Precious resource: Agriculture makes up only 2.5% of South Africa’s gross domestic product
COMMENT
At the ANC’s 54th national conference in December, it was announced that a decision had been taken to speed up land reform by pursuing expropriation without compensation, provided that it is sustainable and does not harm the agricultural sector or the economy.
No formal paper has been released outlining the manner in which this will be implemented but there are several ways this could be done, although all will have serious economic and legal consequences.
If the Constitution is amended to allow for the expropriation of land without compensation, it may be permissible not to compensate owners for land that was acquired as a result of racially discriminating laws or practices in the past. But some compensation will still need to be paid for relocation costs, machinery (if the land is acquired as a going concern) and other incidentals, even if it is less than market value.
The wording of the Constitution does allow for discounted compensation to be paid where it is in the public interest. It refers to finding a just and equitable balance between the public interest and the interests of those who are affected.
Agriculture makes up only 2.5% of South Africa’s gross domestic product but when the upstream (input supplies of fertiliser, seed, feed, animal and plant health industries) and downstream (food processing, distribution, transport and storage, trade industries) food chains are added, this comes to close to 7%, which makes it a large part of the total economy.
If there is a programme of mass expropriation, it will result in a protracted period in which there will be no net new investment in agriculture, which means no growth in agricultural output and no growth in the agribusiness sector. This is because commercial farmers, regardless of race, whose land has not yet been expropriated, will be unlikely to start new investments, and new farmers will not have the means to do so.
The agri-industrial complex is more labour-intensive than most other industries. On average, primary agriculture employs 4.5 additional workers for every R1-million in capital invested (compared with 2.94 for the economy as a whole), and the food processing industry is the most labour-intensive component of the manufacturing sector.
Overall, growth in employment can only happen because of growth in investment. Therefore, it could be argued that radical land reform will lead to a decline in employment.
One of the biggest risks with any form of expropriation without compensation would be the effect it has on general prices in the economy. All prices are the result of countless and unknowable interactions between economic agents that result in ever-changing prices that are attached to everything. Land is simply one form of property and it is not practical to differentiate.
Property rights are inherently required to establish capital investment throughout the economy. If one set of property rights is to be affected, the expectation will be that others, or all, might be affected.
Moreover, a modern economy is mainly based on the credit structures of the role players and their risk profiles, and this delivers the yield that is required to compensate for the risks involved. This yield requirement is directly linked to prices.
Therefore, the spillover effects of expropriation will be experienced throughout the economy and will not be limited to agriculture.
Many assets related to land (houses, for example) will respond by also decreasing in value, whereas those that are not affected by the changes will, in turn, need to increase. Foreign assets will gain value, leading to a greater demand for them, which in turn will influence the value of the currency.
Domestic asset classes exposed to the sector, such as banks, will have much of their underlying value destroyed, leading to much less available credit, no matter for which sector. Given the scale of the intervention, it is likely that the effect will be calamitous as capital rushes to adjust.
We have attempted to formulate four scenarios based on two key uncertainties — the economic and the legal consequences.
Self-help (economically and legally bad)
We envisage a situation in which citizens take the law into their own hands, triggered by a lack of clarity about what is meant by political statements such as “taking the land back”. As a result, illegal land occupations escalate, coupled with farm invasions, subsequently making the agricultural sector nonfunctional and unproductive.
Aside from human rights violations becoming commonplace, employment will decline, production will fade and imports will rise, leading to high levels of food insecurity.
Gradual decline (better legally but bad economically)
In this scenario, the ANC, possibly with the assistance of the Economic Freedom Fighters, amends section 25 of the Constitution, paving the way to implement expropriation without compensation.
Land reform still takes place within the ambit of the rule of law. Although no compensation is paid for the land, compensation is still paid for incidentals related to the going concern, as the intention is for the beneficiary to continue with the farming enterprise.
Land acquisitions take place legally and follow a fair administrative procedure — disputes are settled in the courts and no one is evicted without due process.
Illegal land occupation and rights violations are prevented but the protection of property rights is diminished, as is investment in agriculture. This gives rise to the agricultural, financial and agri-processing sectors being the biggest losers in terms of production, exports and employment.
Business-as-usual (mixed legal merits but good economically)
This scenario prioritises the significance of sustaining the agricultural and food system, as well as not harming other sectors of the economy, as stated in the ANC’s decision.
Accordingly, the decision is taken not to amend the Constitution, or to use the existing powers of expropriation, but rather to continue with the current mechanisms of acquiring land for redistribution.
The first step is to conduct a land audit to determine who the owners of the land are, and the amount of land that has been transferred since 1994. The audit will include all social partners such as government, business, labour, traditional authorities and “communities”.
The balance between the significance of distributing land to correct the injustice of past laws and the need to sustain the food system to boost food security and promote inclusivity is skewed slightly towards the latter. This leads to the long-term sustainability of the food sector but in the short term does not meet the demands of those calling for the rapid redistribution of land.
That said, the inclusion of previously disadvantaged individuals in the formal food system remains relatively low, despite a growing amount of land being transferred to previously disadvantaged individuals by government and private sales.
But there are many factors other than land scarcity that sustain the food production system. Access to markets, the availability of financing, infrastructure, training and skills, and access to information are much more regressive to inclusivity than the scarcity of land.
This scenario is aimed primarily at economic sustainability and therefore scores high on the economic scale. From a legal point of view, the merits are mixed. It provides strong protection of property rights and upholds the rule of law but there are differing opinions about the extent to which the current mechanisms as implemented by the government will deliver on the constitutional obligation to foster conditions that enable citizens to gain access to land on an equitable basis.
Hybrid (economically and legally moderately good)
In this scenario, a mix of mechanisms is used to speed up the pace of land reform. A blended financing model and agri-black economic empowerment (agri-BEE) are used to transform productive farmland. Land that is unbonded, unused and uninhabited by the owner is targeted for expropriation to reduce negative economic effects.
As far as productive land is concerned, stakeholders work towards public-private partnerships (PPP) in line with chapter six of the National Development Plan. As it suggests, the identification of transferable farms and beneficiaries takes place at a district level, facilitated by district land reform committees (DLRCs), which were already established in 2015. The PPP models are flexible and can take a several forms, for example:
Farms for sale are identified by the local DLRC and a leading successful farmer. The farmer is appointed as mentor/co-investor to acquire new land with a qualified beneficiary. The beneficiary will only be selected by the farmer-investor (not by the state) to ensure a good working relationship.
In acquiring a farm, the state can contribute 30% of land value in grant money to the beneficiary. Another 30% can be a loan from the Land Bank in the names of the beneficiary and the farmer (50/50), and the 40% remaining is a cash contribution by farmers with a turnover of R3-million a year. The contributing farmers are then exempted from future land reform claims.
The farm can be operated according to the farmer’s existing operation to ensure the success of the redistributed farm.
With regard to the Land Bank loan, a subsidised interest rate is provided and backed by a state guarantee in the spirit of risk sharing.
Aside from the financial models used to acquire land, it is necessary to maintain the rule of law and to ensure that the right to an administratively fair process, access to the courts to resolve disputes and the right not to be evicted without a court order remain respected so that the process does not degenerate into a “land-grab” scenario.
The hybrid approach can be described as moderately good, both legally and economically. Legally it achieves increased access to land, thereby promoting the objectives of section 25 (5) while maintaining the rule of law and respecting fundamental rights.
But much relies on the outcome of the test cases and the extent to which the public interest argument influences the calculation of expropriation with regard to the land targeted for expropriation.
Affluent individuals and companies who bought land for recreational purposes or as investments for future development may suffer economic losses. Land is quickly made available for settlement but substantial investments are still required to make the land usable and habitable.
Ownership of productive agricultural farms is transformed using agri-BEE transactions and PPP funding models, thereby minimising the disruptive effect on production and investment confidence in the sector.
Conclusion
The scenarios are not intended to be recommendations, but simply four possibilities that could arise. They deal primarily with the financial aspects related to acquiring land for redistribution.
But distributing and increasing access to land without addressing the barriers to market access, and input supply constraints coupled with a lack of infrastructure for smallholder and communal farmers, will not lead to production growth. Instead it will exacerbate food insecurity.
This is already at unacceptable levels and could get worse if land is distributed to previously disadvantaged individuals without putting mechanisms in place to increase access to markets, financing, inputs and infrastructure.
This article was written before the State of the Nation address, debate and response. The views expressed in it, adapted from an edited paper, are those of the authors and do not represent an official position of the Agricultural Business Chamber