COORDINATED DEVELOPMENT AND PURPOSE SPECIFIC FINANCING DATE: 28 February 2017 INSPIRING GROWTH AND INCLUSIVITY: in Agriculture Presentation by: TP Nchocho CEO: Land Bank

Strategy for Comprehensive Development Financing for Agriculture CONTENT Strategy for Comprehensive Development Financing for Agriculture

Problem Statement Unlocking the potential of the sector for new entrants has significant challenges across the entire Agri-Value Chain Key Challenges affecting emerging farmers … Agriculture Value Chain Land Acquisition Inputs Farming Processing Storage Logistics / Distribution Insurance Infrastructure: Water, Energy, Transport … Complex land ownership Affordability Lack of capital Lack of security Inadequate operating history Inadequate financial & insurance products High cost of capital Lack of security Lack of technical Unable to access inputs at commercial rates Lack of funding & insurance products Lack of technical expertise to apply inputs on best practice basis Significant skills shortage covering farming, business & technical skills Market access Capital & cash flow Produce suite typically short term Inadequate & costly insurance products Offtake agreements favour larger operations Financial products focused on corporates due to their strong balance sheet Lack of business & technical skills Very specialised and highly capital intensive Lack of equity Access to markets Stable end off taker Inadequate & insurance products Challenge Summary: Emerging Farmers Access to Land Lack of equity / security Inadequate Technical Services support Loan facilities not suitable for EF Lack of capital and cash flow to grow Market Access Inadequate Insurance Products & Cover

Comprehensive Development Financing for Emerging Farmers The Starting Point: Foundation Principles Differentiation between: Farming for livelihood Farming for commercial purpose Land Bank’s perspective and focus is on the Emerging farmers whose intent is commercial scale farming for profit Question: Where and how should subsistence farming be supported (i.e. families farming for livelihood)? Embracing the fundamentals of Business Finance (How does Business Finance work?) Life Cycle view of (any) business The reality of the Experience Curve Differentiated needs (Financing & Support) at the different phases of the Life Cycle Differences in the Risk Profiles at the different phases of the Life Cycle The relevance of the Industry Economics  

MED COMMERCIAL & EMERGING Segmentation of the Sector Target Market Profile Value Proposition – Emerging Commercial Farmers AGRI BUSINESS Provide agri-inputs and services to farmers, use agri-produce as inputs (market for farmers) or on-lending. Includes: Large Agriculture; Corporates; Specialised Agriculture; On-lenders (intermediaries). LARGE FARMERS Operate on large agricultural land; capacity to influence/dominate the market; agro-processing capability. Asset value: >R100m Turnover: >R500m – R1b Hectares: > 1 000 ha MED COMMERCIAL & EMERGING Established in commercial farming with skills and access to markets. Asset value: R10m – R100 Turnover: R5m–R500m Hectares: 100 – 1 000 ha EMERGING FARMERS New to commercial farming with some access to markets. Weak financial security (collateral) Asset value:<R10m Turnover: <R5m Hectares: 10 – 100 ha SUBISTENCE FARMERS Subsistence farmers do not form part of the Land Bank’s target market –they are serviced by DAFF / DRDLR Operate small allotment and own few livestock mainly for own consumption Hectares: < 10 ha   Deep understanding of the sector Detailed on-farm risk analysis and advice End-to-end support through value chain progression Meaningful partnership through development cycle Sector specific financing solutions Provision of appropriate funding mechanisms Provision of affordable insurance products Appetite for innovation Intermediary bringing Government / NGO’s / Private sector together Co-ops & Agri Business Large Farmers Target Market Medium Commercial Emerging Farmers Subsistence Farmers

Development Finance is Growth Finance Core Principles: Financing for Growth & Inclusion Development Finance is Growth Finance Core Principles: Drive for Sector Growth, Productivity & Inclusivity Strategic Framework: Alignment and Tailoring of Financing to Business Needs Acknowledgement of the need for “Special Support” measures to the Emerging Sector Comprehensive = (1) Land + (2) Infrastructure + (3) Funding + (4) Technical Support + (5) Market Access + (6) Risk Mitigation Development Financing = Fiscal Support + DFI + Private Sector Monitoring & Evaluation through robust Information Systems Critical Success Factors: Innovation + Partnerships + Cross-sector Synergies

Life-Cycle based Growth Financing Approach Strategic Framework: Life-Cycle based Growth Financing Approach Development Finance Commercial Bank Debt Private Equity Finance Development (Growth) Capital / Venture Capital Revenue Maturity Start-Up Capital Expansions & Consolidations Seed Capital Growth Phase Early – Stage Development R & D Feasibility Business Plan Idea / Concept Launching Own Equity / Grants Risk Equity (Grants) / Venture Funding / Development Debt Long Term Debt / DFI Funding / Commercial Bank Debt / M & A’s Time Land Bank: Growth Capital & Transformation Fund Agri – BEE Fund (Land Mortgage Facilities) Agri Seed Capital Fund Agri Start – Up Fund Land Bank Mortgage Fund: Technical Support & Advisory Services

Tailoring Different “Fund Pools” for Different Business Phases Support Area Financing Instruments Fiscal Support 1. Foundation / Entry - Level 1.1 Seed Capital Fund Annual allocation Utilisation for: Development Capital 2. Growth Phase / Intermediate 2.1 Growth Capital Fund Annual Allocation Interest Rates Concession 3. Consolidation & Expansion / Mature Stage 3.1 Land Bank Capital Capital Formation Land Mortgages Working Capital Where needed, general or specific Sovereign Guarantee for raising Long Dated Capital (World Bank / African Development Bank) 3.2 Agri – BEE Fund (Empowerment) Empowerment facility Equity assistance Transformation Balancing Gearing in the capital structures 4. Technical / Advisory Support Services 4.1 Structure Technical Support Programme: Project Development Costs Business Plans Production Support Services Programme Expenditure Support (OpEx)

Value Chain Financing (1/2) Tailored solutions based on challenges identified in the Agriculture Value Chain Agri Business Value Chain Land Acquisition Inputs Farming Processing Storage Distribution Emerging farmer Insurance Products Technical Assistance   Key Challenges affecting Emerging Farmers … Long Term Mortgage Facility Existing Facility Working Capital Support / Revolving Facility Access to Land Asset Finance New / Planned Production Loan Lack of security Equity Support Sale and Lease Back (Spec Fin) Commodity Financing Lack of skills and support Risk Mitigated Financing (Structure Finance / Mezz and Equity products) Term Loan Facility Inappropriate loan facilities Equity Support Enablers: Pricing Government support for interest rate subsidisation funding, insurance, access to grant pool etc. Equity support to enable ownership Link to M&E via technical assistance and apply geo tech solutions Development of affordable insurance solutions Availability of suitable longer based terms (>25 years) Flexible loan structures Clear alignment between government agencies supporting emerging farmers – support across the agri value chain Implement programmes / partnerships to extend post financing services (agri, commercial, logistics support, etc.) Long Term Mortgage Loans Market Access Working Capital / Revolving Loans Term Loan Facility Adequate Insurance cover Insurance Technical Support

Value Chain Financing (2/2) Tailored solutions based on challenges identified with regard to Land and ownership rights … Government owned land Communal land Private land Facilitate speedy granting of surface lease agreements Implement funding solution that does not require security over land Implement partnerships between communal land owners and stakeholders to allow for commercial farming of land Incentivise commercial transactions that drive inclusivity Focus on projects that drive economic growth and employment opportunities Location and availability of government owned land to be analysed to determine best use of the land Land clusters to be determined and long term projects (agri parks etc..) to be proposed Key Challenges affecting Emerging Farmers … Access to Land Lack of security Lack of skills and support Inappropriate loan facilities Pricing Land Availability to EF Enablers : Determine best use of Government owned land in conjunction with Government agencies Develop legal framework for the use of communal land – assist applicants to develop commercial scale projects Commercialisation of land acquired under the Land Reform programme Long term solution for lack of security via: Government financial support Uptake of relevant insurance products Availability of suitable funding solutions (>25years) Market Access Legal Assistance for Land Development Adequate Insurance cover Long Term Mortgage Facility Enhanced SLA with DRDLR Communal Farming Fund

Re-engineering Agricultural Development Finance (1/2) Operation Phakisa Re-engineering Agricultural Development Finance (1/2) Initiative Summary The development of blended financial instruments from public and private funds, administered centrally, in order to improve access and affordability of finance and lessen the current reliance on grants Issues Addressed The initiative addresses the issue around access to finance, especially small scale farmers, linked to the challenge of collateral and perceived risk, as well as affordability of finance due to mainly the high cost of finance Loan affordability is often a problem for small scale producers where the farm’s production/income is insufficient to cover the required instalments

Re-engineering Agricultural Development Finance (2/2) Operation Phakisa Re-engineering Agricultural Development Finance (2/2) Solution Design The new blended financial instruments will consist of a grant component (from public sector, which will be ring-fenced) and a loan component (from commercial banks, DFI’s and other financiers) The new blended financial instruments will be held in an interest-bearing account at a suitable bank (pooled fund holder) The instrument is designed to cover both long and medium term loans (e.g. for buying a farm, assets, equipment and machinery) as well as short term loans (for production) The respective contributions of grant vs. loan is allocated on set criteria, with the grant portion decreasing over time as beneficiaries become commercialised and are able to afford loans. For example: Buyer Small scale farmers can obtain funding consisting of a maximum 65% grant and 35% loan (or own contribution) Medium scale farmers can obtain funding consisting of a maximum 50% grant and 50% loan (or own contribution) The process is different for subsistence farmers who will apply for grant funding (maximum 90%) with 10% own contribution, through the department as per current process. The approval letter must be sent to the financier to disburse funding Large Commercial Producer (Applicant) Medium Commercial Financier Grant Max 50% Loan/Own Remainder Small scale Grant Fund Grant Max 65% Loan/Own Remainder Subsistence Farmers Grant Max 90% Loan/Own Remainder

Current producer support is uncoordinated and is not comprehensive Operation Phakisa Dynamic Business Model for Producer Support (1/2) Initiative Summary Strengthening new and existing commodity groups to provide comprehensive producer support services to small scale producers enabling them to be productive, competitive and integrated across the value chain Issues Addressed Black farmers are largely not organised and remain excluded from the mainstream agricultural value chain Black farmers have challenges in accessing markets, finance and technical support and to link with integrated value chains and lack the skill and capacity to be competitive Current producer support is uncoordinated and is not comprehensive Further challenges facing producers include poor production and market infrastructure

Commodity Organisation Funding, Personnel, Expertise Operation Phakisa Dynamic Business Model for Producer Support (2/2) Solution Design The initiative is a partnership between the government, community organisations and other stakeholders to develop and provide a commodity-specific comprehensive producer support package for each black producer participating in the initiative DAFF Contribution: Funding, Extension Personnel, MoA with partners Commodity Organisation Contribution: Funding, Personnel, Expertise Farm Assessment Skills Audit Market Needs Audit Funding & Financial Audit Assessment of Viable Economic Unit per Commodity & Area DFIs and Commercial Banks Services: Loans, Grants, Insurance, etc. ARC/NAMC/PPECB/OBP Services: Research, Market Information, Vaccines, Product Quality Assessment, etc. Farm Producer Support Business Model Comprehensive producer support programme for commodity organisation participants Academic Institutions Services: Research, Capacity Building, etc. Services PDAs/DSB/DRDLR/DWS/DEA Services: Water and Environmental Authorisation, Extension services, Farmer Training, Business Plan Development, etc. Farm Profiling Business Plan Development Market Access Info & Negotiation Specialist Extension Services Mentorship Accreditation Export Support

THANK YOU!