provincial DFIs, each with specific mandates • National DFIs • Land Bank • IDC • DBSA and others • Provincial DFIs • Mega- Mpumalanga • Limdev- Limpopo • ECDC- Eastern Cape • Ithala- KNZ and others Capital Markets the primary source of funding 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
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: • There is a formal sector populated by commercial farmers; and • 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 Multilateral Funding % profit for development % profit for development
Lending Model Retail Commercial Banking (RCB) – Previously :Retail Business and Corporate and Banking (B&CB), Previously : CFU Retail Emerging Markets to be funded by a combination of Government support and Value Chain Model The combined NPL’s for RCB and B&CB are 6.2%. Borrowing for the purpose of funding commercial business
Sustainable business model: Developing Farmers Support Facility
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.
