DEPARTMENT RURAL DEVELOPMENT AND LAND REFORM The Blended Financing Model Joint briefing to the

1. DEPARTMENT RURAL DEVELOPMENT AND LAND REFORM The Blended Financing Model Joint briefing to the Portfolio Committee on Rural Development and Land Reform Date : 21November 2018

2. Presentation Outline • Rational of the blended funding model • Problem Statement • Introduction to Blended Financing Model • Objectives of Blended Financing Model • Process Flow for Applications • Value Chain for BF • Legal Compliance and MTEF Financial commitments • Financial Contribution by DRDLR and DAFF • Financing instrument for BF • Utilization of disbursed funds • Implementation Methodology: Dynamic Business Model for Producer Support • Roles and responsibilities • Institutional controls • Related Annexures

3. RATIONALE FOR THE BLENDED FINANCING MODEL Purpose of the Presentation: • To apprise the Portfolio Committee on Rural Development and Land Reform of the status on the development process of the Blended Financing Model to respond to Black Producers Commercialisation program(BPCP) Main objective: • To guide & regulate interventions (support) provided to the various categories of producers/farmers by government and other sector stakeholders. Blended Financing Model seeks to give effect to the following Operation Phakisa Initiatives: • Financial Partnerships for Accelerated Land Redistribution and Sustainable Land Reform • Reengineering of Agricultural Development Finance • Dynamic Business Model for Producer Support • Black Producer Commercialization Programme

4. Problem Statement Inequality to access, ownership and control of resources coupled with skewed participation along the value chains: Inequality in sector also manifests itself through access to resources (land, water, finance, markets, infrastructure etc.). The slow pace of land reform programme is also a threat to achieving development objectives of the NDP. Low agricultural, forestry and fisheries productivity: Productive potential of farms is low due to skills shortages & limited resources.Agro-climatic conditions also have an impact on this since it is estimated that a only third of RSA receives sufficient rain for crop production. Unsustainable agricultural practices coupled with the sector’s vulnerability to climate change: Climate change has become a major threat to development & is associated with increased incidents of extreme weather events (e.g. droughts, floods, & fires). Uncoordinated producer support systems: There is lack of coordination & non alignment of producer support at various levels often leading to the limited resources of government being thinly spread resulting in a limited impact.

5. Introduction DAFF, DRDLR and Land Bank signed a Memorandum of Agreement in September 2018 for the creation of the Blended Finance Facility (“BF”). BF forms part of the response to the Stimulus Package for Land Reform. BF will be administered by Land Bank and an intergovernmental Funding Forum (“FF”) will has been formed. The FF will include participants from DAFF, DRDLR, and other government institutions. The FF will act as an interface between the Funders (Commercial banks & DFIs, which includes Land Bank) and the Fund Administrator (Land Bank) in the application for BPCP BF support funding. The Fund Administrator oversees BPCP BF support disbursements and conducts monitoring and reporting for all disbursed funds.

6. Objectives of BF The key objectives are: • Reduce reliance on grants and increase access and affordability of loans by black producers; • Expand the agricultural base and inject new black entrepreneurs into the sector; and • Shift the demographic composition of South Africa’s commercial agriculture, forestry and fisheries and transform the sector.

7. Blended Financing Value Chain SIGNING OF TERMS AND CONDITIONS FOR GRANTS

8. Process Flow for Applications APPRAISAL

10. LEGAL COMPLIANCE • Steercom was established comprising of DRDLR , DAFF , NT & LB • New MOU tripartite was developed- Completed – Completed • SLA was developed – Completed • Funding Forum established - Completed • Service provider was appointed to do Manual ant Artefact's – Completed • National treasury has approved the transfer of funds to Land Bank as Fund manager – Completed • Approval of policy on Land development support – Completed • Partmership Agreement with Commodity Organizations inline with Dynamic Producer support – Completed • National Treasury approval for the transfer of funds - Completed FINANCIAL COMMITMENT OVER THE MTEF

11. DRDLR and DAFF Contribution to BF DRDLR: • Providing the Grant Funding Facility to Land Bank in the amount of R2 682 432 000 (two billion six hundred and eighty two million four hundred and thirty two thousand Rand) which will be used as co-funding to de-risk Black Commercial Producers loan applications for land acquisitions, production in restitution projects, insurance which amount shall be provided as follows: • R800 000 000 (eight hundred million Rand) of the Grant Funding Facility to Land Bank for the 2018/19 financial year; provided that, of this amount, R500 000 000 (five hundred million rand) is ring-fenced for support towards  restitution projects, while R300 000 000 (three hundred million rand) will be utilised for land acquisition and  development support of other land reform farms. However it should be noted R150 million will come from Curatorship Fund at already at Landbank • R910 153 000 (nine hundred and ten million one hundred and fifty three Rand) of the Grant Funding Facility to Land Bank for the 2019/20 financial year; and • R972 279 000 (nine hundred and seventy two million two hundred and seventy nine Rand) of the Grant Funding Facility to Land Bank for the 2020/2021 financial year. DAFF: • Providing the Grant Funding Facility to Land Bank in the amount of R370 000 000 (three hundred and seventy million Rand) which will be used as co-funding to de-risk Black Commercial Producers loan applications, provide technical support, insurance and related products; which amount shall be provided as follows: • R100 000 000 (one hundred million Rand) of the Grant Funding Facility to Land Bank for the 2017/18 financial year; • R120 000 000 (one hundred and twenty million Rand) of the Grant Funding Facility to Land Bank for the 2018/19 financial year; and a further allocation after the mid-term budget review as would be determined by National Treasury; and • R150 000 000 (one hundred and fifty million Rand) of the Grant Funding to the Land Bank for the 2019/20 financial year.

12. Financing instrument through the Reengineering Agricultural Development Finance Initiative Summary Solution Design 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. • 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 commercialized and are able to afford loans, for example: Issues Addressed • This initiative addresses the issue around access to finance, especially for 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 installments. • 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 the funding. 12

13. Utilization of disbursed funds • The Grant Funding Facility will be used by the parties to provide funding facilitation and/or grant financing to Black Commercial Producers for: • The acquisition of primary agricultural land parcels and/or commercially viable agricultural sector value chain operating entities. • support of land development for restitution projects and other land reform projects redistributed land • the purchasing of capital equipment and infrastructure (“CAPEX”). • working capital and/or production funding facility (“Production Facility”).; • Government through DAFF and DRDLR will advance to Land Bank as the fund administrator, an amount 2.5% (two coma five percent) for project management and administration of the grant facility on the total funds disbursed as grants under this Agreement, • Subsequent to the deduction of the admin fee, an amount equivalent to 1% (One percent) of the remaining • amount disbursed to the bank by the DRDLR and DAFF grants, shall be set aside and ring-fenced by Land • Bank for structuring, planning purposes including external consulting fees for specialised and/or complex • assessments and/or transactions due diligences as and when required; • Commodity organizations will receive 2% for the support work to be done on the total approved project fund which includes development of comprehensive Business Plan, Facilitation for development of infrastructure where possible, Procurement of operational inputs, machinery and equipment , market access , value chain integration and reporting. • NB: should the need for additional planning grants emanate from the implementation of this agreement, the LAND BANK may approach the DRDLR in request of approval of such funds. Which approval shall be granted or withheld solely at the discretion of the DRDLR.

14. Implementation Methodology: Dynamic Business Model for Producer Support 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 organized and remain excluded from the mainstream agricultural value chain •Black farmers have challenges in accessing markets, finance and technical supports 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 Solution Design The initiative is a partnership between the government, commodity organisations and other stakeholders to develop and provide a commodity-specific comprehensive producer support package for each black producer participating in the initiative.

15. Dynamic Business Model for Producer Support Continue… Government will partner, through a Memorandum of Agreement (MoA) or Service Level Agreement (SLA), with existing or new commodity organization to provide comprehensive producer support services to small scale producers. For example, the agreement may include the secondment of government extension practitioners to the commodity organization. The government and the commodity organization will also blend their current producer support funds and personnel to provide these producer support services to identified participants. Government will also partner, through a Memorandum of Agreement (MoA) or Service Level Agreement (SLA), with private sector, SOEs and academic institutions which have specialist support services (i.e. NAMC, ARC etc.) to strengthen the services provided by the commodity organization. National Treasury has approved the participation with Commodity Organizations and this will assist in expediting the support of the 262 farms already assessed during this FY.

16. Dynamic Business Model for Producer Support Diagram

17. INSTITUTIONAL CONTROLS • All applications under the Integrated Financing Model will be appraised through the normal process of Financial Institutions for a loan component and the funding forum will approve the advance component. • In the event, the DRDLR decide to fund outside the Blended Financing Model(Infrastructure in PLAS), applications shall be recommended by PTC and approved by NLAACC. • All Blended funding application will be approve in two separate process: Bank Credit Committee for the loan portion and Funding Forum for grant portion. • Black producer Commercialisation Steering Committee will oversee the performance and operations of Funding forum and report to the two DG’s of both DAFF and DRDLR. • Banks will not have a representative at the funding forum. • Commodity organisation will do the implementation/ support farmers who participate on the program . • Provincial Offices of DRDLR shall receive and screen applications for projects and refer to the Funding forum. • Other Banks will also direct applications to the funding forum for appraisal after conducting assessments and economic viability studies.

18. Related Annexures • Artefacts related to Application • Artefacts related to Disbursement • Artefacts related to Monitoring and Evaluation • Draft KPIs

19. THANK YOU