Land Bank

Presentation to SCOPA November 2008

Issues with what Land Bank has been doing (strategy)

Issues with how Land Bank has been doing it (execution)

1. Limited progress on Development objective

2. Lack of adherence to mandate of Land Bank Act of 2002 on LDFU strategy

3. No clear funding and financial stability strategy

4. Operating model uncompetitive, high cost and directly competing with better- positioned commercial Banks

5. People and capacity issues unresolved

6. Previous turnaround strategies not sufficiently actioned

7. Substantial evidence that core business and management processes not in place, leading to a qualified audit and other sources of challenge

8. The organisational structure has contributed to lack of accountability

Declining loan book & High NPL’s 27% employee turnover for 2007/08 vs.

industry benchmark of 7-9% Capital adequacy at 11.18% as at

March 2008

The current situation at Land Bank has led to a crisis point which we now have to manage

Implications

Informing and assuring stakeholders

Tracking and governance Recovery milestones Support required from stakeholders

The Assurance

Previous turnaround strategies not actioned until now Reports-McKinsey 2005Comments extracted Land Bank Comments

Create partnerships to access opportunities and fully support clients

Focus n the Agri value chain & play a role in the consolidation of the sector, focus on aftercare

Provide corporate Banking, investment Banking and retail Banking businesses

Move to development whilst maintaining capacity in the commercial space

DFI 2007

Stick to mandate laid out in 2002 Act to address development as core, Exit LDFU

Target short-term turnaround activities

Implement clean-up & stabilisation quick-wins

Align stakeholders around strategic priorities

Develop partnerships at all levels

Avoid competing with commercial Banks

Address market failure

Land Bank ExCo 2007

Fix cost: income funding dynamics Diversify funding sources, increase revenue & reduce costs

Deal with legacy issues Clean-up & Stability

Implement new business model Future strategy on sustainability to address development as core

Improve organisational health and people capacity issues

org structure to be informed by strategy, Performance management systems to enhance productivity

Focus on development as core product offering

Mainstream development into CFU & Retail

Upgrade IT systems Efficient IT systems required to enable faster delivery and turnaround times

Implement risk management Integrate enterprise-wide risk management, ensure statutory & regulatory compliance, Identify & quantify relevant strategic & operational risk

Revitalise brand Positioning LB in the minds of stakeholders

Cor

e fo

cus

Enab

lers

ABSA 'Agri-Business'Standard Bank 'Agri-Plan' Land BankProducts Transaction and savings account

Complete suite of short, medium and long-term loans for production and mortgage

Revolving credit facilities for working capital finance

Vehicle and asset finance Wealth creation and estate planning

products Commodities trading and hedging

facilities Crop insurance and life assurance

products

Transaction and savings accounts Production credit and term loans for

inputs, land and fixed capital Silo certificate finance Revolving overdraft credit for working

capital Investment profit CTS Crop insurance and life assurance

products Grain trading and helping facilities International Banking

Short-term production loans Revolving short-term cash credit

accounts Medium-term instalment sale

financial loans Medium-term establishment loans Lon² 耀 term mortgage loans Livestock financing LBIC – Insurance services

Price Competitive market-related interest charges

Transaction and service fees

Competitive market-related interest charges

Transaction and service fees

Low service fees, but Land Bank interest rates currently priced above rest of the market especially on long term loans against the industry norm

Service delivery

Quick processing and turnaround time Quick processing and turnaround time Poor systems and slow loan processing pace

Significant internal bottlenecks in processes

Agriexpertise

20 specialist managers, 22 agricultural economists, 120 agricultural Bankers

53 agricultural business specialists 28 agricultural officers across 27 branches ( need to review)

4-person AERIS unit (Insufficient)

Channels Leverages off wide retail distribution network

Technology-centric proposition including internet Banking, electronic Banking, cell phone Banking

Leverages off wide retail branch network

Very sophisticated and technology driven, including internet Banking, electronic Banking (using custom software)

No internet Banking, telephone or cell phoneBanking (Explore)

People Soft system is inadequate in loan processing (Need for proper MIS)

Operating model uncompetitive, high cost and directly competing with better-positioned commercial Banks

•Limited revenue streams•Limited product diversity•Limited opportunity for cross subsidisation

. . . culminating in qualified audit opinion

IT Systems procurement control breakdown & irregularities

Procurement and payroll control breakdown, documentation shortcomings and irregularities

LDFU mandate and legality Control breakdown,

documentation shortcomings and irregularities of funds administered on behalf of DoA

Lack of robust operational procurement & HR policies

Failure to respond to previous audit findings and recommendations

Failure to implement SCOPA resolutions

Irregular fruitless and wasteful expenditure

PFMA non-compliance reportable matters

Weak governance structure

. . . consistently indicate poor operating and management processes . . .

Key themes

Breakdown of controls particularly in relation to procurement and payroll

Sources of evidence . . .

Substantial evidence that core business and management processes not in place, leading to a qualified audit

Cumulative audits

Management letter

Internal audit reports

Forensic investigations

SCOPA resolutions

Portfolio Committee undertakings

Conditions on Government guarantee

Consolidation of policies

Irregular expenditure, e.g., procurement policy non adherence

Fruitless expenditure, e.g., travel and subsistence, consulting fees

Moratorium on collection of debts

Lack of available information for auditors

Lack of other policies

Poor governance structure

Lack of HR policy

Number of 'special investigations' ongoing

Lateness and material changes on financial statements

Absence of approval of payments to previous CEO and acting CEO

Absence of effective declaration of interest system

IT system implementation irregularities

Development mandate not adhered to

Partnering and stakeholder relations strategy

Sector consolidationStrategy for intermediaries (for on lending/wholesaling)Joint venturesSyndicationPost funding/handholding support services

Land Bank must effect a turnaround across the board to respond to this context

'Our operating model and execution capabilities need to change to enable us to deliver against this purpose in an economically prudent and financially robust way'

Governance, Compliance & Risk management

Integration of Enterprise-wide risk management Statutory & regulatory compliance Identify & quantify risk

Elements of execution

Funding & financial sustainability strategy

Improved Liquidity ManagementDiversified Sources of fundingRevenue generationCost containment

People and skills strategy

Attraction AcquisitionDevelopment &Retention of talent

Management system strategy

Performance managementprocessesConsequence managementManagement information systemsBusiness process automation

Operating model strategy

Wider footprintOperational efficiencyTurnaround timeQuality managementProject orientated approachSeamless-end-to end lending processesPost funding support

'We need to change to become development-focused to deliver on our mandate to support poverty eradication and food security, and focus on un-banked sector of society whose only alternative is a Land Bank supported investment'

Development as core to businessStrategic Intent

Strategic execution – the pillars which enable us to deliver the purpose

Legacy issues (Clean-up & Stabilisation)Stop the Bleeding

Description Impact

We have made early progress on getting to a policy framework

Integrate Land Bank’s business into development and ensure Development impact in jobs, output, trade

Job creation and preservation Entrepreneurship Focus on areas of economy where

market failure has occurred Integration and consolidation of

agricultural sector

Mainstream

Assist emerging farmers and new entrants by upholding land and agrarian reform principles

Economic access and ownership of HDIs

Broad-based black economic empowerment

Contribution to rural and broader economy

Contribution to success of government programmes

Transformation

Adjust products and services to withstand volatile markets, suit agri-business and meet specific needs of the sector

Participation extended throughout agricultural value chain Innovation

Lay foundations for long-term development success through capability building, advocacy and partnerships

Rural development Targeted programmes for resource –

poor regions of the country Foundation

Strategic purpose ‘Development’

Principles

Intervention and programme ideas

Leverage funding for agriculture and rural development

Support government priorities in land and agrarian reform

Ensure sustainable development Promote and enhance

partnerships Mainstream Development

throughout business Identify, quantify and monitor

Development impact Alleviate poverty and advocate

food security

Establish an Agricultural Development Function to provide guidance (and funding) for the Bank

Launch an Emerging Farmer Support (incubation) programme to help farmers grow into commercial

• 5-7 years incubation per farmer• Discounted interest rates, training and extension

support• Programme life expectancy 10-15 yrs

Provide Development indicators for funding assessment for existing and new business

Establish Development management system • Board level, management level, Development forum at

operational and branch level• Charter for Committee and Board• Support team to guide the Board

Introduce a Development monitoring system to track and communicate progress in development impact

Partner with other institutions• To leverage funding• To arrange non-financial services

Establish a ‘Land Bank Development Foundation’ • Consolidate CSI programmes• Focus on capacity building, farming community

projects, basic farming infrastructure, advocacy

In addition we have identified some principles and early ideas around initiatives which will begin to move us in the right direction

Strategic purpose ‘Development’

Development as core to business plan

Short to medium term (0-7 Years):• Partnerships with Agribusiness and other stakeholders• Hand-holding and aftercare services

Medium to long term (7years and longer)• A DFI with a wider footprint across the country• One-stop agricultural shop

Development progress report

Land Bank Turnaround strategy approved by the Board with Development as core to the business

Formulated a Development policy framework Established a Development Committee Identified pilot projects Communicated to Branches Engaged other stakeholders such as investors, Banks,

clients, Departments (now targeting farmer organisations) In the process of establishing partnerships

The Turnaround Plan

Land Bank operating within government guidelines, regulations and policy, reducing the risk

To deliver a transformed Bank in the long term with development being core to the business

Stabilise the core operations, management systems, human capital and funding

Build a foundation for sustainability

Movement towards future strategy

Timeline

The Turnaround Plan

Phase I: Clean-up

Phase III: SustainabilityPhase II: Stabilisation

Mar 09- Sep 09Sep 08 – Jul09 Sep 09 - tbd

Objective

Change the fundamental value proposition and focus of Land Bank and introduce a Development orientation

Put in place execution foundations to help ensure overall effectiveness for the long term health of Land Bank

Clean-up based on audit reports, forensic audits, SCOPA resolutions and investigations

Priority activities

Note: Some of the work on stabilisation and clean-up will happen in parallel

Phase I – Clean-up

Phase II – Stabilisation

Phase III – Sustainability

Objective: Land Bank operating within Government guidelines, regulations and policies

Focus on cleaning up based on audit reports, forensic audits, SCOPA resolutions and investigations

Anticipated timing: Sept 08- Sept 09

Three phases of turnaround

2008 Audit report matters (qualifications & other)

Management letter Internal audit reports SCOPA resolutions Forensic

investigations recommendations

Policy shortcomings Conditions of the

Gov Guarantee Portfolio committee

undertakings

IT HR Credit Risk Treasury Operations (CFU

& Retail) Internal Audit Legal Communications AERIS

HR Capacity IT-Procurement and

HR Funding Dynamics Balance Sheet Cost to Income

Ratio LDFU Norms and

Standards

Clean up Stabilisation Sustainability

SystemsProcesses

Stab

ilisa

tion

People

Cle

an u

p

Sust

aina

bilit

y

Turning the Land Bank around

Overall approach and nature of the clean up

Facilitate and track progress of:

1. Verification of transactions ito validity, completeness, accuracy and PFMA compliance.

2. Construction of a paper audit trail to support transactions and the 2008/2009 external audit process.

3. Identification of shortcomings and possible irregularities.

4. Corrective action ito documentation and authorisation shortcomings.

5. Resolution of possible irregular and fruitless and wasteful expenditure.

Facilitate and track progress of:1. Update of existing and drafting of

new policies & procedures.2. Implementation of new &

improved approved policies, procedures and controls.

3. Monitor and control of adherence to improved procedures.

4. Maintenance of a paper audit trail for the full financial period (until 31 March 09)

5. Items 3 to 5 under past column.6. Independent assessment of

clean up and improved processes by internal audit.

7. Early establishment of a working relationship with AG & SCOPA.

History (1 April 08 to current) Present & Future (FYE and beyond)

Immediate priority of the clean up

Immediate priority: Audit report matters Objective: “Cleaner” audit report for 31 March 2009 year end

Qualification: LDFU, new system costs capitalised, procurement & payments, payroll & funds under administration

Qualification: Non compliance with legislation (PFMA for irregular & fruitless and wasteful expenditure)

Other matters:• Ineffective governance (audit committee, internal audit, late submission of AFS,

non implementation of audit findings & SCOPA resolutions).• Manual work created by inappropriate banking module.• Non compliance with legislation, addressing: (late submission of corporate plan &

shareholder compact, declaration of interests, moratorium on development loans, payments to the former CEO’s).

• Ineffective performance management of strategic objectives• Forensic investigations completed and in progress

Payroll projects status

Project StartedSubstantial

progress% of

completed Target date

Employee file: GAP analysis 1 April to 31 October 2008 95% 15-Dec-08

Employee file : Address documentation and authorisation shortcomings in respect of GAP analysis   31-Jan-09

Payroll: GAP analysis 1 April to 31 October 2008 50% 15-Dec-08

Payroll: Address documentation and authorisation shortcomings in respect of GAP analysis   15-Feb-09

Declaration of interest by all employees 95% 28-Nov-08

Declaration of interest: Independent verification (selective)   31-Jan-09

Qualification verifications (including employment history)     31-Jan-09

PAYE: Risk assessment Scoped   15-Dec-08

PAYE: SARS voluntary disclosure   31-Jan-09

PAYE: Quantification of exposure   31-Mar-09

Contractors: Documentation audit trail from 1 April 2008 for PAYE assessment 70% 21-Nov-08

Bonus calculation linked to performance management system   30-Jun-09

Leave pay validation     31-Mar-09

Directors emoluments validation and recalculation (since appointment of new board) 70% 21-Nov-08

Procurement projects statusProject Started

Substantial progress % Completed Target date

Vendor and sundry payments for qualified accounts: 1 April to 31 October 2008 80% 30-Nov-08

Vendor and sundry payments: Address documentation and authorisation shortcomings in terms of GAP analysis   31-Jan-09

VAT remediation project (SARS interaction, apportionment risk, sustainable solution) Scoped  

 31-Mar-09

Other audit report matter projects status

Project StartedSubstantial

progress % Target date

Funds under administration - facilitate control adequacy assessments by IA1. Mafisa2. Agri BEE3. Other

1. 2.3.

 No disbursements until such time as processes and

controls strengthened with independent assessment by internal audit

Fruitless & wasteful expenditure process and identification: 1 April to 31 October 2008  

15-Dec-08

Fruitless & wasteful expenditure quantification: 1 April to 31 October 2008  

31-Mar-09 

Phase I – Clean-up

Phase II – Stabilisation

Phase III – Sustainability

Objective: Stabilise the core operations, management systems, human capital and funding. Build a foundation for sustainability

Focus: Put in place execution foundations to help ensure overall effectiveness for the long term health of Land BankAnticipated timing: Mar 09 – Sept 09

Stabilisation

HR ITCost to incomeLand for Development Finance Unit (LDFU) FundingBalance Sheet

IT

Implement a performance management system

Recruitment: Fill critical vacancies

Ensure an accurate SAP HR system

Organisational Structure:• Align organisational structure

strategy

Ensure an adequate SAP Finance & Procurement system

• Audit history• Compliance to PFMA

SAP Banking assessment

Implement SAP- Segregation of duties e.g. order & payment.

HR

Funding Dynamics

Increase net Income

• Enhance existing revenue streams

• Add new revenue streams

Reduce Cost of Funds

Reduce Operational Expenses

Assess Critical Cost Increases• To enhance product offering

• To improve service delivery

Additional Income

Improve Liquidity Position

Lengthen Maturity Profile

Minimise short term refinancing risk

Increase Roll-overs and Issue New Funding

Cost to Income Ratio

Determine Land Bank’s legal standing on LDFU contracts

Re-assess valuations Segment loan book Complete disposal of the book

Take legal action

Action

Why divest

Mandate issues

AFS qualification

Financial instability Reputation risk

Now in negotiations across the board

Early resolution probable for some loans

25% of the book expected to be settled in current fiscal year

Total book expected to be collected by end of March 2010

LDFU disposal strategy

There is a rigorous process in place to work through the disposal

Non Performing Loans: Context & Progress

Balance Sheet

Action area Recoverability

CFU

LDFU

RETAIL

LEGAL

Low High

Context/Progress

Transfer of some assets in progress

Probability to recover

LB already intervene to dispose

Others being refinanced

Restructuring

Portfolio segmented Arrangement Auction Settlement Insolvencies

Progress on StabilisationAction area Progress to date

HR

IT

Cost to income

Funding Dynamics

Blue print for performance management system developed 35 of the 114 critical positions filled. Intention to fill all critical positions by June 2009 SAP HR system fixed Organisation structure pending approval of the strategy by the Minister

All weaknesses on the SAP HR & finance systems have been plugged Appointed a service provider to assess the SAP system Propose external process for validation

Major cost contributors identified, isolated and are being managed Maintained costs within the approved budget Cost to income ratio improved to 73% as at September 2008

Liquidity position at R2.6 Billion Maturity profile extended beyond 3 months up to 1yr Minimised refinancing risk 100% rollover rate & new issues Increased investor confidence, appetite & amounts invested

LDFU

Balance sheet

Negotiations for settlements with all clients taking place 1st account to be settled soon 2 more accounts to may be settled before the end of financial year

Biggest non performing loan being settled Declining impairments (see un-audited financial results 30 September 2008) Already seeing positive impact on the Bank’s equity

Phase I – Clean-up

Phase II – Stabilisation

Phase III – Sustainability

Objective: To deliver a transformed Bank in the long term and focus on development as core to the business

Focus Change the fundamental value proposition and focus of Land Bank and introduce a Development orientation

Sustainability is guided by six strategic imperatives emanating from the corporate plan

Clean-up , Stabilise& Sustain the

Business

2. Improve service delivery and stakeholder engagement

1. Implement Development as core to business

4. Enhance HumanCapital

5. Implement systems solutions, drive research and innovation

6. Ensure Sound Governance, Risk Management and Compliance

3. Maintain Financial Sustainability

28

Sustainability is guided by six strategic imperatives

Implement Development as core to business

Improve service delivery and stakeholder

engagement

Maintain financial sustainability

Develop and enhance human

Capital

Systems, technology research & innovation

Corporate Governance & Risk

management

Stabilise , Grow

& Transform the

Business

2. Ensure quality and improve service

delivery(efficiencies)

1. Implement the business model on

development

4.Develop/enhencehuman capital

(enhancing management capacity)5. Implement

systems solutions, embrace

technology and drive research,

development and innovation

6. Ensure sound corporate

Governance, risk

management And compliance

(including processes

and policies)

3.Maintain

financial sustainability

(manage costs and revenue)

Addressing issues of the core mandate as per the Land and Agriculture Development Bank Act No 15 of 2002. Participating in areas of market failure, contributing to poverty eradication, rural development and land reform.

Optimise processes, organisational efficiency and effectiveness & ensure visibility with stakeholders, beneficiaries and interest groups

Addressing issues Manage and reduce operational costs and increase revenue. Exercise financial prudence, ensure adherence to PFMA and related Regulations.

Ensure the attraction, acquisition, development and retention of relevant, adequate personnel

Ensure adequate Management Information Systems for the core business

Minimise & risk issues and introduce controls

The Land and Agricultural Development Bank

Financial Results –Financial Results – 30 September 200830 September 2008

Income statement for the period ended 30 September 2008 Actual Actual

Sep-08 Mar-08

R’000 R’000

Interest income 984,154 1,893,984

Interest expense (662,700) (1,385,616)

Net interest income 321,454 508,368

Impairment of loans 66,565 (189,671)

Income from lending activities 388,019 318,698

Non-interest income 38,866 108,545

Fair value gains (35,468) 59,468

Operating Income 391,417 486,710

Balance sheet as at 30 September 2008Sept-08

R’000Mar-08R’000

Cash at bank 1,957,892 1,443,992

Trade and other receivables 7,401 6,418

Repurchase agreements 264,439 177,896

Derivative assets 45,944 103,336

Loans 12,397,352 14,102,136

Market making assets 24,254 104,033

Intangible asset 9,423 11,114

Investments 191,878 195,188

Investment property 78,616 79,474

Property and Equipment 148,830 154,130

Total assets 15,126,029 16,377,716

Retained earnings 1,840,750 1,709,658

Bank overdraft - 324

Derivative Liabilities 45,365 63,484

Repurchase agreements - 5,116

Trade and other payables 214,412 136,470

Funding 12,053,658 13,485,606

Funds under administration 746,069 752,149

Provisions 23,835 22,969

Post retirement obligations 201,940 201,940

Total equity and liabilities 15,126,029 16,377,716

Thank You!!!