Document of The World Bank FOR OFFICIAL USE ONLY Report No: ICR00005898 IMPLEMENTATION COMPLETION AND RESULTS REPORT IBRD-86860 ON THE LOAN IN THE AMOUNT OF US$93 MILLION TO THE Land and Agricultural Development Bank of South Africa With the Guarantee of the Republic of South Africa FOR A Land Bank Financial Intermediation Project January 20, 2023 Finance, Competitiveness And Innovation Global Practice Eastern And Southern Africa Region CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 2022) Currency Unit = South African Rand (ZAR) ZAR 16.93 = US$1 US$1.33 = SDR 1 FISCAL YEAR July 1 - June 30 Regional Vice President: Victoria Kwakwa Country Director: Marie Francoise Marie-Nelly Regional Director: Asad Alam Practice Manager: Douglas Pearce Task Team Leaders: Ajai Nair, Peter Goodman, Barry Patrick Maher ICR Main Contributor: Rinku Chandra ABBREVIATIONS AND ACRONYMS AfDB African Development Bank CB Corporate Banking CDB Commercial Development Banking CFO Chief Financing Officer COVID-19 Coronavirus Disease 2019 CPS/CPF Country Partnership Strategy/Framework DAFF Department of Agriculture, Forestry and Fisheries DFI Development Finance Institution DALRRD Department of Agriculture, Land Reform, and Rural Development E&S Environmental and social ESMS Environmental and Social Management System FCI Finance, Competitiveness, and Innovation FIL Financial Intermediary Loan GDP Gross Domestic Product GP Global Practice IBRD International Bank for Reconstruction and Development ICR Implementation and Completion Results Report IPF Investment Project Financing ISM Implementation support mission ISR Implementation Status and Results Report LOC Line of Credit M&E Monitoring and evaluation MIGA Multilateral Investment Guarantee Agency MTR Mid-Term Review NDP National Development Plan NPL Non-Performing Loans PAD Project Appraisal Document PDO Project Development Objective PFI Participating Financial Intermediary PMU Partnership Management Unit REM Retail Emerging Markets SARB South African Reserve Bank SME Small and medium enterprise TTL Task Team Leader US$ United States Dollars WB World Bank WBG World Bank Group ZAR South African Rand TABLE OF CONTENTS DATA SHEET .......................................................................................................................... 1 I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ....................................................... 5 A. CONTEXT AT APPRAISAL .........................................................................................................5 B. SIGNIFICANT CHANGES DURING IMPLEMENTATION .............................................................. 10 II. OUTCOME .................................................................................................................... 13 A. RELEVANCE OF PDOs ............................................................................................................ 13 B. ACHIEVEMENT OF PDOs (EFFICACY) ...................................................................................... 13 C. EFFICIENCY ........................................................................................................................... 15 D. JUSTIFICATION OF OVERALL OUTCOME RATING .................................................................... 15 E. OTHER OUTCOMES AND IMPACTS ......................................................................................... 15 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ................................ 17 A. KEY FACTORS DURING PREPARATION ................................................................................ 17 B. KEY FACTORS DURING IMPLEMENTATION ............................................................................. 18 IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME .. 19 A. QUALITY OF MONITORING AND EVALUATION (M&E) ............................................................ 19 B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ..................................................... 20 C. BANK PERFORMANCE ........................................................................................................... 21 D. RISK TO DEVELOPMENT OUTCOME ....................................................................................... 23 V. LESSONS AND RECOMMENDATIONS ............................................................................. 23 ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ........................................................... 26 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ......................... 32 ANNEX 3. PROJECT COST BY COMPONENT ........................................................................... 34 ANNEX 4. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS ... 35 ANNEX 5. SUPPORTING DOCUMENTS .................................................................................. 37 The World Bank Land Bank Financial Intermediation Project (P150008) DATA SHEET BASIC INFORMATION Product Information Project ID Project Name P150008 Land Bank Financial Intermediation Project Country Financing Instrument South Africa Investment Project Financing Original EA Category Revised EA Category Financial Intermediary Assessment (F) Financial Intermediary Assessment (F) Organizations Borrower Implementing Agency Land and Agricultural Development Bank of South Land and Agriculture Development Bank of South Africa Africa Project Development Objective (PDO) Original PDO The project's development objective is to sustainably scale up Land Bank's financing, specifically to benefit emerging farmers. Page 1 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) FINANCING Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$) World Bank Financing 93,000,000 10,942,616 10,942,616 IBRD-86860 Total 93,000,000 10,942,616 10,942,616 Non-World Bank Financing 0 0 0 Borrower/Recipient 0 0 0 Total 0 0 0 Total Project Cost 93,000,000 10,942,616 10,942,616 KEY DATES Approval Effectiveness MTR Review Original Closing Actual Closing 23-Jan-2017 29-Sep-2017 11-Dec-2019 01-Apr-2022 01-Apr-2022 RESTRUCTURING AND/OR ADDITIONAL FINANCING Date(s) Amount Disbursed (US$M) Key Revisions 21-Dec-2021 26.88 Change in Components and Cost Cancellation of Financing Reallocation between Disbursement Categories KEY RATINGS Outcome Bank Performance M&E Quality Highly Unsatisfactory Moderately Unsatisfactory Modest RATINGS OF PROJECT PERFORMANCE IN ISRs Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) 01 04-May-2017 Satisfactory Satisfactory 0 02 06-Dec-2017 Satisfactory Satisfactory 0 Page 2 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) 03 17-Jul-2018 Satisfactory Moderately Satisfactory 6.60 04 04-Mar-2019 Moderately Satisfactory Moderately Satisfactory 6.60 Moderately 05 23-Sep-2019 Moderately Unsatisfactory 6.60 Unsatisfactory Moderately 06 19-May-2020 Moderately Unsatisfactory 26.88 Unsatisfactory 07 21-Dec-2020 Unsatisfactory Unsatisfactory 26.88 08 22-Jul-2021 Unsatisfactory Unsatisfactory 26.88 SECTORS AND THEMES Sectors Major Sector/Sector (%) Agriculture, Fishing and Forestry 10 Agricultural Extension, Research, and Other Support 10 Activities Financial Sector 80 Banking Institutions 40 Other Non-bank Financial Institutions 40 Industry, Trade and Services 10 Agricultural markets, commercialization and agri- 10 business Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Private Sector Development 100 Jobs 100 Page 3 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) Finance 25 Financial Infrastructure and Access 25 MSME Finance 25 Finance for Development 25 Agriculture Finance 25 Urban and Rural Development 50 Rural Development 50 Rural Markets 50 ADM STAFF Role At Approval At ICR Regional Vice President: Makhtar Diop Victoria Kwakwa Country Director: Ivan Velev Marie Francoise Marie-Nelly Director: Gloria M. Grandolini Asad Alam Practice Manager: Alejandro Alvarez de la Campa Douglas Pearce Ajai Nair, Peter Goodman, Task Team Leader(s): Uzma Khalil, Birgitte Gunhild Berg Barry Patrick Maher ICR Contributing Author: Rinku Chandra Page 4 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES A. CONTEXT AT APPRAISAL Context 1. The Government of South Africa was pursuing an ambitious policy agenda to support rural development and achieve a reduction in poverty and inequality, anchored by their National Development Plan (NDP). More than 20 years after the end of apartheid, unemployment, poverty and inequality remained important development challenges in spite of substantial progress in overcoming the legacy of the past. Unemployment was high and was above 20 percent in 2015, totaling approximately 5.4 million people (40 percent of which were new entrants). Gross domestic product (GDP) growth was 1.3 percent in 2015, which was well below the 5 percent estimated to be needed to lower unemployment. Although poverty had declined significantly, there were pockets of poverty that remained deeply entrenched and inequality was amongst the highest in the world. 2. Rural and agricultural development were listed as two of the top priorities in the NDP, and a substantial reduction in poverty and inequality required investment and success in rural development. South African’s agriculture sector was characterized by dualism: a modern, market-oriented capital-intensive farming sector consisting of a small number of large commercial farms and a large number of subsistence, and small-scale farms.1 Land distribution was also one of the most unequal in the world and the progress of land reform had been slow and many land reform beneficiaries were not using the land productively. In 1994, the government had committed itself to transfer 30 percent of the agricultural land owned by whites (24.5 million hectares) to historically disadvantaged farmers by 2014 through land restitution and redistribution. However only 9.4 percent had been transferred by that time, and most of the transfers involved large commercial farms to beneficiaries that were typically resource poor, risk-averse, and inexperienced historically disadvantaged farmers. Support for the beneficiaries after the takeover of land was inadequate and they often experienced numerous problems accessing services, such as credit, training, technology extension, transport, plowing services, veterinary services and marketing service. Consequently, there was limited integration of small farmers into structured value chains. 3. One of the main challenges rural and agricultural development was facing was affordable access to working and investment capital for small and medium-sized farmers and agricultural enterprises. Small and medium scale farmers experienced numerous challenges related to accessing finance, including limited physical assets that could be used as collateral. The large majority of these farmers were unable to use the land that they farmed on as collateral since they had often obtained these lands through the government’s redistribution or restitution programs where the farmers had use-rights over the land but the state retained 1The Project Appraisal Document refers to estimates of 2.5-3.5 million households engaged in subsistence farming, 350,000-700,000 emerging farmers producing part of their output for the market, and between 11,000-15,000 small to medium scale farmers who are commercially oriented. The term ‘emerging farmers,’ as used in South Africa, typically refers to small-scale farmers who are producing at least part of their produce for the market but have much lower productivity than large commercial farmers and are typically not very attractive clients to the commercial banks. The current Department of Agriculture, Land and Rural Development (DALRRD) definitions use turn-over as the basis and define a small-scale producer as an individual or a business entity having annual turnover between R50,000 and R1 million, and a medium scale producer as an individual or a business entity having annual turnover between R1 million and R10 million, both being income from agricultural, forestry and fishery activities along the value-chain. The Implementation and Completion Results Report (ICR) will use the term small-scale farmers in lieu of emerging farmers to align with current DALRRD terminology which is more aligned to the terminology generally used in the sector globally. Page 5 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) ownership. The most recent FinScope Small Business Survey at the time from 2010 estimated that only 5.6 percent of small and medium-scale farmers used formal credit services and only 2.5 percent had access to credit from a bank. The government recognized that integration of small-scale farmers into organized value chains was critical to address the significant skills and financing gaps of these farmers. There had been significant success in the sugar, poultry, tobacco and forestry sectors, and there was growing recognition in government and the private sector that value chain integration could be an effective way forward. 4. Land and Agricultural Development Bank of South Africa (hereinafter referred as Land Bank) played a critical role in land reform and agricultural development in South Africa. Land Bank, fully owned by the South African government, was the leading development finance institution in the rural and agricultural sector, with an approximately 29 percent market share in agricultural financing in 2015. The NDP called for Land Bank to play a key role in providing financial support to land reform beneficiaries and to help them overcome difficulties in entry into commercial farming. Land Bank had adopted a new strategy in 2015 to strengthen the operational and financial performance and increase its focus on their development portfolio. Following the adoption of this new strategy, Land Bank had two main business lines: Corporate Banking (CB) and Commercial Development Banking (CDB), with CB accounting for 83.6 percent of the bank’s loan book and CDB accounting for 16.4 percent. Land Bank offered direct and wholesale lending under both CB and CDB business lines. The wholesale finance facility under CDB was focused on lending to small scale farmers, who typically have little or no collateral, and hence had difficulty accessing finance from commercial banks but were assessed to have the potential to become commercially sustainable and viable over time. Lending was based on cash-flows and farmers were provided non-financial support services by the Land Bank intermediaries, which were typically large agribusinesses and agriculture cooperatives or their financial subsidiaries. While at the time of project appraisal Land Bank on-lent funds to these intermediaries at a highly subsidized interest rate, under the project it intended to revise its pricing policy to allow Land Bank to initially cover at least its average cost of funds, and later transition to also recovering operating costs in order to contribute to Land Bank’s financially sustainability. The direct retail lending under CDB, undertaken through Land Bank’s branch network, had been loss making due to high operating costs and high non-performing loans (NPLs), and as part of the new strategy, Land Bank was consolidating the branch network, lowering operating costs, as well as focusing on supporting the borrowers, typically medium-scale farmers, integrate into established value chains. The CB business line had traditionally been the most viable business line and targeted commercial farmers with both direct and wholesale financing options. While CB targeted commercial farmers, the workers employed on these farms tended to be part of the low-income population. 5. Land Bank had faced financial difficulties in the past but had achieved a significant turnaround in the previous five years although challenges remained. Land Bank was on a sustainable trajectory based on its profitability, return on average assets, and return on equity, and low levels of NPLs. In addition, Fitch Ratings had upgraded Land Bank from AA to AA+ in January 2014 and that it was maintained in December 2015. Notwithstanding these positive developments, the PAD highlighted (although only in the annex) several weaknesses in Land Bank’s financial model, including their asset liability mismatch, with the significant short- term funding that was being utilized for long term loans, and that Land Bank was not independently supervised, but rather was overseen by the owner of the institution (National Treasury). 6. National Treasury’s and Land Bank’s efforts to transition to a sustainable model were supported by several lenders in addition to the World Bank. Building on World Bank’s engagement with the Land Bank to prepare a loan, KfW and European Investment Bank had commenced preparing financing operations. By the time of World Bank Board of Executive Directors’ approval of the project, the KfW approved a small and medium enterprise (SME) loan for R899 million (in 2016), European Investment Bank had approved a climate adaptation loan for small-scale farmers for Euro 50 million (in 2017), and Multilateral Investment Guarantee Page 6 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) Agency (MIGA) approved up to US$575.6 million in non-honoring guarantees to enable Land Bank to borrow from international commercial banks (in 2016). African Development Bank (AfDB) had approved a ZAR 1 billion loan to Land Bank in 2013 and was under implementation at the time of World Bank project approval. 7. The World Bank portfolio in South Africa was limited at the time, and this project was the first lending engagement after a considerable period of time. In addition, this operation was the first financial sector operation in South Africa. In light of this and the high priority of the agriculture sector, the World Bank devoted significant resources to preparing the project as the counterparts were not familiar with all of the World Bank’s policies, procedures, and fiduciary arrangements. 8. At the time of appraisal, the project was fully aligned with the Country Partnership Strategy (CPS) for South Africa for the period of FY2014-17. As per the Project Appraisal Document (PAD), the project was expected to contribute to all three pillars of the CPS. First of all, it supported the reduction of inequality by increasing access to finance for the historically disadvantaged population, specifically to benefit small and medium scale black farmers. Secondly, it catalyzed private investment in rural development and agriculture through financing solutions provided by Land Bank. Thirdly, it helped strengthen institutional capacity of Land Bank on agricultural financing as well as asset-liability management, and the capacity of its intermediaries. Theory of Change (Results Chain) 9. The project was a financial intermediary loan (FIL) of US$93 million to Land Bank as the borrower and implementing agency with a guarantee of the Republic of South Africa. The theory of change as presented in the PAD (Figure 1) identified that the project’s outcomes would include: contributing to the government’s objective of promoting job creation and income generation, improving access to finance for commercial and emerging farmers, supporting the integration of emerging farmers into value chains. The critical assumptions were that Land Bank would remain committed to implementing the strategy supported by the project and that there would be appropriate demand for the product offering supported by the project. Page 7 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) Figure 1: Project Level Result Chain Input Activity Output Outcomes Project Development Objectives (PDOs) 10. The PDO was to sustainably scale up Land Bank’s financing, specifically to benefit emerging farmers. The PDO was to be achieved by providing long-term financing for Land Bank and facilitating a broader and deeper financial intermediation by Land Bank and diversifying its funding sources away from government. Key Expected Outcomes and Outcome Indicators 11. The achievement of the objectives and outcomes of this project were measured through the following PDO results indicators: • Volume of wholesale loans disbursed under the project (amount US$). • Volume of direct value chain loans disbursed under the project (amount US$). • Number of direct project beneficiaries. • Total NPL rate under the credit line (%). 12. Intermediate results indicators were as follows: • Increase in outstanding loan portfolio of Land Bank (%). • Increase in CB outstanding loan portfolio of Land Bank (%). • Increase in Retail Emerging Markets (REM) outstanding loan portfolio of Land Bank (%). Page 8 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) • NPL rate for Land Bank (%). • Land Bank liabilities that are long-term (over 1 year) (%). • Return on Average Equity (%). • Land Bank Return on Assets/ Equity (%). 13. The intermediate indicators primarily focused on measuring the change in Land Bank’s business model towards wholesale financing and increasing its developmental impact through increased lending to small-scale farmers. As the PDO is targeted at changing the behavior of Land Bank, and ultimately the use of wholesale financing as a mechanism to affect agricultural financing in the longer-term, the indicators above aimed to measure how the project will contribute to Land Bank’s overall portfolio and its asset-liability management framework. Components 14. The project had one component: a Line of Credit (LOC) for agricultural financing in the amount of US$93 million. This included two main financing windows (see Figure 2): • Window 1: Wholesale finance to commercial and emerging farmers. This window aimed to provide a wholesale line of credit to Land Bank to on-lend to participating financial intermediaries (PFIs) which comply with eligibility criteria agreed with the World Bank. The PFIs would in-turn on-lend funds to eligible agriculture enterprises, commercial and small-scale farmers, communal property associations and other eligible borrowers supported under the Land Bank’s CB and CDB business lines. • Window 2: Financing to integrate emerging farmers into established value chains. This window aimed to provide a line of credit to Land Bank to finance direct lending to emerging farmers for integrated value chain finance. For direct lending to value chain finance/development projects, Land Bank was to finance eligible small-scale farmers and agriculture enterprises in collaboration with large agriculture corporates and/or technical partners in a targeted value chain. Figure 2: Project Design Page 9 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) B. SIGNIFICANT CHANGES DURING IMPLEMENTATION 15. The significant delays in project implementation and non-trivial changes in Land Bank’s business model led to discussions about restructuring the project following the Mid-term Review (MTR) undertaken in 2019. The project had only disbursed 6 percent at that time. There had been delays in upgrading Land Bank’s Environmental and Social Management System (ESMS), and in implementing Environmental and Social Action plans with intermediaries, and the pace of originating loans under both the direct and wholesale finance windows was slow. There were also changes in Land Bank’s business model and product offerings that were not envisaged when the project was approved. 16. The proposed restructuring, along with an agreed action plan with Land Bank aimed to address some of these bottlenecks. The key elements of the proposed restructuring included: (a) replacing ‘wholesale financing window’ with an ‘indirect financing window’ including wholesale financing, intermediary-originated financing, and financing through Special Purpose Vehicles; (b) utilize financing under the project only for ‘transformation’ and ‘development’ segments, with the financing being utilized primarily for the ‘development’ segment, and (c) financing of willing seller-willing buyer land transactions.2 Changes (a) and (b) were proposed to accommodate changes in Land Bank’s business model and strategy. As part of these changes, Land Bank envisaged reaching the ‘development’ or small-scale farmer segment through wholesale financing, intermediary-originated financing as well as Special Purpose Vehicles and supporting ‘transformation’ projects that envisaged supporting increased black ownership in commercial agricultural operations. Special Purpose Vehicles allow Land Bank to blend its commercial financing with grant financing from the Government and other sources, such as industry associations, and enable it to provide small-scale farmers financing at lower than commercial cost without adversely affecting its own sustainability. 17. It was also agreed during the MTR that Land Bank would develop a capacity building plan to address its operational and technical capacity needs and needs of its intermediaries. This was expected to address the capacity constraints in implementing the project at Land Bank and the implementation of the strategy that was envisaged when the project was approved, and Land Bank agreed to allocate at least US$3 million over a period of three years to implement the actions identified in the plan. The plan was to provide technical assistance to strengthen strategic focus for the expansion of Land Bank’s Transformation and Development portfolio, and to develop proposals for public funding support. It also envisaged support for strengthening operational capacity by creating a project management function that would drive origination of ‘transformation’ and ‘development’ transactions.3 In addition, the MTR also focused on strengthening partnerships with other development partners that were engaged with Land Bank to support the technical assistance needs. 18. However, this restructuring was not completed as Land Bank faced financial difficulties in early 2020 that led all project related activities to cease. In January of 2020, Moody’s downgraded Land Bank to below investment grade and it triggered a liquidity crisis since Land Bank was not able to refinance some of its borrowings that were maturing. The downgrade was triggered by the rating agency’s assessment that the government’s capacity to support the Land Bank had worsened due to tightening of its fiscal space, as well as Land Bank’s institutional weaknesses, including increasing NPLs and reduced capital adequacy, and delays in appointing a Chief Executive Officer. Land Bank’s efforts to raise bridge-financing from its lenders was not fully successful, and this led to the Land Bank defaulting on one of its commercial credit obligations in April 2020. Further, this triggered cross-defaults with most of its lenders and resulted in a stand-still on all its payments to all lenders. Page 10 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) 19. The World Bank initiated high-level engagements with the Land Bank and the National Treasury to support their efforts to resolve Land Bank’s default status. The World Bank’s Country Director initiated engagement with the National Treasury’s senior management and also convened a meeting of all Land Bank’s development finance partners in May 2020 to discuss options to resolve Land Bank’s situation at the earliest. In parallel, following consultations with Finance, Competitiveness and Innovation (FCI) Global Practice (GP) Global Director and Equity, Finance and Institutions Regional Director, the World Bank recommended an independent audit of Land Bank to ascertain its financial position and an assessment of Land Bank’s business model, informed by the proposed audit, to shape the restructuring strategy for Land Bank and develop a sustainable plan. The World Bank also informed the National Treasury that it could potentially restructure its loan to support the implementation of the plan, including technical assistance component to support the implementation of the plan. Land Bank engaged a corporate finance advisor (Rand Merchant Bank) and a legal advisor (ENS Africa) to advise it on its debt restructuring and started to periodically engage with the South African / commercial lenders and development finance institution (DFI) lenders. The Government provided a capital injection of R3 billion in 2020 and committed to provide an additional R7 billion if the creditors agreed to a resolution. The fiscal pressure faced by the government, including additional ones due to the COVID-19 pandemic, limited their ability to provide additional support to the Land Bank. At the time of the ICR, Land Bank’s default status remained unresolved. 20. Due to the stand-still on payments to lenders, Land Bank did not make the interest payment that was due to the World Bank in July 2020 and this resulted in the sovereign guarantee being called. In late June 2020, Land Bank informed the World Bank that it would not be able to make the interest payment due to the World Bank on July 1, 2020. The World Bank invoked the sovereign guarantee for this payment later during this month and the payment was received before the end of the month. Land Bank restarted making interest and fee payments to all lenders, including the World Bank, later during the year and made three capital reduction payments in 2021 and 2022 as its liquidity position improved.4 21. Land Bank’s continuing default status has resulted in a steep reduction of lending to its customers. Following the default in April 2020, Land Bank suspended origination of new loans and steeply reduced lending to its existing customers. The reductions were particularly steep for the ‘transformation’ and ‘development’ segments, and it is estimated that the development segment have been particularly impacted by Land Bank’s situation since, prior to its default, Land Bank was providing over 50 percent of the total lending to this segment. 22. Following a request from the Land Bank, the undisbursed portion of the loan was cancelled in December 2021 through a Level 2 project restructuring. Land Bank’s request followed failures of multiple iterations of debt-work out proposals and was made once it was clear it would not be feasible to draw down and utilize fully prior to the closing of the project. Previously, the World Bank and the Land Bank had agreed on a broader restructuring and extension of the closing date, if the following preconditions were met: (i) the default status is cured, (ii) clean audits are made available, and (iii) such restructuring is part of a medium- 2 While detailed eligibility criteria were to be included in the revised operations manual, the ‘development’ segment was generally understood to referred to small and medium scale black farmers (aligned with previously referred to DALRRD definition) and “transformation segment” to black-owned businesses with turnover larger than R10 million. 3 The MTR team’s initial proposal to allocate some of the project funds to a second component that would provide technical assistance was not agreed to by the Land Bank. 4 As of October 2022, the World Bank had to call on the sovereign guarantee two more times – first in July 2022 for a partial payment (R100 million) out of the R267 million refund that Land Bank had to make on the balances in the project’s Designated Accou nt and second, for the first principal payment of R1,557,000 in October 2022. These guarantee calls were made following Land Bank informing the World Bank that it cannot make the payments due to their having to adhere to INSOL principles guiding debt workouts. Page 11 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) term strategy that is supported by a viable business model. However, these pre-conditions were not met and hence this restructuring was not undertaken. 23. World Bank continued to have a high-level engagement with the National Treasury and Land Bank through the two-year period till project closure and, at the time of this Implementation and Completion Results Report (ICR) being prepared, continues to engage with the objective of supporting a speedy resolution of Land Bank’s situation. Over this period, World Bank has participated in bi-weekly DFI partner calls; provided written briefs to the National Treasury and the Minister of Finance on resolution options; provided review inputs to Land Bank management and its advisors on various iterations of debt workouts that were proposed; and, engaged with Land Bank board on strategic considerations beyond the debt-work out, including on the need to develop a sustainable strategy and business model for Land Bank. The World Bank’s decision not to close the project earlier than the original closing date was also intended to provide the maximum opportunity to the Government and the Land Bank to resolve the default status and fully utilize the funds available under the project. Page 12 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) II. OUTCOME A. RELEVANCE OF PDOs Assessment of Relevance of PDOs and Rating 24. The PDO of sustainably scaling up Land Bank’s financing, specifically to benefit emerging farmers remained highly relevant during the life of the project. The 2018 Systematic Country Diagnostic and FY22-26 Country Partnership Framework (CPF) highlighted the importance of agriculture and rural development, the need for more support to small scale farmers, access to finance constraints for small farmers, and fostering linkages across value chains. The government also continues to prioritize rural and agriculture development as part of its NDP. The challenges related to unemployment and poverty, and their high levels in rural areas, were exacerbated by the COVID-19 pandemic and the subsequent slow-down in the economy. Unemployment has exceeded 30 percent at the end of 2020 and poverty was more than double in rural areas (81.3 percent) compared to urban areas (40.6 percent). 25. The relevance of the PDO is rated as High as evidenced by the strong alignment of the project objectives to the CPS, during preparation and implementation, and to the CPF, at the time the operation closed. The PDO was also fully aligned with the government’s reform strategy and priorities as articulated in the NDP. B. ACHIEVEMENT OF PDOs (EFFICACY) 26. The project did not achieve its envisaged objective of scaling up Land Bank’s financing to benefit small- scale farmers. The project did not disburse any funds allocated under the wholesale finance window, which was intended to be the primary channel to reach small-scale farmers and supported only two sub-projects under its direct lending window. While the project disbursed US$26.9 million, it utilized only US$8 million and the balance was refunded.5 27. All four PDO level outcome targets were not achieved: • Disbursement of wholesale loans (0 vs. target of US$65.1m): Due to delays in upgrading Land Bank’s own ESMS and resulting delays in implementing the required environmental and social framework (E&S) for intermediaries, and due to non-availability of grant funds that had allowed it in the past to offer these loans at sub-market rates to allow intermediaries to provide non-financial services to beneficiaries, the project was not able to disburse any wholesale loans prior to Land Bank suspending origination of new loans in mid-2020. • Disbursement of value chain loans (US$8.0 vs target of US$27.9m). Although the target was not met, the project did support two value chain sub-loans. These included a project that supported the first black majority-owned pork producer of significant size in South Africa and a black majority- owned project to develop grape and citrus orchards. • Number of beneficiaries (350 vs. target of 1,100). The project supported 350 beneficiaries, nearly all in the form of new jobs at the two sub-projects that were financed. While the proportion of 5The difference between the initial disbursement of US$10.9 million shown as final disbursement after refunds and the US$8 million reported as funds utilized for sub-projects is accounted for by currency exchange rate changes. Disbursements under the project were made in ZAR utilizing currency SWAPs. Page 13 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) target beneficiaries reached is high in comparison to the proportion of loan funds utilized, this is due to most of the beneficiaries being jobs generated by the two value chain projects rather than small-scale farmers benefitting from the finance provided. • Total NPL rate under credit line (74 vs target of <10): At the time of writing this ICR, the larger of the two sub-loans under the credit line was in NPL status. This results in a total NPL rate of 74 percent. The ICR team interviewed the sub-borrower associated with the sub-loan in NPL status. The managers reported that while the sub-project was forced to default on its obligations to the Land Bank due to cash-flow challenges associated with COVID-19 (high freight charges) and extended drought conditions, the sub-project continued to be operational and was generating a positive cash-flow. 28. The intermediate results indicators were focused on Land Bank’s institutional performance, and five out of the seven intermediate results indicators were not met. This was primarily driven by decline in Land Bank’s financial performance following 2020. The two that were met only achieved the target due to writing off a significant volume of loans rather than achievement of the objectives of the project that aimed to strengthen Land Bank’s performance. 29. The main driver for the PDO not being achieved was Land Bank’s default to commercial lenders in April 2020 and the default status remaining unresolved till project closure in April 2022. The suspension of new lending during the default status meant no new sub-loans being financed under the World Bank project after June 2020. The proximate reason for the default was the liquidity crisis triggered by Land Bank’s inability to refinance some of its loans following a credit down-grade. However, a more fundamental issue was the risks inherently associated with Land Bank’s business model which used short-term liabilities to finance long- term assets resulting in a significant asset liability mismatch. 30. Other drivers that caused early delays in project implementation were also contributing factors. These included longer than estimated time taken to upgrade Land Bank’s ESMS and that of its intermediaries’ ESMSs; challenges faced by Land Bank in scaling-up its wholesale lending facility due to inadequate resources to support non-financial services that small-scale farmers needed; and its insufficient capacity at both Land Bank and its partners involved in agent-originated lending model to originate loans benefiting small-scale farmers. Justification of Overall Efficacy Rating 31. The overall efficacy of the project is rated as Negligible. The project, through the credit line, aimed to support the implementation of a new strategy for Land Bank that focused on small-scale farmers. The project did not achieve this objective due to the project’s very low level of utilization of project funds , particularly there being no utilization of project funds under the wholesale financing window envisaged to support small-scale farmers. Page 14 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) C. EFFICIENCY Assessment of Efficiency and Rating 32. A traditional economic analysis was not done due to the low level of disbursement and there being no disbursement under the wholesale financing window. The PAD provided details on an economic analysis that only included wholesale lending and did not attempt to complete an economic analysis for direct lending. Since the wholesale lending did not disburse at all, there is no basis for comparing what was presented in the PAD to the actual results from the project. Land Bank utilized US$8 million to finance two sub-projects under direct lending that created approximately 1,444 jobs. The ICR attributes 350 of these jobs to the WB financing based on the share of WB financing in the total Land Bank financing provided for these two sub-projects. 33. The overall efficiency of the project is rated to be Negligible. Even though a traditional economic analysis was not done, the efficiency is assessed to be very low since less than 10 percent of project funds were utilized, and the risks associated with the viability of one of the sub-projects financed given the current NPL status of the sub-loan. The costs to the Borrower and the World Bank in implementing the project were substantial in comparison to the US$8 million in funds that financed the sub-projects. The costs to the World Bank for preparation and supervision exceeded US$1.5 million during FY14-22. The costs to Land Bank including the commitment fee on undisbursed loan funds, the currency swap fees on the disbursed loan amount and the interest costs on the disbursed amount, are also estimated to be significant.6 D. JUSTIFICATION OF OVERALL OUTCOME RATING 34. Although the relevance of the PDO is rated as High, the overall outcome rating is Highly Unsatisfactory due to the Negligible ratings on efficacy and efficiency. The project’s efficacy is rated as Negligible since it did not achieve the PDO due to the very low level of utilization of project funds and in particular no utilization under the project’s wholesale window which was intended to be the primary channel for achieving the PDO. The project’s efficiency is rated as Negligible since the costs incurred by the World Bank and Land Bank are assessed to be much larger in comparison to the benefits arising from the funds utilized. E. OTHER OUTCOMES AND IMPACTS Institutional Strengthening 35. The project had significant impact on strengthening the ESMS at the Land Bank. As part of project implementation, Land Bank mainstreamed this system within its credit approval process based on customized Environmental and Social screening tools. It also updated its ESMS policy and put in place a qualified E&S team, under the guidance of the General Manager for Agriculture Economics Advisory and General Manager for Strategy. The E&S specialists were responsible for carrying out comprehensive environmental due diligence of ESMS of Land Bank’s Intermediaries and of its direct borrowers. In addition, the E&S team rolled out regular awareness sessions across the Land Bank to inform staff and management on the need for early 6 Land Bank incurred commitment fees on the undrawn amount of US$66 million till December 2021, when this amount was cancelled. Land Bank incurred interest costs on ZAR 390 million (equivalent of US$26.8 million) from February 2020 to July 2022, when it refunded the unutilized amount of ZAR 267 million. Page 15 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) engagement on E&S risk assessment within the credit process. The Borrower highlighted that the project had transformed the ESMS at Land Bank and had mainstreamed it into the credit approval process. 36. The project also was a key factor for the Land Bank establishing a Partnership Management Unit (PMU) to drive and coordinate the implementation of externally funded projects at the Land Bank. The PMU was established following the project’s MTR identifying the lack of a dedicated structure at the Land Bank to drive the implementation of the World Bank financed credit line as a key factor constraining its effective implementation. Land Bank agreed with this MTR finding and established the PMU with responsibility to coordinate all externally funded projects at the Land Bank. While the suspension of all new lending that followed Land Bank’s default has meant that the PMU’s effectiveness is yet to be demonstrated, it is expected that PMU will help improve Land Bank’s capacity to effectively implement externally funded projects. Page 16 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME A. KEY FACTORS DURING PREPARATION 37. The project design was based on significant World Bank experience with credit lines and international experience related to DFIs. Based on this experience and lessons learned, the project focused primarily on a wholesale model, as this has led to better performance compared to retail lending by DFIs. The project also was designed so that the LOC would be offered on commercial principles to support the financial sustainability of Land Bank. However, the project team did not include a co-task team leader (TTL) from the World Bank’s Agriculture GP, which could have helped to ensure a more substantial contribution from the Agriculture GP to the project design and thereby helped improve the design of the project. This could have particularly beneficial in assessing the adequacy of funding and effectiveness of delivery of non-financing services for small-scale farmers to be funded under the wholesale financing window of the project. 38. The Borrower was not willing to allocate project funding for technical assistance or for project management as was recommended by the World Bank team. The World Bank team identified that it would be preferable to include components that would finance technical assistance and for operating expenses related to the project. The PAD identified this as a risk, and it was assumed that it could be mitigated through external technical assistance resources. However, this risk did materialize and the delays in project implementation could have been avoided had these funds been allocated as part of the project design. As previously mentioned, discussions were held in 2019 to restructure the project to include a technical assistance component but Land Bank instead preferred to allocate their own funding for these purposes. This was agreed to by the World Bank, but this did not happen either because of Land Bank’s financial crisis in early 2020 and the default that followed. 39. The assessment of Land Bank during the preparation of the project was limited by the lack of external financial supervision of Land Bank. Land Bank, like other South African DFIs, is not supervised by the South African Reserve Bank (SARB), which supervises its banking sector. Instead, it is supervised by its owner, the National Treasury. This supervisory approach is not aligned to generally accepted good practice which requires that ownership function is separated from financial supervision, and that financial supervision is carried out by a specialized financial regulator such as the SARB. Thus, the assessment of Land Bank done by the World Bank team as part of the appraisal process was constrained by not having access to independent supervisory reports from an independent financial supervisor. Some of the risks that materialized related to asset quality, Land Bank’s Expected Credit Loss models and related inadequacy of loan provisioning, internal controls related to the service level agreements entered with loan origination partners, and asset-liability mismatch issues arising from the use of short-term liabilities to fund long-term loans may have been identified earlier had Land Bank been supervised in line with the previously referred generally accepted good practice7. A more robust national supervisory framework may have helped the task team identify some of these issues earlier and put in place remedial actions to avoid the liquidity crisis that materialized during project implementation. 7 The entity audit for FY 2020, that followed the default, identified significant under-provisioning due to weak credit loss models and led to a financial statement for FY2019 being restated. Page 17 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) B. KEY FACTORS DURING IMPLEMENTATION 40. Initial project implementation was hampered due to delays in upgrading Land Bank’s ESMS. During project preparation the extent of improvement required to Land Bank’s ESMS to effectively implement the required Environmental and Social Safeguards was underestimated. Upon project approval, the first disbursement was delayed by more than a year for Land Bank to make the necessary improvements to its ESMS. The World Bank and Land Bank teams spent significant time and effort to implement the necessary changes, and both consider that it has transformed the way that Land Bank factors in Environmental and Social Safeguards in the loan approval process. 41. Second, the lack of a dedicated structure and project resources for driving/managing the implementation of the project within Land Bank hampered the implementation of the project. There was no dedicated unit with responsibility for driving/managing the implementation of the World Bank project (as was the case for other externally funded projects). The overall responsibility at the Executive level was with the Chief Financing Officer (CFO) of Land Bank rather than a Chief Operating Officer or equivalent, and the project management function was limited to the liaison role carried out by the Investor Relations Manager in the CFO’s office. In addition, in contrast to the typical case with implementation of credit lines provided by the World Bank, there were no project resources allocated to implementing the project. All of these factors hampered the effective implementation of the project. 42. Third, changes in Land Bank’s strategy and delivery models also hampered the implementation of the project. The project was based on Land Bank’s strategy at the time of project preparation that intended to grow Land Bank’s financing for small-scale farmers primarily through wholesale lending. However, wholesale lending, as envisaged under the project, proved to be not viable. This wholesale funding model to be supported by the project was expected to be based at interest rates that did not include all subsidies that had previously been included and was used by intermediaries for the delivery of non-financial services to small scale farmers. This new model assumed that these vital non-financial services would be provided by the financial intermediaries who would include the cost in the interest rate or would be financed from other funding sources. However, based on Land Bank’s experience there was little appetite for this product without the subsidies. The agent-originated lending instrument and Special Purpose Vehicles were not eligible for support by the project without a project restructuring, although they were consistent with the original project’s theory of change when used to finance small-scale farmers.8 43. Lastly, the default of Land Bank to its commercial lenders caused the project to fully cease implementation in 2020. As noted previously, Land Bank suffered a liquidity crisis in early 2020 following its credit rating downgrade and its resulting in Land Bank not being able to refinance some of its liabilities. This in turn led to the Land Bank defaulting on its commercial credit obligations and suspending origination of new lending to its customers. While the proximate factor in the credit rating downgrade was worsening market conditions and tightening of government’s fiscal space leading to a concern about the government’s capacity to support the bank, other factors included the delay in appointment of a Chief Executive Officer and Land Bank’s worsening NPLs. 8The project restructuring agreed to after the 2019 MTR envisaged including these channels under the project, but these plans could not be implemented since this project restructuring did not happen due the liquidity crisis and the default that followed in 2020. Page 18 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME A. QUALITY OF MONITORING AND EVALUATION (M&E) M&E Design 44. The theory of change behind the design of the M&E for the project was clear, with a straightforward PDO and four PDO indicators defined to measure progress towards achieving the PDO. The design of the project indicated that Land Bank will monitor and evaluate progress against the proposed indicators through regular reports and report on the PDO and intermediate indicators on a semi-annual basis. The ICR identified some gaps in the results framework, including related to the PDO indicators on the number of beneficiaries. The target of 1,100 is relatively low considering the project size and there was lack of clarity as to how the beneficiaries are defined. The PDO suggests that the project’s beneficiaries were intended to be primarily black small-scale and medium scale farmers, but the definition provided in the results framework included jobs created in the farming enterprises financed under the project. In addition, a dedicated project implementing unit within Land Bank that would have responsibility for implementation of the M&E framework would have been preferable and would have strengthened the project design. M&E Implementation 45. Since very little project funds were disbursed and there were only two sub-loans, the implementation of the M&E framework was limited. Land Bank provided the information included as part of the M&E design in the early implementation phase of the project through formal reports and in later period before its liquidity crisis through responses to World Bank data requests. There was no formal reporting in 2020 following the suspension of project activities although Land Bank continued to respond to World Bank data and information requests. M&E Utilization 46. As there were only two sub-loans totaling slightly more than US$8 million, the actual project specific reporting and utilization of the M&E information on project design was minimal. Justification of Overall Rating of Quality of M&E 47. The overall rating for the quality of the M&E design, and its implementation and utilization is rated as Moderate. Even though utilization of the systems was limited due to the limited implementation of the project, the design and implementation of the systems was mostly robust, with some minor gaps. Page 19 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE 48. The project was classified as FI-2, in line with OP/BP 4.03 World Bank’s Performance Standards for the Private Sector Projects, implying that the environmental and social risks and impacts generated from implementing the sub-loans are moderate. Prior to project effectiveness, Land Bank was to put in place an environmental and social management system consistent with the World Bank performance standards. The World Bank delivered three training modules in 2017 and 2018 to build the capacity of Land Bank environment and social safeguards officers, credit officers and senior management on environmental and social risk assessment and management. The training also aimed at creating awareness to Senior Management on the importance of achieving sustainability in Land Bank operations. Land Bank further committed resources to this effort and employed a senior manager and two environmental specialists under its Agriculture Advisory Department to operationalize the Land Bank’s ESMS. The World Bank team also undertook a gap analysis of Land Bank ESMS and provided training sessions. Following Land Bank upgrading its ESMS, it was approved by the World Bank in 2018. The two sub-loans under the direct lending window were approved in compliance with Land Bank’s ESMS system. 49. PFIs were also required to use procedures included in the Environmental and Social Operational Manual in reviewing and appraising the sub-loans, and to inform the beneficiaries of environmental and social requirements for sub-loan appraisal, so that the subprojects can be implemented in an environmentally and socially sound manner. The procedures and requirements were to incorporate the Republic of South Africa regulatory requirements for environmental management and the World Bank’s Performance Standards for Private Sector (OP 4.03). Land Bank commenced the roll-out of ESMS for the PFIs, including assessing current environmental and social systems capacity. Based on the assessments, Land Bank prepared a summary gap analysis and remediation and implementation plan for each PFI. ESMS tools inclusive of templates were prepared and provided to PFIs for implementation and in addition to the ESMS tool, Land Bank provided capacity training to the PFIs. Although none of the ESMSs of the PFIs were approved, Land Bank completed a Gap analysis for five intermediaries and agreed on action plans with two intermediaries. The gap analysis showed that institutional E&S risk management capacities are generally absent in the intermediaries and that these capacities and structures would need to be established. The effort needed to implement an appropriate ESMS system in the PFIs was much more significant (mainly from a resource perspective) and time consuming than envisaged during the preparation of the project. Since no PFI ESMSs were approved and no wholesale lending was disbursed, there is no ability to measure compliance of the PFIs. 50. Findings from the Fiduciary compliance demonstrate consistent application of the project financial management reporting protocols. Land Bank’s Systems Applications & Products accounting system provided the required reports for monitoring the financial aspects of the project. The annual financial reports were audited by the Auditor General in accordance with international standards on auditing promulgated by the International Federation of Accountants and audit reports were submitted to the World Bank in a timely manner. Page 20 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) C. BANK PERFORMANCE Quality at Entry 51. Although significant effort was made in the preparation and appraisal of the operation, there were gaps in the project design. First, the project appraisal determined that there was a commitment to implement a strategy at Land Bank that was in line with the project objectives and a key element of the strategy involved an increase in wholesale lending to reach small-scale farmers. However, the viability of the wholesale financing model was not fully tested during project appraisal. Second, the environmental and social review also failed to appreciate the resources and time needed to implement an upgraded ESMS system at both Land Bank and the PFIs, which led to delays in project implementation. Third, the World Bank’s assessment of the Land Bank as documented in the PAD did not sufficiently recognize the risks arising from it not having access to supervision reports from an independent financial supervisor9. And, lastly, the lack of a technical assistance component and a dedicated project implementing unit also delayed the implementation of the project, and should have been included in the project design. However, it is important to note that the team preparing the project did recommend that a technical assistance component be included in the project, but Land Bank preferred to utilize other resources rather than including the needed technical assistance in the project. 52. The project design failed to properly test the viability of the new wholesale lending model that was being funded as part of the project. This wholesale funding model was to be based at interest rates that did not include all of the subsidies that had previously been included using grant funding available from DALRRD and used by intermediaries to provide non-financial services to small-scale farmers. This new model assumed that these vital services would be provided by the financial intermediaries who would include the cost in the interest rate or would be able to finance these services from other sources. However, Land Bank was unable to secure resources from other sources to provide these subsidies and hence there was little appetite for this product. The lack of having a co-TTL from the Agriculture GP, which could have helped ensure a more active involvement of the Agriculture GP in the project design development, contributed to this key project design flaw. 53. The project design did not accurately assess the risks and put in place appropriate mitigants. The project risk rating was listed as moderate, but there were substantial risks that were not properly identified or mitigated against. These include the risks related to implementing new products, the risks related to the financial supervision of Land Bank, and the complexity of the agriculture finance market in South Africa. Quality of Supervision 54. The World Bank spent significant resources in supervising the project but did not identify early enough the flaws in the project design and the financial risks associated with Land Bank’s business model. A multidisciplinary Task Team provided close and continuous implementation support. There were two main TTLs and this relative stability in the task leadership helped in the implementation of the project, particularly efforts to restructure the project following the MTR and support Land Bank’s efforts to agree on debt- restructuring with its lenders following its default to commercial lenders. The project included one co-TTL from the FCI GP during preparation and approval, and a co-TTL each from the Agriculture GP was added during project implementation. One of the FCI co-TTLs and the Agriculture GP co-TTL were based in South Africa. The 9 However, it is important to note that the team preparing the project did engage with SARB and the National Treasury about supporting improvements in the supervisory framework for Land Bank. Page 21 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) co-TTL from the Agriculture GP co-led the project’s MTR in 2019 and made significant contributions to the design of the restructuring that was agreed with the Borrower. Although the restructuring did not go forward, the close collaboration between global practices strengthened the supervision and implementation support for the project, and if there was no suspension of project implementation in 2020, could have played a key role in supporting effective project implementation, particularly in strengthening synergies between Land Bank and DALRRD. The Borrower highlighted the quality and value of implementation support for the ESMS and its impact on the project and Land Bank overall. The team completed 8 implementation support missions (ISM), including MTR in 2019 and a virtual implementation support mission in 2021. 55. The support provided during ISMs and the MTR was of high quality, and performance ratings reported through Implementation Status and Results Reports (ISR) reflect a high level of candor. The ISM and MTR aide-memoires identified key issues critical to speeding up project implementation and enhancing development impact. Due to delays in project implementation, task-team downgraded PDO rating from Satisfactory to Moderately Satisfactory in March 2019, further downgraded it to Moderately Unsatisfactory in September 2019, and following project implementation being suspended in mid-2020 further downgraded it to Unsatisfactory in December 2020. The project risk rating was increased from Moderate to Substantial in September 2019 and High in December 2020. 56. In addition to the ISMs and the MTR, the World Bank also prepared and delivered an Agriculture Finance Diagnostic during the implementation phase of the project. The Diagnostic assessed key opportunities and constraints to the development of agriculture finance market in South Africa and made recommendations for the main public and private stakeholders to address these constraints. The diagnostic was aimed at supporting policy and market actions to enhance access to and use of suitable, competitive, and sustainable financial services by agriculture sector clients, particularly black small and medium scale farmers. In taking a market-wide and policy perspective to agriculture finance, the diagnostic complimented the project that was focused on the Land Bank. 57. However, the World Bank did not identify early enough the increasing risks to Land Bank business model during supervision. Although there were significant resources allocated to supervising the project, the issues related to the viability of the wholesale financing strategy and risks associated with the agent-originated financing was not identified early enough. In addition, the supervision did not identify the financial risks that were increasing and initially resulted in a credit rating downgrade and was followed by a liquidity crisis and default. Additional resources and expertise focused on the risks of Land Bank financial and business model could have potentially helped to support Land Bank in implementing needed reforms prior to the default in 2020. 58. The World Bank provided significant support to Land Bank after it faced financial difficulty in 2020. As previously discussed, although project activities ceased from mid- 2020, the World Bank, both Country Management and the Task Management Team demonstrated significant commitment to supporting the counterparts that went beyond the project objective and continues to do this at the time of writing this ICR six months after project closing. The World Bank Country Director led the World Bank’s engagements with the Minister of Finance, the Minister of Agriculture, National Treasury officials, and Land Bank’s board, supported by one of her senior advisers with extensive experience in supporting restructuring in state-owned banks. This included reviewing business model options for Land Bank. The World Bank also coordinated its support with MIGA, which has also continued to remain engaged with the National Treasury and Land Bank in the efforts to help restructure Land Bank. Page 22 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) Justification of Overall Rating of Bank Performance 59. Overall, the ICR rates World Bank performance over the entire life-span as Moderately Unsatisfactory. This is primarily due to the issue related to project design and assessment of project risks, as well as the inability to identify early enough the risks that were increasing during supervision. D. RISK TO DEVELOPMENT OUTCOME 60. Although the development outcomes are limited due to only two sub-projects being financed, the continuing uncertainty relating to Land Bank’s financial status create significant risks to the limited development outcome achieved. Land Bank has played and can continue to play an important and significant role in agricultural and rural development, including through job creation in rural areas. The project was designed to support an important institution but there are significant risks arising from Land Bank’s default situation remaining unresolved. The World Bank continues to play an active role in supporting the Government of South African and Land Bank, and has committed to doing so going forward to minimize this risk to the development outcomes of the project. In addition, there are also risks that emanate from the NPL status of the larger of the two sub-loans financed under the credit line that has generated the majority of the jobs under the project. V. LESSONS AND RECOMMENDATIONS 61. There are six recommendations based on the lessons from this project to support similar operations in the future. These are related to: 1. including components related to technical assistance and operating expenses; 2. recognizing risks arising from financing DFIs that are not supervised by a specialized financial supervisor and including support for appropriate supervision of DFIs as part of the project design; 3. ensuring that replacing subsidized lending instruments with ones that are market based is carefully studied to ensure that the instrument is viable and there is sufficient demand; 4. including co-TTLs from both the relevant sector as well as FCI GP for credit line projects that focus on specific sectors and ensuring that the relevant ministry is included in the project implementation arrangement; 5. recognizing better the risks to project arising from financing implementing entities that have commercial borrowings; and 6. refining policies for local currency swaps in the case of delayed payments to the World Bank by the Borrower. 62. Lines of credit that involve new products or strategic changes within the implementing entity would benefit from components that provide resources to support these changes. The project envisaged significant changes in the strategy and product offerings at Land Bank, but there were no project resources allocated to supporting these changes. The team did consider and recommend this during the design of the project, but agreement could not be reached and the team was assured that Land Bank would utilized donor funds to meet the technical assistance needs. Future projects that involve similar changes in strategy or product offerings should consider including a component to support needed technical assistance. Similar projects Page 23 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) should also consider allocating resources for project implementation, as this would have led to improvements in the implementation of this project. This could even be a small component and if the funds were not fully utilized, the resources could be reallocated to another component. Technical assistance resources would have also supported the needed capacity building of ESMS systems for PFIs. 63. World Bank projects that support DFIs that are not adequately supervised should address this as part of the project or prior to project approval. The World Bank project preparation team accurately identified that there were gaps in the institutional and legal framework for supervising DFIs, including Land Bank, in South Africa. In similar circumstances, it would be prudent to delay approval of the project until improvements are made or support to make the needed changes are included as part of the project. Improvements that could be made in the South African context include, in the short-term, National Treasury’s financial sector policy division having a role in providing oversight over national DFIs, and in the medium- term, SARB taking on the role of prudential supervision of these entities. 64. The World Bank should ensure that replacing subsidized lending instruments with ones that move towards full cost recovery is carefully studied to ensure that lending without subsidies are viable. Subsidized lending tends to distort financial markets, and the project correctly supported moving towards a model where all associated costs are included in the loan pricing. However, in this case the subsidized lending was indirectly financing the cost of providing agricultural advisory and market access services using a grant from the Department of Agriculture, Forestry and Fisheries (DAFF).10 There was not enough analysis done in the project design phase to assess whether there would be demand for wholesale lending at higher than previously provided rates and how these services would continue to be financed during the project period with a lower subsidy. Early on during project implementation, the DAFF grant that supported the subsidized wholesale financing was exhausted and was not renewed. As a result, Land Bank decided to wind-down the subsidized lending product but faced challenges in generating sufficient demand for a replacement that did not include the subsidy. This scenario could potentially have been avoided if more detailed market analysis was done during project preparation jointly with the Agriculture GP and the DAFF. 65. For credit line projects that focus on specific sectors, it is important to include a co-TTL from both the relevant sector and FCI GP as well as have the relevant ministry involved in the project implementation arrangement. Having a co-TTL from the Agriculture GP may help avoid some of the design flaws that hindered the project implementation. A similar issue also seems to have been there at the borrower level since the project implementation arrangements did not have any role for the DAFF. Having the DAFF as part of a steering committee responsible for guiding project implementation may have helped address some of the challenges the project faced in scaling up financing, particularly under the wholesale window. 66. Providing financing to entities that depend significantly on commercial borrowings exposes the project implementation to significant risks that are extraneous to the project. As previously discussed, the Land Bank’s liquidity crisis leading to its eventual default was initially triggered by a downgrade in Land Bank’s credit rating and its inability to roll-over its borrowings and/or access sufficient bridge-financing. A key driver of the downgrade was the rater’s assessment on the capacity of the sovereign to support the Land Bank, which was fully extraneous to the project. Further, the sovereign does not have a bridge financing instrument to support its state-owned enterprises and its guarantees were not sufficient for Land Bank to access sufficient bridge financing from the market. A key factor driving the continuing challenges in the resolution of the default status is due to South Africa not having an established framework for resolving state-owned financing institutions. All of these factors become critical because of Land Bank’s significant dependence on commercial borrowings. Future World Bank operations that are considering lending to entities with similar borrowing 10 Currently the DALRRD. Page 24 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) profiles such as the Land Bank need to recognize better the risks arising out of carrying a small share of the credit exposure in an institution with much larger commercial exposure 67. There are gaps that were identified in the World Bank’s management of local c urrency swaps as part of the project implementation that should be reviewed. The project involved disbursing in local currency and the World Bank was responsible for implementing the local currency swap. However, when Land Bank missed making a payment this posed a financial risk to the World Bank since it was required to meet the currency swap obligations. While in the case of non-payments by the Land Bank, the World Bank was able to meet its swap obligations because of the relatively small amounts and because the Borrower provided the World Bank with some advance notification, in other cases where the amounts are larger this may be an issue. . . Page 25 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS A. RESULTS INDICATORS A.1 PDO Indicators Objective/Outcome: PDO is to sustainably scale up Land Bank’s financing, specifically to benefit emerging farmers Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Volume of wholesale loans Amount(USD) 0.00 65,100,000.00 0.00 disbursed under the project (minimum) 31-Oct-2016 31-Mar-2022 31-Mar-2022 Comments (achievements against targets): There was no achievement under the wholesale financing window since Land Bank decided to wind down its wholesale financing facility after the project was approved. The plan to restructure the windows as indirect lending to also include agent originated lending and special purpose vehicles, which was agreed on during the mid-term review in 2019, could not be implemented due to Land Bank moving into default status in April 2020. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Volume of direct value chain Amount(USD) 0.00 27,900,000.00 8,022,250.00 loans disbursed under the project (minimum) 31-Oct-2016 31-Mar-2022 31-Mar-2022 Page 26 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) Comments (achievements against targets): The achievement is from two sub-loans that utilized WB financing for a total of R123 million. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Total NPL rate under the line Percentage 0.00 10.00 73.00 of credit (maximum) 31-Oct-2016 31-Mar-2022 31-Mar-2022 Comments (achievements against targets): The NPL under the credit line is higher than that for Land Bank's overall loan book since it is an average of the risk classification of just two sub-loans that utilized WB financing. Of these two, one utilized R90 million and the other R33 million, and the former is in non-performing status. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Direct project beneficiaries Number 0.00 1,100.00 350.00 (minimum) 31-Oct-2016 31-Mar-2022 31-Mar-2022 Comments (achievements against targets): Bulk of the direct project beneficiaries are workers under one of the sub-projects that utilized WB financing. This project estimates 1444 new jobs that provide employment for 10 months in a year, 62% of who are women. These jobs are however at risk due to ongoing challenges being faced by the project following Covid (increased freight rates for produce exports), extreme weather variations related to climate change, and financial challenges faced by Land Page 27 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) Bank. The ICR attributes 22.5% of the jobs created from this sub-project and 50% of jobs from the second sub-project to the World Bank Project, in proportion to the World Bank financing utilized for these sub-projects. A.2 Intermediate Results Indicators Component: Line of Credit for Agricultural Financing Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Increase in outstanding loan Percentage 37,796,688,000.00 48.00 0.00 portfolio of Land Bank (minimum) 31-Dec-2015 31-Mar-2022 31-Mar-2022 Increase in CB outstanding Percentage 31,607,333,000.00 48.00 0.00 loan portfolio (minimum) 31-Dec-2015 31-Mar-2022 31-Mar-2022 Increase in REM Percentage 489,051,000.00 150.00 0.00 outstanding loan portfolio (minimum) 31-Dec-2015 31-Mar-2022 31-Mar-2022 Comments (achievements against targets): The original targets were a 1.5% increase in year 1, and 10% increase annually from year 2 to Year 5. This translates to a cumulative target of 48% over five years. Land Bank's outstanding loan portfolio grew from the baseline to R45.2 billion in March 2020 but started contracting following Land Bank defaulting to its commercial lenders in April 2020, new customer lending being suspended, and collections being used to primarily pay creditors. The situation remaining unresolved at the time of project closing and Land Bank's gross loan book had contracted to R 25.9 million Page 28 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Land Bank liabilities that are Percentage 31.00 40.00 58.00 long-term (over 1 year) (minimum) 31-Dec-2015 31-Mar-2022 31-Mar-2020 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Return on Average Equity Percentage 6.78 6.78 42.70 (minimum) 31-Dec-2015 31-Mar-2022 31-Mar-2022 Comments (achievements against targets): The high ROE is misleading since it is caused by Land Bank reporting a large profit for the year driven primarily due to release of impairment charges of R 1.3 billion but its equity having reduced significantly over the past three years due to accumulated losses. Land Bank reported a profit of R1.5 billion in FY2022 following three years of cumulative losses of R4.4 billion. Its equity for FY 2022 was R 3.98 billion and that for FY2021 was R 2.59 billion. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Return on Average Assets Percentage 1.12 1.12 3.80 (minimum) 31-Dec-2015 31-Mar-2022 31-Mar-2021 Page 29 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) Comments (achievements against targets): The high ROA is misleading since it is caused by Land Bank reporting a large profit for the year driven primarily due to release of impairment charges of R 1.3 billion but its assets having reduced significantly over the past three years due to contracting loan book. Land Bank reported a profit of R1.44 billion in FY2022 following three years of cumulative losses of R4.4 billion. Its assets for FY 2022 was R 40.2 billion and that for FY2021 was R 34.7 billion. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Total NPL rate for Land Bank Percentage 3.72 10.00 47.70 (maximum) 31-Dec-2015 31-Mar-2022 31-Mar-2022 Comments (achievements against targets): Land Bank's continued default status resulting in a contracting performing book has contributed to rapid growth in proportion of NPLs from 23% in March 2020 to 47.7% in March 2022. Page 30 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) B. KEY OUTPUTS BY COMPONENT Objective/Outcome 1: To sustainably scale up Land Bank’s financing, specifically to benefit emerging farmers 1. Volume of wholesale loans disbursed under the project 2. Volume of direct value chain loans disbursed under the project Outcome Indicators 3. Number of direct project beneficiaries 4. Total NPL rate under the credit line 1. Increase in outstanding loan portfolio of Land Bank (minimum) 2. Increase in CB outstanding loan portfolio of Land Bank (minimum) 3. Increase in REM outstanding loan portfolio of Land Bank (minimum) 4. Total NPL rate for Land Bank (maximum) Intermediate Results Indicators 5. Land Bank liabilities that are long-term (over 1 year) (minimum) 6. Return on Average Equity (minimum) 7. Return on Average Assets (minimum) 1. Land Bank utilized US$8 million to finance two sub-projects that created approximately 1,400 jobs. Key Outputs by Component 2. The project supported 350 beneficiaries in in the form of new jobs at the two sub-projects that were (linked to the achievement of the financed. Objective/Outcome 1) Page 31 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION A. TASK TEAM MEMBERS Name Role Preparation Uzma Khalil, Birgitte Gunhild Berg Task Team Leaders Chitambala John Sikazwe Procurement Specialist Tandile Gugu Zizile Msiwa Financial Management Specialist Ayanda Mokgolo Team Member Elizabeth Chacko Team Member Maria Eileen Pagura Team Member Dorothe Singer Team Member Christiaan Johannes Nieuwoudt Team Member Jemima Harlley Team Member Kisa Mfalila Social Specialist Edith Ruguru Mwenda Counsel Paula F. Lytle Social Specialist Ioannis John Balafoutis Team Member Magalie Pradel Team Member Lalit Raina Team Member David J. Nielson Team Member Supervision/ICR Ajai Nair, Peter Goodman, Barry Patrick Maher Task Team Leaders George Daniel, Chitambala John Sikazwe Procurement Specialists Tandile Gugu Zizile Msiwa Financial Management Specialist Andrea Vasquez-Sanchez Team Member James Seward Team Member Jean Okolla Owino Team Member Christiaan Johannes Nieuwoudt Team Member Jorge Luis Alva-Luperdi Team Member Sandra M Kuwaza Team Member Mmaserole Magdeline Mabuela Team Member Erika Ella Auer Social Specialist Danilo Queiroz Palermo Team Member Johanna Martina Whitfield Environmental Specialist Page 32 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) B. STAFF TIME AND COST Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation FY14 9.405 60,049.98 FY15 53.602 294,167.07 FY16 21.729 102,199.59 FY17 10.275 35,443.75 FY18 1.547 4,417.05 FY19 .275 792.99 Total 96.83 497,070.43 Supervision/ICR FY14 .777 1,722.94 FY15 2.460 5,451.36 FY17 11.738 65,811.38 FY18 16.425 140,157.11 FY19 24.440 179,621.26 FY20 36.153 262,102.88 FY21 32.817 204,986.84 FY22 19.397 132,714.61 FY23 10.150 79,720.76 Total 154.36 1,072,289.14 Page 33 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) ANNEX 3. PROJECT COST BY COMPONENT Amount at Approval Actual at Project Percentage of Approval Components (US$M) Closing (US$M) (US$M) Line of Credit for Agricultural 93.00 8.02 8.6 Financing Total 93.00 8.02 8.6 Page 34 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) ANNEX 4. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS 1. Introduction The World Bank financial intermediary loan to Land Bank was a strategic funding line for Land Bank in its quest to increase its development effectiveness through the provision of finance to emerging farmers (small and medium scale Black farmers), and to improve the Bank’s liability profile through procuring long term funding facilities as was the case with this loan from the World Bank. 2. Loan facility and its construct 2.1. The facility of $93m was designed for Land Bank to primarily offer funding to wholesale counterparties who would on-lend to emerging farmers, as well as to secondarily provide direct lending to individual emerging farmers. Indirect lending through the Bank’s Service Level Agreement partners was not included. 2.2. The value proposition to the emerging farmers was to offer affordable finance, as well as pre- and post-financing services to reduce the risk of entrepreneurial failure and potential non-performing loans. 2.2.1. Affordable finance would be offered by Land Bank’s Wholesale Financing Facility (WFF) product in which the World Bank facility (which was unfortunately not priced on a concessionary basis) would be complemented by the Department of Agriculture’s grant funding to subsidise interest rates for the clients and the Wholesale Finance counterparty in order for the counterparty to provide pre- and post-finance support to its borrowers. 2.2.2. Amongst other pre- and post-finance support services the Wholesale Finance counterparty would provide project preparatory support and business planning, technical support, as well as facilitation of market access. 2.3. A key requirement by the World Bank was the implementation of the environmental and social governance framework in line with the objective to ensure responsible banking practices by borrowers of the World Bank. 2.4. The negotiations for the loan facility by Land Bank was undertaken through the Bank’s Head of Treasury and the CFO, and did not include inputs from the Bank’s lending business units. This resulted in the challenges and gaps on the construct of the facility that would have been avoided if all useful inputs were obtained at the time of concluding the facility agreement. For example: 2.4.1. The exclusion of Service Level Agreement (SLA) intermediary model for the utilisation of this loan facility was a significant omission during the conclusion of the facility agreement, which also impacted on the performance of the project. The Bank had begun a process to set development and transformation targets for SLA intermediaries where this loan facility would have complemented this development and transformation initiative. The inclusion of the SLA’s was negotiated during the project restructure discussion with the World Bank and was in the process of being included as an approved delivery channel but was not implemented due to the default Page 35 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) 2.4.2. Some of the development and transformation Special Purpose Vehicle programmes with commodity organisations and strategic partners were not included in the target segment. 3. Performance 3.1. The project development objectives or key performance indicators were not achieved. 3.1.1. By the time the Bank stopped lending to new clients due to the debt default status that it experienced from April 2020 to date, the Bank had utilized an amount of $8m of the $93m loan facility. 3.1.2. The objective on the number of beneficiaries was not achieved, with 350 of the target of 1,100 recorded. 3.1.3. The project development objective on the quality of the financed portfolio from this facility was also not met – with only two counterparties funded in the project and one being a non- performing loan the percentage target of <10% was not met. 3.2. Key contributors to the level of performance includes the following: 3.2.1. The withdrawal of the grant from the Department of Agriculture to subsidise interest rates through the WFF programme also led to the wind down of the WFF book, and a cessation of the origination of new transactions. 3.2.2. The exclusion of the SLA intermediaries in the utilisation of the loan facility contributed to the slow start in the origination of transactions. It is notable however, that the SLA intermediary model has since been abandoned, with almost all the SLA intermediary arrangements being terminated, and the portfolios originated through these intermediaries insourced. 3.2.3. Delays were experienced in the implementation of the required environmental and social action plans consistent with the World Bank performance standards. 3.2.4. The Bank’s default status in April 2020 resulted in the halting of all new lending activities until the Bank would cure its default status. 4. Conclusion Land Bank values the relationship it has established with the World Bank, and appreciates the support it has received as a borrower of the World Bank. Land Bank has learned lessons from the experience of this project funding that should ensure that future funding arrangements are managed more efficiently. The establishment of Land Bank’s Partnership Funds Management Unit, whose focus is ensuring that the funds procured for specific programmes are appropriately managed and executed across the business in support of the Bank’s Treasury Department, will improve the management of these kinds of funding opportunities going forward. Land Bank and World Bank have complementary developmental objectives which should be leveraged upon in future. Land Bank is therefore desirous to explore future borrowing opportunities once it is in a position to raise funding again. Page 36 of 37 The World Bank Land Bank Financial Intermediation Project (P150008) ANNEX 5. SUPPORTING DOCUMENTS • World Bank. 2016. South Africa - Land Bank Financial Intermediation Loan Project. Washington, D.C. : World Bank Group. https://documentsinternal.worldbank.org/search/27085272 • Mwenda,Edith Ruguru.2017. Official Documents- Loan Agreement for Loan 8686-ZA (Closing Package). https://documentsinternal.worldbank.org/search/27767188 • Mwenda,Edith Ruguru.2017. Official Documents- Guarantee Agreement for Loan 8686-ZA (Closing Package). https://documentsinternal.worldbank.org/search/27767185 • Nair,Ajai.2021. Disclosable Restructuring Paper - Land Bank Financial Intermediation Project - P150008. https://documentsinternal.worldbank.org/search/33687806 • Msiwa,Tandile Gugu Zizile.2021. Land Bank FY2020 Audited AFS.pdf. Washington, D.C. : World Bank Group. https://documentsinternal.worldbank.org/search/32866512 • Msiwa,Tandile Gugu Zizile.2019. Land Bank AFS FY2019. Washington, D.C. : World Bank Group. https://documentsinternal.worldbank.org/search/31514099 • ISRs sequences # 1-8 Page 37 of 37