The cost of seizing land for free

Knock-on effects are catastrophic, as shown in Zimbabwe’s decline

● This week the National Assembly made a landmark decision to review section 25 of the constitution to cater for the principle of land expropriation without compensation.

This is a marked shift in policy, and comes at a time when land reform (through both the state and market) has made more progress than experts and policymakers care to admit.

It is disheartening that the ANC’s amendment to the EFF motion also disregarded the real progress made with land redistribution and restitution.

Ironically, this decision comes at a time when the Zimbabwean government has established a compensation committee under its Land Acquisition Act to allow for dispossessed white former commercial farmers to be compensated for land seized 18 years ago. This raises the question why the ANC and the EFF are taking a position that their revolutionary counterparts across the Limpopo are retreating from.

If the Zimbabwean experience is not sufficient to proffer some fundamental lessons for South Africa, it would be prudent to point out a number of facts that should prompt policymakers to reconsider the December 2017 policy decision.

The Zimbabwean experience tells us that the notion of expropriation without compensation is a bad idea.

The Zimbabweans might have seized the land without compensation 18 years ago, but they collectively paid for it through eight consecutive years of economic decline that led to job losses, deindustrialisation and a loss of agricultural export revenues.

In 2009, economist Eddie Cross estimated the cost of Zimbabwe’s land reform at $20-billion (R237-billion). This included lost export revenues, rising food aid imports and economic growth foregone.

After unemployment rates of over 90% and tepid growth in the recent past, the Zimbabwean government is going back to correct its fundamental mistake. The farmers’ estimated compensation costs are set to amount to $11-billion.

The moral of the story is, if the government declines to compensate its commercial sector for land improvements — at the very least — then someone else will have to pay for it, indirectly.

The compensation effect, as we would like to call it, results in the entire economy and its citizenry paying for land seizures through lost agriculture export revenues and job opportunities.

Let us unpack the compensation effect in the South African context.

First, if the constitution is amended to allow for land to be expropriated without compensation, how would the law cater for the assets on the farm and improvements made to the land? The land on its own is roughly 10% of the total value of a typical farm operation, if fixed and movable assets are taken into account. Would sunk investments (such as general farm infrastructure and other investment assets such as farm machinery) be subject to expropriation without compensation too?

If compensation is due for farm assets, and not the land itself, then a technical argument arises: would it be prudent for the government to pay 90% in compensating farmers for improvements to the land, in order to obtain the 10% that represents the actual land value?

Second, a complication would emerge from the fact that agricultural land is heavily indebted. Farm debt that is linked to the actual land through title deeds used to secure loans now stands at over R160-billion.

In this case, two scenarios are worth considering. One scenario is how the government handles heavily indebted land, and the question here is: if compensation is not due to farmers, would there be compensation to banks who are de facto partial owners of that land through debt? If the government exonerates itself from compensating the banks, this would translate to R160-billion wiped off the books of the banks.

Another scenario is if the government commits to cover the debt associated with land, which by definition becomes expropriation with compensation. The only difference is that the compensation goes to the bank rather than the farmer.

Let us assume that the government is sensible enough to compensate the commercial farmer for improvements, and the bank through debt owed by the farmers.

If it so happens that the government determines the value of infrastructure and investments on the farms, and then uses that same value to cover the debt that is owed to the banks, there are situations that could arise where farmers receive “zero compensation”. There might also be situations where seized farms are insolvent, in which case the government would have to pay the banks the balance of what is owed by the farmers whose land it is seizing.

This scenario is already permissible under the constitution and does not require an amendment of any law.

Third, the government will awaken to the realisation of the extremely complex technical headaches of expropriating land without compensation, by which time land reform will have stalled. This will lead to another wave of impatience that will seek to implement further draconian reforms to allow the government to seize land with impunity.

We saw this in Zimbabwe when commercial farmers took the government to court over land seizures; in another moment of madness, in 2003, the constitution was amended to nullify all those cases.

With the benefit of the Zimbabwean experience, most of which people are quick to ignore and dismiss, we learn an important lesson that needs to be the hallmark of landreform thinking in South Africa: that there is no such thing as expropriation without compensation in a quasi-capitalist economy.

The history of land expropriation under apartheid has left a sore wound that indeed ought to be corrected. However, the enduring principle of equitable and just (not necessarily market value) compensation in contemporary economics serves as an important reference point.

If the government seizes private property for free, someone, somewhere within the economy, will have to pay.