The World Bank Land Bank Financial Intermediation Project (P150008) REPORT NO.: RES40344 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF LAND BANK FINANCIAL INTERMEDIATION PROJECT APPROVED ON JANUARY 23, 2017 TO LAND AND AGRICULTURAL DEVELOPMENT BANK OF SOUTH AFRICA Finance, Competitiveness And Innovation Eastern And Southern Africa The World Bank Land Bank Financial Intermediation Project (P150008) ABBREVIATIONS AND ACRONYMS ESMS Environmental and Safeguard Management System FIL Financial Intermediary Loan IP Implementation Progress MTR Mid-term Review PDO Project Development Objective WB World Bank ZAR South African Rand Regional Vice President: Hafez M. H. Ghanem Country Director: Marie Francoise Marie-Nelly Regional Director: Asad Alam Practice Manager/Manager: Douglas Pearce Task Team Leader(s): Ajai Nair, Barry Patrick Maher, Peter Goodman The World Bank Land Bank Financial Intermediation Project (P150008) BASIC DATA Product Information Project ID Financing Instrument P150008 Investment Project Financing Original EA Category Current EA Category Financial Intermediary Assessment (F) Financial Intermediary Assessment (F) Approval Date Current Closing Date 23-Jan-2017 01-Apr-2022 Organizations Borrower Responsible Agency Land and Agricultural Development Bank of South Africa Land and Agriculture Development Bank of South 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. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-86860 23-Jan-2017 10-Apr-2017 29-Sep-2017 01-Apr-2022 93.00 26.88 66.12 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Land Bank Financial Intermediation Project (P150008) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status 1. The Land Bank Financial Intermediation Project was approved on January 23, 2017, became effective on September 27, 2017, and is scheduled to close on April 1, 2022. The project is a financial intermediary loan (FIL) and has one component: a Line of Credit (LOC) for agricultural financing valued at US$93 million. The loan is extended to Land Bank as the borrower and implementing agency, with a guarantee of the Republic of South Africa. The project provides both wholesale finance to participating financial intermediaries for on-lending to commercial and emerging farmers (historically disadvantaged small and medium scale farmers) (Window 1) as well as direct financing to support the integration of emerging farmers (historically disadvantaged small and medium scale farmers) in established value chains (Window 2). 2. The project implementation has encountered significant delays. Only US$26.88 million1 (converted at disbursement to ZAR 390 million), amounting to 28.9 percent of the approved loan amount, has been disbursed. The first disbursement of US$6.6 million was made in June 2018 and was fully utilized by December 2019. The second disbursement of US$20.3 million was made in February 2020 but only US$2.2 million has been utilized. The first drawdown and utilization was delayed due to the delays in the rolling out of the updated Environmental and Social Safeguard Management System (ESMS) that met World Bank requirements and slower than expected pace of origination of loans that met the eligibility criteria. The utilization of the second disbursement was put on hold following the Land Bank going into default status with its commercial lenders in April 2020. 3. The project Implementation progress (IP) as well as progress towards achievement of the PDO are rated Unsatisfactory. Due to initial delays in disbursements the PDO and IP ratings were downgraded to “Moderately Unsatisfactory’ from ‘Moderately Satisfactory’ in September 2019. These ratings were further downgraded to ‘Unsatisfactory’ in December 2020 due to lack of implementation progress resulting from Land Bank’s default status. The project risk rating was also increased to ‘High’ in December 2020. Project implementation continued to be on hold in 2021 and hence all the ratings have remained unchanged. 4. The project task team, with the support of the Country management and Global Practice management, has been closely engaged with the efforts of the Land Bank and the National Treasury to resolve Land Bank’s default status. These contributions have been made through the team’s participation in biweekly meetings of the Development Finance Institution lenders convened by the Land Bank, and review inputs on the various documents – strategy and credit presentations, credit models, and audit information that have been shared with lenders. The Country Management has also regularly engaged the National Treasury directly – both through periodic meetings with the leadership of the National Treasury and through written briefs. 5. A virtual Implementation Support Mission was undertaken from May 17 to June 14, 2021 and the management letter and mission aide memoire were issued on June 28, 2021. The mission reiterated the importance of curing of Land Bank’s default status at the earliest, National Treasury clarifying Land Bank’s mandate and funding plan to achieve this mandate, Land Bank developing a viable business model for this mandate, and strengthening of Land Bank’s systems and processes, particularly those related to estimation of Expected Credit Losses, institutional Grievance Redressal Mechanism, corporate governance, and financial supervision. The mission also communicated that the World Bank could consider a restructuring of the project to extend the project closing date to allow for full utilization of the project funds and achievement of the project’s development objective if: (i) default status is cured, 1 Under this project, Land Bank has opted for automatic conversion to local currency at disbursement. The pricing is based on a variable spread over a floating Jibar 3-month rate with interest rate to be paid on quarterly basis. The World Bank Land Bank Financial Intermediation Project (P150008) (ii) clean audits are made available, and (iii) such restructuring is part of a medium-term strategy that is supported by a viable business model. However, these pre pre-conditions have not yet been met. 6. Audits and governance. The Entity is not fully in compliance with the financial management requirements relating to the submission of the Interim Financial Reports (IFR) and audits. The IFR for the quarter ending June 2021 was submitted but that for the quarter ending September 2021 is overdue. The audit report for FY2021, due by end September 2021, is also overdue. The borrower received a Disclaimed Audit Opinion for FY 2020. 7. Legal covenants. The project has no legal covenants. 8. Payments: The borrower was late in making the interest payment that was due on July 1, 2020 and the World Bank requested the Government of South Africa to make this payment in its role as the guarantor. This payment was received before the end of July 2020. The borrower has paid all interest and commitment fee payments that have since fallen due on time. The first principal payment on the loan is due on October 1, 2022. B. Restructuring rationale 9. The borrower requested the cancellation of the undisbursed balance on November 29, 2021. The borrower re-confirmed the request on December 8, 2021 following discussions with the National Treasury. The task team also assesses that it is prudent to cancel the undisbursed balance since the Land Bank has not been able to meet the pre- conditions for an extension of closing date that was set out following the Implementation Support Mission in June 2021. 10. Notwithstanding continued efforts by the Land Bank and the National Treasury, Land Bank’s default status remains unresolved. Land Bank, with the support of its corporate finance and legal advisors, has put forward multiple versions of ‘liability solutions’ as proposals to restructure its commercial debt. The latest version of the solution was shared with lenders in March 2021, and further enhancements were offered in June 2021. Following a R3 billion capital injection in 2020, the National Treasury has committed to making an additional capital injection (R5 billion in FY2021 and R1 billion in each in FY2022 and FY2023) if creditors accept the latest version of the liability solution. The National Treasury has also issued the pre-conditions that need to be met before the capital injection is made and the use conditions that would govern the use of the capital. Land Bank is continuing its discussion with lenders with the objective of getting an agreement with all lenders before January 2022. This would allow sufficient time for National Treasury to make the capital injection before end of the financial year on March 31, 2022. 11. The default status has significantly impacted Land Bank’s operational and financial performance. Customer loan disbursements decreased by over 75 percent in the financial year 2021 (April 2020 to March 2021) compared to the previous financial year. The reduction in disbursement to the development and transformation segment is estimated to be over 90 percent. No new clients were financed during the year. Land Bank’s non-performing loans have also deteriorated steeply, increasing from to 11.4 percent in March 2020 to 30.1 percent in June 2021. While the audited financial report for the financial year 2021 is awaited, the Land Bank is expected to make a significant loss in FY2021. This follows a R2.4 billion loss in FY2020 and a loss of R942 million (restated following the FY2020 audit).2 2 As a group, including its insurance subsidiary, losses were higher in FY2020 at R2.8 billion and lower in FY2019 at R902 million. The World Bank Land Bank Financial Intermediation Project (P150008) II. DESCRIPTION OF PROPOSED CHANGES 12. This restructuring paper introduces four changes: (a) cancellation of the undisbursed balance of $ 66,124,638.88, (b) revisions to the disbursement estimates, (c) changes in disbursement categories, and (d) changes to components and costs, of which the latter three changes are related to cancellation of funds. The full amount of the undisbursed amount is proposed to be cancelled. The revised disbursement estimates indicate that there will be no further disbursements. III. SUMMARY OF CHANGES Changed Not Changed Components and Cost ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Results Framework ✔ Loan Closing Date(s) ✔ Disbursements Arrangements ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ The World Bank Land Bank Financial Intermediation Project (P150008) Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Line of Credit for Agricultural Line of Credit for Agricultural 93.00 Revised 26.87 Financing Financing TOTAL 93.00 26.87 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation BORROWER' S REQUEST IBRD- Disburs USD 93,000,000.00 66,124,638.88 29-Nov-2021 26,875,361.12 FOR 86860-001 ing COUNTRY REASONS IBRD- Disburs USD 0.00 0.00 0.00 86860-002 ing OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-86860-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: Line Credit under the Project 93,000,000.00 8,022,249.52 26,875,361.12 100.00 100.00 The World Bank Land Bank Financial Intermediation Project (P150008) Total 93,000,000.00 8,022,249.52 26,875,361.12 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2017 18,600,000.00 0.00 2018 27,900,000.00 6,598,240.47 2019 18,600,000.00 0.00 2020 18,600,000.00 20,277,120.65 2021 9,300,000.00 0.00 2022 0.00 0.00 .