Investors are being misled into believing the government has a good grasp on designing a workable land reform policy that includes expropriation without compensation (EWC) when, in fact, policy considerations have become lost in a swirl of politics and spin.

The government has no clear idea who the beneficiaries of land reform or expropriation should be, or how and where land is needed, making it impossible to design or cost an overarching land reform policy that includes EWC. This suggests that the fiscus is in for a rude shock once the actual costs finally emerge.

This is one of the key messages in a report on the future of land reform in SA by Intellidex, the capital markets and financial services research house.

The report coincides with the decision last week of parliament’s joint constitutional review committee that the constitution be amended to allow the state to expropriate land without compensation. A different committee will draft the wording of the amendment — something the ANC says will be impossible to finalise before the 2019 elections.

Most opposition parties and written submissions to the committee were strongly against amending the constitution, but most speakers at public hearings were strongly in favour of it, signalling pervasive dissatisfaction with the government’s existing land reform efforts.

Responding to the committee’s decision, Business Unity SA (Busa) points out that the issue is far broader than amending section 25 of the constitution: "It’s about how the entire edifice of the land reform programme has been a resounding disappointment to those intended to benefit from it."

Busa urges the country to take a holistic, unifying approach to land reform that factors in past policy failures and moves SA forward without undermining its economic fundamentals.

However, according to Intellidex’s paper, "Land Distraction", policy considerations have been drowned out by "politics, vested interest, short-term strategic plays and public relations". And because it holds that politics will ultimately trump policy, it urges investors not to disregard the force that is exerted by those who believe in forced restitution and sweeping constitutional change.

"Land reform in its totality is a strong, long-term positive for SA if it can be executed through a capable, capacitated and clean state — conditions that do not exist and are unlikely to do so in the foreseeable future," says Intellidex’s head of capital markets research, Peter Attard Montalto.

"Expropriation without compensation does have a role in this ideal policy world, but is a dangerous, potentially growth-dampening distraction in the interim given the form of the debate."

The problem is that the debate is not concerned with what an ideal land reform policy should look like and what new legislation, institutions, development of skills and capacity and additional spending will be needed to make land reform work.

As a result, it is impossible to say whether a good land policy is a R50bn or a R100bn project.

"We don’t believe there has been any particular discussion on increasing the allocation to the department of rural development & land reform in the latest medium-term expenditure framework negotiations," says Attard Montalto.

The amount the government spends on land reform and restitution as a share of total government expenditure has been falling steadily in recent years (see graph), gobbled up increasingly by the department’s wage bill.

The department’s budget was just 0.2% of total government expenditure in 1997/1998 and rose to a peak of 1.1% in 2007/2008, during the Mbeki years. The National Treasury has budgeted for it to fall back to 0.7% by 2021/2022.

The pace at which land is redistributed has also fallen from a peak of 500 kilohectares (kha) a year in 2007/2008 to a projected 90kha a year. At this rate it will take another 43 years to settle all outstanding claims.

An ideal land reform policy would require strong, independent institutions backed by a decent budget. Government would have to invest in skills, equipment and infrastructure to support new farmers as well as rural supply chains and economic cluster developments in urban areas.

Because of this, Intellidex expects that there will be a "shock" when the expenditure implications of running a proper programme emerge.

But that assumes SA will get to the point of designing a holistic land reform strategy — something that cannot be taken for granted, given the way the land reform debate has become focused almost exclusively on EWC.

Intellidex believes that EWC should form only a small part of an ideal land reform strategy.

It says the debate has become skewed towards the expropriation issue partly because people misunderstand the conflicting data on land redistribution and what has gone wrong with existing land reform efforts, but also because it has been driven by vested interests that "strong-armed" the issue at the ANC’s conference last December after much lobbying and alleged vote buying.

Intellidex cautions investors that there are strong rent-extraction forces at work that want access to land at minimal cost. They continue to influence the debate and their pressure needs to be quashed.

The Cyril Ramaphosa camp, on the other hand, is interested in a rational, technical policy debate on broader land reform. It sees EWC as just one way to accelerate land reform to spur economic development, achieve historic redress and satisfy land hunger.

It believes EWC can be accommodated through a constitutional change that is narrow and tightly defined.

However, even within this camp the respect for property rights is not unequivocal.

"For instance, in the discussions we’ve had with policymakers in recent months we have been surprised that there is a core group of people even within the Ramaphosa camp who would admonish us for ‘fetishising’ property rights, or for putting the interests of banks and investors ahead of historic justice," says Attard Montalto.

"The argument that we put forward that getting historic justice is a lot easier when property rights are respected and the economy and fiscus are well functioning was dismissed."

What will decide the outcome of the land reform debate, therefore, depends largely on how strong the forces of rent extraction are, as well as how deep the respect for property rights runs in the ANC.

Intellidex believes things could now go one of three ways.

In the first scenario, Ramaphosa successfully kicks the EWC issue "into the long grass" by managing to keep political pressure at bay until after the 2019 elections.

He takes the lead on the constitutional amendment process and engineers a tight, clarifying amendment backed by a new expropriation bill. Investors and banks remain on board, the market settles down, racial and land tensions remain subdued, and the economy recovers marginally on greater policy certainty.

At the opposite extreme, in the "downward spiral" scenario, Ramaphosa loses control of the process to vested interests in his own party, with a majority in the national executive committee (NEC) forming against him.

Other aspects of land reform are overlooked as EWC gets liberally applied with broad brush strokes that the courts are slow to contain. Land grabs occur, the banking sector takes a hit, racial tensions boil up and SA suffers further ratings downgrades.

Intellidex considers both these scenarios unlikely. The most realistic outcome, it believes, is one in which Ramaphosa gets backed into a corner on the EWC issue but broadly keeps a lid on it for the coming year. A more hard-hitting constitutional amendment is pushed through ahead of the election owing to disunity in the NEC and pressure from the EFF, which votes for the amendment in parliament, abandoning its call for wholesale land nationalisation.

In this scenario the rand will be volatile, the property market will remain risk averse, and downward pressure on the ratings and growth will resume.

Ultimately, however, the state will lack the capacity to implement EWC and the entire process will become bogged down in interminable court challenges.

While there remains a risk that the country could veer off course, the report concludes that the outcome will be benign, noting that typically in SA "these things take longer and are less eventful than expected".

Yet, it warns that the markets are underestimating the noise that could be generated by the EWC issue in the short term and the damage this could do to investment sentiment.

Citibank economist Gina Schoeman believes that, given SA’s precarious twin-deficit position, volatile currency and dire need for GDP growth, the negatives of land expropriation outweigh the positives.

"Until the uncertainty on property rights is resolved with confidence that land expropriation will not harm the economy (as the ANC has stated), markets will continue to price in a risk premium while local investment and foreign direct investment will be arguably more difficult to attract," she says.

"Until the uncertainty on property rights is resolved with confidence … markets will continue to price in a risk premium" — Gina Schoeman

What it means: Emotion and vested interests have hijacked the broader policy debate