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Land expropriation: the acid test for Cyril’s commitment to policy consistency

Putting the intricacies surrounding land expropriation and Ramaphosa’s commitment to policy consistency for investors under the microscope.

The whole of South Africa is still in shock after the South African Reserve Bank announced that SA is in a technical recession following two consecutive quarters of negative growth. Most analysts had expected a moderate increase in GDP.

But the most shocking number in the statistics is the 29.2% decline in agricultural production over the second quarter. Statistics SA said: “The decrease was mainly because of a drop in the production of field crops and horticultural products”. The decline in agriculture wiped out a gain of 4.9% in the mining and quarrying sector, while manufacturing and transport also fell.

In the last three months, the rand has lost 15% of its value against the US dollar, and 10% of that in the last week. All of this is against the backdrop of significant uncertainty about the issue of land expropriation. President Cyril Ramaphosa has yet again given assurance on the issue of land expropriation, this time during a state visit to China where he said that the fear in South Africa around the planned expropriation of land without compensation policy is subsiding. At a breakfast meeting in Beijing this week he went on to say that government should not only provide policy certainty but policy consistency to investors in order to attract much-needed foreign direct investment. 

Policy consistency is a critical aspect that is arguably yet to be achieved.  An uncertain regulatory landscape cannot hope to instil confidence in foreign investors.  Not only does this refer to how expropriation without compensation (EWC) will look as a policy document, but also in how the wording of Section 25 of the Constitution will be amended to accommodate this.  As the founding document from which policy takes its lead, there is the additional risk that the amended Section 25 will create ambiguity for other pieces of existing legislation that govern investment in South Africa.

The Protection of Investment Act and Section 25

When President Ramaphosa activated the controversial Protection of Investment Act 22 of 2015 in July this year, the warning bells around Section 25 and EWC had already been ringing.  From the start, the investor protection law had been routinely criticised both nationally and internationally due to its reduction of protection in SA for foreign investors, and the impact that this could have on investment.  Now that Section 25 looks to be amended, the protection for foreign direct investment grows murkier.

The main concern with the Act has been whether foreign investment assets could be expropriated without compensation. Previously, South Africa was party to a number of Bilateral Investment Treaties (BITs), which are international investment agreements that ensure countries are bound to treat investors from other countries fairly. BITs explicitly state that in the event of assets being expropriated from foreign investors, these investors must be adequately compensated. According to BITs, for expropriation to be lawful it must occur against compensation, which should be ‘prompt, adequate, and effective’ or ‘immediate, full and effective’. This means that the compensation for expropriation to be paid to investors must reflect the market value of the expropriated investment.

The Protection of Investment Act which now replaces BITs has its own expropriation clause which intentionally mirrors Section 25 of the Constitution as it currently stands. The clause states that foreign investors have the right to property as provided for in the South African Constitution and may only be expropriated for a public purpose or in the public interest and subject to compensation (the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided or approved by a court). Despite having only been passed into law this year, the Protection of Investment Act may yet have to be amended in light of subsequent changes to Section 25.

It should be noted that since 2015 the South African government began cancelling BITs as these came up for renewal. So far, BITs have not been renewed with European Union member countries that include Belgium, Denmark, Germany, Luxembourg, Spain, Switzerland and the Netherlands. Much of South Africa’s foreign direct investment (FDI) comes from these countries whose BITs have been terminated.

Investor disputes under BITs are arbitrated through an international mechanism, often under the auspices of the World Bank’s ICSID (International Centre for the Settlement of Investment Disputes), referred to as investor-state dispute settlement.  The Protection of Investment Act requires an investor to dispute an action in this country with South Africa’s Department of Trade and Industry, and only if domestic remedies have been exhausted might the South African government consent to international arbitration, although it is not clear how long and at what point this would be deemed to have occurred.

The upshot for foreign investors is that will be required to jump through a lot of hoops. Not only do they face the risk of expropriation of their assets without compensation, they will now be subject to local regulation guiding their investment terms rather than an international agreement and should a dispute arise they may feel prejudiced due to domestic arbitration. 

In this climate there is every possibility that direct foreign investment could contract significantly.  Prior to 2018, Sarb statistics showed that FDI into South Africa declined from c. R76 billion in 2008 to just R17.6 billion in 2017 and a UN report, the ‘Global Investment Trends Monitor’ indicates that in 2015 FDI into South Africa fell by 74% to $1.5 billion. However, the Department of Trade and Industry claims that there is very little to no correlation between investment inflows and BITs.

Converting EWC principles into policy

Discounting tweets coming out of the White House, leaders such as China’s President Xi Jinping and British Prime Minister Theresa May have shown support for government’s decision to speed up land expropriation.  Indeed, there is nothing wrong in principle with government’s message on land expropriation, which is not a disregard for property rights as a general position but an enabler for people to access land and allow them to build capital. If people have the ability to create a capital base through land this will ultimately grow the economy and encourage foreign investment.  

This is also the stance of the Banking Association of South Africa (Basa). Initially playing down the risk of expropriation of property without compensation, South African’s banks have since proposed a fund to help accelerate land transformation.  Although no amount has been suggested for the fund, the proposal signifies the banks’ intention of seeking practical solutions to protect the billions of rand in assets that are tied up in farm loans.  Banks are the biggest source of credit for farmers at 61% and about R 148 billion outstanding in loans for agricultural land.

A lot is at stake for South Africa’s commercial banks, which have loans of about R148 billion in the agricultural sector and R1.6 trillion in property, if EWC is executed badly by the government. The Banking Association of SA (Basa) – a body representing the banking sector – has quantified the staggering amount of bank loans, which have the potential to fuel much-needed economic activity in the country and create wealth for people.

“If this land debate continues in the way that it [is] and we don’t reach a constructive resolution, those figures of lending will start coming down,” warns Basa MD Cas Coovadia.

“The last thing we need in this country is rhetoric that gets investors jittery and stops us from moving from the pedestrian growth,” says Coovadia. “The critical issue for SA is attracting investment and growing the economy.” Coovadia admits that there is no clarity on what happens to bank-held loans, which are collateralised by land and properties, in the current expropriation debate.

As the banks wade into the debate, government should be providing a clear and coherent sense of what policy will look like and how both foreign and local investors’ property rights will be protected.  Until this happens investors will tend to keep their money locked up rather than look for the next investment opportunity, which will ultimately dilute government’s drive to secure $100 billion in foreign investment.

Ian Matthews, head of business development at Bravura.

COMMENTS   11

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What a disappointment Ramaphailure is turning out to be. Is the ANC functionally incapable of doing anything right?

EWC is just the next stage of the slow moving politics, using his fronts (EFF, BFLF)to build momentum. As the ANC stand outside the anarchy of his front companies, he use people demands to push down his decisions, to power.

EWC will happen, and its not going to be state owned land, the Keizer is not going to give away the riches of his kingdom, AN-CR suddenly a Robin Hood, caring about the people, more a snake with five heads – lies, deceit, corruption, theft, and rac1st.

If state owned land was on the table as they(AN-CR)say, Section 25 would not even be a discussion today, instead it would be, respect to the AN-CR as to trying. The total addiction to have Section 25 change, proof the sinister, lies and deceit from AN-CR.

100% in agreement…

If this was ever about the land, there would be ZERO issues with paying fair compensation…

Its about retribution for past wrongs and electioneering…

We are watching the state play with fire, and we the citizens can do nothing, as the “majority” of us, have nothing of value, so dont have any skin in the game….

Willie Sutton (1901 to 1980) the famous bank robber was once asked why he robbed banks. “His answer was that is where the money is”. Sutton’s law, named after Willie concerns diagnosis and considering the obvious explanation first. Given the above, one should have no difficulty imagining why so many look to the ANC regime for their livelihood.

The great thing about a free enterprise economy is that people can only get rich by helping each other in some way. Supplying goods and services that others either want or need. Helping others in some way, if you like. Think about it as mutual altruism and consensual interaction. Bill Gates never forced the homeless man to buy his products. The poor are poor because they have little to offer society. They don’t get to consume much because they produce little of value.

There are, of course, two economies. The other economy is the parasitic economy. This gets to use force or threat of force. These people use the regime to force people to give them money. The government takes by force or threat of force and hands the plunder to those who vote for them so the cycle can be perpetuated. In a nutshell you can either make it and trade, or you can take it for force. Many who take it are criminals who embezzle you your money for self enrichment. Take note, folks: there is a growing army using the state to take from you using the law. These people produce nothing of value for you in return.

Cape town is currently borrowing a large sum in Euro (R1.4 billion) against the backdrop of PEWC- an extension of the parasitic economy. The interest rate exceeds 8 per cent and will be paid and paid back using a depreciating currency. The connection between PEC and the interest rate is self evident. Responsible organisations normally pay Euro loans at about 2%. This is simply the market’s position on the risk with which South Africa is viewed and the chance of a full scale economic collapse and default. All the unnecessary valuable forex going overseas due to the ANC’s policies.

Much is made of the racial makeup of land ownership in South Africa by the MSM. This is only possibly by practising Group identity politics. There is obviously an agenda. Somehow we never see the wealth breakdown by Group in the USA splashed over the media.

No; we do not need policy consistency.

Specific easy wins with major benefits:

Scrap fee free tertiary education

Scrap EWC (naked theft aka a criminal act)

Scrap all work on NHI

Are you saying we should reward hard work and not victimhood? Sounds like a plan!

South Africans from all backgrounds and colors are victims of a government that does not stop surprising us with the worst governance and absolute ignorance.

Pensions have not seen any growth in the last five years, every year, if you have a job, you save to make up for the previous years’ government mistakes and the pace just keeps picking up.

And then you have a government that looks scared of a 5% minority that wants to nationalize Banks, grab farms and everything every educated tax payer citizen worked for.

Impossible to save for the future.

A country is either in a state of Peace or War.

Peace is represented low crime rate, steady growth and stability in the value of earnings.

War is represented by high crime rate, decline in growth and devauled earnings.

So many people are spending their pay check before the end of the month because they are scared it will be worthless.

The emerging makert crisis will become a global crisis 2022.
So here is the new story on the block.

The IMF is going to give EM a nice rub of QE. Seeing that it worked so well in creating a false climate of positive global GDP. 100 year bonds at a massive discount with good returns.

By doing this the first world countries are exporting their trash to emerging markets.

Instead of this just being each individual country problem, it’s going to be a global crisis. And no body will be able to stop it.

This is what it will look like, the cash will raining down and everyone will be getting free cash, 2006 financial crisis will be a distant memory and then it’s pay back time.

BTC will be $100,000.00
Gold will be $25,000.00

Cracks starting to show in ANC policy, for even the rural populace in Mpumalanga –

Community Property Association member Philemon Maseko says the ANC has failed them. “The government cannot live up to its promises. It failed to return its own land to the people but now wants to go after the white farmers.”

Seething, Maseko also says it is ironic that the democratic government had failed where the KaNgwane homeland succeeded. The semi-independent homeland created by the apartheid government in 1981 comprised territories near the border with Swaziland. The reserve was in its jurisdiction, and created thousands of jobs for locals as business boomed.

“Hundreds of people used to fill big trucks to get to work at the reserve and in nearby farms … we thought things would get better but now we are not benefiting from this land and neither is the government. It makes us wonder what the end game is,” Maseko sighs in defeat.

https://www.businesslive.co.za/bd/national/2018-09-04-despair-as-once-prosperous-songimvelo-falls-into-disrepair/

Only surprise is that people are surprised that agriculture nosedived. Firstly you had crippling drought in the WC and secondly why would farmers buy more livestock or plant more fruit trees or vines or increase acreage planted if the farmer does not have certainty that his farm will be taken away from him in 12 months time.

We need to stop pussyfooting about and trying to downplay the impact of EWC.

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