Land Bank troubles are another cloud over reform
The case for a dedicated fund becomes more pressing because it would be a low-cost way of stimulating productive farming
The debate about the amendment of section 25 of the constitution is getting more technical by the day, locating it increasingly in the realm of legal and constitutional philosophy. However, there are other just as important issues in the land reform space that need attention to complete the important task of land reform.
With agricultural economist and Business Day columnist Wandile Sihlobo, I have argued in past articles why expropriation of land without compensation (or with nil compensation), is a mistake from an economic perspective. Expropriating land will not deal with the slow progress of land reform; it is a red herring. As many scholars from all sides of the ideological spectrum have noted, the problem is not the constitution but poor delivery of land reform through the government machinery. This is the real issue, a reality that has been further compounded by three recent events.
First is the reported loss by the Land Bank of R184.7m for the six months ending September and the decision by Moody’s Investors Service in late January to downgrade the bank’s bonds to junk status. The interim loss is attributed to the worsening of the Land Bank’s financial situation due to slow loan book growth. Nonperforming loans rose to 9.9% from 5.8% of the portfolio. Another 9.1% of loans are underperforming. This reality informed Moody’s decision to downgrade the bonds.
It seems from its statement that, aside from the drought effects on agricultural conditions, what concerned Moody’s most was that a poorly executed expropriation without compensation process could result in a loss of investor confidence, an increase in problem loans and the drying up of funding sources as investors might not be willing to continue to fund the Land Bank, in particular, or SA agriculture in general.
These are worrying developments and are likely to further negatively affect SA’s ability to deliver on land reform and agricultural development. The Land Bank needs solid and visionary leadership to deliver on these two very important tasks.
Land acquired is most often used to support the patronage network and, in the process, productive activities get bogged down in bureaucratic red tape
Second is agriculture, land reform & rural development minister Thoko Didiza’s written responses to a series of parliamentary questions in December that highlighted the status of farms acquired by the state through its proactive land acquisition strategy.
I have consolidated the various ministerial replies into a table, which makes for startling reading. The government has acquired 6,092 farms since the inception of the programme in 2006 and managed to lease out fewer than half to beneficiaries. One assumes that on the remaining 3,172 farms little activity is taking place as caretakers will not invest in production.
Many of the lease agreements are for short periods of one to three years, making long-term investments and improvements impossible. It has been established from research work by the University of the Western Cape’s Prof Ruth Hall that none of the proactive land acquisition strategy farms were legally transferred to beneficiaries with full ownership rights. In addition, the support systems for those farmers leasing the land is very poor, setting them up to fail.
These facts present the empirical evidence to support the prediction in a book I co-authored with fellow agricultural economists Johan van Zyl and Hans Binswanger-Mkhize in 1996. We stated that “the state is very good at acquiring land, but very bad at distributing land”. Land acquired is most often used to support the patronage network and, in the process, productive activities get bogged down in bureaucratic red tape. This is why a decentralised approach (with ample and effective state support) to redistribute land is a preferred solution for rapid land reform.
The third point is the cabinet’s response to the recommendations of the presidential panel on land reform, and specifically the decision not to approve the idea of a land reform fund. It is important that discussion on the need for such a fund be reopened. My sense is that there has been some misinterpretation on how this fund should operate and how it would become an important instrument to fast track land reform.
The cabinet did approve a land donations policy, which was in itself an important move. An integral part of the donations policy is an incentive mechanism to inspire more farmers and companies to donate land. These incentives could include points on a broad-based BEE scorecard, allocation of water rights, export licences or access to subsidised finance. It is in the latter part where the fund was envisaged to play a key role.
Ideally, the benefactor would donate land to an identified beneficiary and in exchange both the benefactor and the beneficiary would have access to the land reform fund. The beneficiary gets access to the fund to commercially operate the land, and the farmer donating land gets the opportunity to intensify (expand) or vertically integrate the remaining portion of the farming operation, and in the process grow the sector and employ more people.
In essence, the land reform fund was designed as part of the incentive mechanism but also to assist beneficiaries with affordable finance without having to borrow at 10%-12%, which would guarantee financial failure within three years. The land reform fund idea is in essence a modernised version of the agricultural credit board, but should be housed outside the realm of the government and the Public Finance Management Act, and be managed by seasoned bankers and financial experts. Access to the fund would, however, only be sanctioned once a land donor and beneficiary have been registered in the “land reform depository”.
The initial proposal included the idea of land reform bonds as one source of capital for this fund, and probably created some discomfort, especially in light of the concerns about SA’s existing high level of sovereign debt. This source of funding can be dropped.
The land reform fund was also envisaged as a depository for companies and wealthy people in the financial sector that do not have land to donate to assist the land reform imperative. For them, the same form of recognition (BEE points and so on) can be used to generate more donations to the fund. It could also be a place for foreign donor funds and other government grants such as those from the Jobs Fund.
Without the need for Land Bank bonds, one can now realise an average cost of capital of 0%. Depending on the operating costs of the fund it could well be possible for the fund to on-lend at 1.5%-2% and still be sustainable. If this were possible it could be an important mechanism to secure success among beneficiaries on donated land (or for that matter those on the leasehold land mentioned earlier).
There are many creative ideas that could be harvested in SA to bring about rapid and sustainable land reform. We do not need to create new institutions with large overheads. A combination of existing private sector and government institutions can be leveraged to deliver land reform effectively. All that is needed is trust and commitment.
• Kirsten is professor in agricultural economics and director of the Bureau for Economic Research at Stellenbosch University.