/ 21 July 2017

One way to solve the land deadlock

Amicable solution: In the Philippines
Amicable solution: In the Philippines

The South African land debate is locked between what appear to be two intractable poles — expropriation without compensation versus land reform premised on the right of the current owners to fair value for their property.

But it doesn’t need to be. There is an alternative. And the alternative deals with the problem of how farmers who acquire land — by whatever means — are kept afloat after they become landowners.

Debt is a reality for many farmers. Agricultural economist Wandile Sihlobo has repeatedly tweeted about the extent of total farm debt in South Africa — estimated to be more than R160-billion at the end of 2016, a drought-related record.

By contrast, the total budget allocated to both the departments of rural development and land reform, and agriculture, forestry and fisheries is some R26-billion for 2017-2018 — not even 20% of total farm debt. Farm debt is the measure of borrowings for capital acquisition (property, plant and equipment) and working capital — having enough cash to fund your farming operation to make it to the next harvest cycle.

There is also another layer of farm debt, where co-ops and corporates extend grower loans and subsidies to the farmers within their supply chains. These are often revolving facilities, and secured against standing crops or mill-delivery schedules. These and other such arrangements extend farm debt beyond what appears in the normal ledger that measures these things.

Here is the rub: any new state-led acquisition process that deviates from market value as a base — that is based on the principle of no compensation — will have implications for the amount of commercial debt available to farmers. Put simply, expropriation without compensation means that farmers will have access to less money — inadequate amounts of money — to fund farms and farming developments.

At the moment banks use a risk model that uses a percentage of total asset value to limit the extent of their liability. What this means is that any change to the market value of land assets reduces the pool of money that is available for farmers to borrow.

In a world of expropriation without compensation, farmers would find themselves at the door of the treasury looking for a top-up to compensate for the reduced pool of commercial loans. They are unlikely to have much luck.

Even before the knocking on the door begins, government-funded institutions such as the Land Bank and the department of rural development do not appear to be available to step into the breach.

The Land Bank had a net loan position of only R36-billion for 2016 — representing 22% of total farm debt — and has only recently started seeing the fruits of their turnaround strategy.

The department of rural development and land reform, on the other hand, has such a small budget for grants and support it would barely make a difference to the overall equation.

It is unlikely then that we will be able to mobilise adequate funding for our farmers from the balance sheet of SA Inc. This means we will land up with an agricultural sector that is undercapitalised — which means it will be unable to fund operations and pay creditors. That, in turn, will beget disruption to the production of food, which, in turn, will lead to rural instability and the inability of the country to feed itself — also known as food insecurity.

Where else could we go?

Our land reform efforts have been placed firmly inside both the state regulatory framework and the state resource pool. State money and capacity are significant constraints — useful fuel for those agitating for a world of expropriation without compensation.

There is another way. It is this: a new fast track for projects that work within the state regulatory framework but outside of the state resource pool. This is how it would work: farmers would be asked to put their heads together to come up with a (proverbial) plan — with the clear stipulation that there is no recourse to state funds.

All funding for the acquisition of land rights, equity or equipment would be sourced from commercial sources, and be based on a project business plan submitted to the lender. The role of the state would be limited to confirming that a deal had been agreed to that met the requirements of our national land reform programme. All implementation capacity and working capital should be sourced and delivered outside of state programmes.

Other countries have tried this, and it has worked. The Philippines, for example, introduced a voluntary land transfer programme as part of their national land reform agenda. There, a landowner and project beneficiary would strike a deal, with the role of the state limited to ratifying that deal. The land could then be transferred directly from landowner to beneficiary.

The voluntary land transfer programme would have defined periods for landowners and beneficiaries to do their deals, with the rider that not doing a deal would then mean expropriation or compulsory settlement at a later stage.

Having the ability to strike a deal with a defined beneficiary or beneficiary group would allow our farmers to take proactive steps towards removing the uncertainties that have hindered investment into our agricultural sector.

A voluntary settlement framework would also allow state resources to be directed to priority areas or to be targeted at landowners reluctant to commit to constitutional land reform.

A key and effective suggestion would be to divert existing budgets into resurrecting extension services across the country, giving projects access to advice and know-how instead of boreholes that are neglected once the pump runs out of diesel.

There are challenges. The two biggest are governance that dogs communal property institutions and the preference for financial compensation over the awarding of land title.

As far as communal property governance goes, the discipline imposed by lenders for a commercially funded land-reform transaction would be welcomed by almost all stakeholders, save those who thrive in murky water. This can only be good for the agriculture sector, because a well-managed and governed environment will be attractive to investors and lenders alike.

The issue of preference for financial compensation may also be an opportunity, because careful handling of this political hot potato may give us a clearer picture of the young people who will drive the next generation of agriculture forward. In a world of open doors, it might actually be possible for a young person to partner with a commercial farmer and to be able to do so with an equity stake in the operation funded by a bank.

At the very least, we need to extend our national discussion beyond the fixation with acquisition of land rights to include the question of what comes next. This means having some frank discussions about where the money comes from. Not just right now, but also for when we decide to disrupt a market-value-led system.

James Rycroft is an independent land reform consultant based in Johannesburg. These are his own views