No room for optimism, given the real expropriation risks - Daily Maverick

5 February 2019 - If the land debate demonstrates one thing, it is that most commentators appear unaware of the risks being multiplied by the drive towards expropriation without compensation (EWC) – and of how great the threat to property rights is becoming.

Anthea Jeffery

The ANC has brought the country to the point where the state will soon be able to assert its control over land and a host of other assets without any compensation being payable at all. However, few commentators seem aware of these risks, or of the scale of the threat to property rights.

If the land debate demonstrates one thing, it is that most commentators appear unaware of the risks being multiplied by the drive towards expropriation without compensation (EWC) – and of how great the threat to property rights is becoming.

Too often, warnings about EWC are mistaken for opposition to land reform itself, and are discounted as alarmist and “anti-transformation”.

But land reform could be far more successful without EWC. This threatens the property rights of all South Africans, without addressing the key reasons why land reform has failed and up to 90% of transferred land has fallen out of production.

If complacency persists, moreover, the risks of deeply negative outcomes will only mount.

In his report, How expropriation could work … without destroying the economy (Daily Maverick, 31 January), Stephen Grootes writes that “the ANC has made it clear it is determined to contain any damage while trying to ensure a positive outcome”. Hence, much will “hinge on whether the party has the power, and will, to achieve that”.

Look behind the ANC’s reassuring rhetoric, however, and there are many reasons to doubt whether the organisation is really “trying to ensure a positive outcome”. Grootes is also mistaken in claiming that, under the recently gazetted Expropriation Bill of 2019 (the bill), “expropriation will apply only to land – not intellectual property or anything else”.

The ANC is currently intent on reassuring South Africans that the “nil” compensation clause in the bill will apply primarily where the state takes ownership of land which has been “abandoned”, is “held purely for speculative purposes”, or is worth less than the subsidies the government has previously provided.

However, this reassurance is deliberately misleading.

First, it ignores the wording of the bill, under which nil compensation is payable in circumstances “not limited” to the examples it lists.

Second, the reassurance overlooks the definition of expropriation in the bill. This has been carefully crafted to look innocuous on the surface. However, its effect will be to allow nil compensation for a host of other expropriations too.

To understand the significance of the bill’s definition, the difference between “direct” and “indirect” expropriation needs to be unpacked. A “direct” expropriation arises where the state takes ownership of property. An indirect expropriation does not involve the acquisition of ownership by the state and could take the form of either a “custodial” taking or a “regulatory” expropriation.

A custodial taking arises where the state takes custodianship of property – as it has already done as regards all mineral and water resources. A “regulatory” expropriation arises, for example, when the state imposes price controls on a product, thereby preventing its owner from selling it at market value. In this situation, the state does not acquire ownership of the product, but its regulations result in a loss to the owner.

Under customary international law, as well as most bilateral investment treaties (BITs), expropriation is defined in a broad way to include both “direct” and “indirect” expropriations. In South Africa, Section 25 of the Constitution (the property clause) does not define what expropriation means. However, the word – especially as contained in this guarantee of property rights – would generally be understood as having its usual wide meaning.

However, the Constitutional Court’s majority judgment in the AgriSA case in 2013 has already begun the process of narrowing this meaning. Here, Chief Justice Mogoeng Mogoeng ruled that expropriation requires the acquisition of ownership by the state. This meant that the state’s “assumption of custodianship” over an unused mining right (the issue before him) did not qualify as an expropriation, or merit the payment of any compensation.

On this reasoning, further custodial takings by the state would not qualify as expropriations or merit compensation. Regulatory expropriations would be treated the same way, as these also do not transfer ownership of affected assets to the state.

The bill’s definition of “expropriation” is clearly based on Mogoeng’s ruling. According to the bill, “expropriation” means the “compulsory acquisition” of property by the state. On this basis, neither custodial takings nor regulatory expropriations will qualify as expropriations because they do not transfer ownership to the state. Moreover, where no expropriation has occurred, no compensation will need to be paid.

If no compensation is payable for custodial takings, this will encourage the state to take custodianship of all rural land, as the Preservation and Development of Agricultural Land Framework bill of 2014 earlier envisaged. The government could also take custodianship of all other lands – whether residential, mining, commercial or industrial – as the 2017 state land audit proposed and as the EFF constantly demands.

Once the state has custodianship of all land, says EFF leader Julius Malema, “every title deed will be meaningless” – and anyone needing land will have to obtain a “land-use licence” from the state. These licences will generally last for 25 years but could be terminated earlier if the state decides that this is in the public interest. These rules will apply not only to individuals but also to “private corporations”, which will find it difficult to borrow or invest when they have so little security of tenure over the land needed for their businesses.

Under the bill’s definition, a host of regulatory expropriations will also be able to proceed without the risk of compensation having to be paid. These takings will extend way beyond land – for both the Expropriation Bill and Section 25 define “property” as “not limited to land” (and hence as including, for example, a grocer’s licence to sell wine, as the Constitutional Court has already ruled).

On this basis, BEE ownership targets could be pushed up to 51%, without any compensation having to be paid for resulting forced sales of equities at prices below market value. Similarly, foreign security (and other) companies operating in South Africa could be subjected to 51% “indigenisation” requirements, again without compensation being payable. In addition:

- export and price controls could be placed on coal and all other minerals identified as “strategic” by the government;
- compulsory licences could become mandatory for many patented medicines, which would allow these to be copied in return for very low royalties;
- price controls could be imposed on all health services, medicines, and other health-care goods under the National Health Insurance (NHI) system;
- medical schemes could be confined to providing a single package of health services in return for monthly contributions decided by the state; and
- “prescribed assets” could be introduced for pension funds, thereby compelling them to invest in Eskom and other failing state-owned enterprises unlikely to deliver an adequate return on these investments.

All these regulatory expropriations are already either in the policy pipeline or under investigation by the ANC. If they proceed, many companies and other owners will suffer major losses but will receive nil compensation under the Expropriation bill.

Moreover, once Section 25 has been amended to allow nil compensation in appropriate (but no doubt unspecified) circumstances, any legal challenge to the constitutionality of these uncompensated losses will be difficult to mount.

This is what the ANC and its SACP ally have long been seeking as part of their national democratic revolution (NDR). The NDR’s overall goal is to take South Africa from a free market system to socialism and then communism. Towards this end, it seeks to “eliminate” existing property relationships, as the ANC stated at its Stellenbosch national conference in 2002.

However, this has to be done by incremental steps and in keeping with what the surrounding circumstances (“the balance of forces”, in NDR parlance) will permit. As the SACP cautions, if “premature attempts” are made “to eliminate all private property”, this can alienate citizens and “do incalculable harm to the quest for socialism”.

In 2012, when the ANC Youth League called for the mines be nationalised, the ANC rejected this proposal at its Mangaung national conference because some R1-trillion in compensation would then have had to be paid.

Now, however – through its incremental NDR interventions – the ANC has brought the country to the point where the state will soon be able to assert its control over land and a host of other assets without any compensation being payable at all.

However, few commentators seem aware of these risks, or of the scale of the threat to property rights. DM

Dr Anthea Jeffery is Head of Policy Research at the IRR, a think tank promoting political and economic freedom. Readers are invited to take a stand with the IRR by SMSing their names to 32823 (SMSes cost R1, Ts and Cs apply)

https://www.dailymaverick.co.za/opinionista/2019-02-05-no-room-for-optimism-given-the-real-expropriation-risks/

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