The threat of expropriation is enough to stall economic recovery - Biznews

Feb 11, 2021
11 February 2021 - The government and other commentators – in describing the Expropriation Bill of 2020 as ‘a good piece of legislation’ which ‘carefully circumscribes’ the powers of the state – have thoroughly muddied the waters surrounding the measure.

Covid-19 and the resultant lockdowns have dealt a severe blow to the South African economy, which was already hanging by a thread. The tobacco and alcohol bans decimated sorely needed tax revenue and opened up a lane for the illicit trade to gain unstoppable momentum. Foreign investment is an essential element in resuscitating the economy, but many have warned that land expropriation will threaten that. Jonathan Katzenellenbogen has forewarned that the appropriation of land and property will rattle the already fragile fiscus. Anthea Jeffery of the IRR unpacks the Expropriation Bill, remarking that ‘the debate does nothing to address the economic crisis. On the contrary, the mere threat of widespread expropriation, especially for ‘nil’ compensation, is enough to deter most direct investment and stall any prospect of economic recovery. This article first appeared on the Daily Friend. – Jarryd Neves

Anthea Jeffery

The government and other commentators – in describing the Expropriation Bill of 2020 as ‘a good piece of legislation’ which ‘carefully circumscribes’ the powers of the state – have thoroughly muddied the waters surrounding the measure. 

A more comprehensive analysis is needed to strip away misconceptions and accurately identify the risks in the Bill. Useful insights can be gained by comparing the Bill with the current Expropriation Act of 1975 – and by measuring the Bill’s provisions against the requirements of the Constitution.

The current Expropriation Act
The current Expropriation Act 63 of 1975 allows the minister of public works (the minister), together with most municipalities, to expropriate property for public purposes such as the building of new roads or dams.

Under the Act, the compensation payable for expropriated property must start with market value and be supplemented by ‘an amount to make good any actual financial loss caused by the expropriation’. Such financial loss would include moving costs as well as any loss of income from the expropriated property.

Ownership and possession pass to the minister on the dates specified in the expropriation notice, but at least 80% of the compensation due must be paid when the minister takes possession. Interest on the outstanding balance is payable from then on.

These provisions in the Act limit the scope for expropriation. They also ensure an adequate measure of compensation, thereby helping to prevent any abuse of the power to expropriate.

Unconstitutionality of the 1975 Act
The ANC has long argued that the 1975 Act is unconstitutional for two reasons. First, the Act does not allow expropriation ‘in the public interest’, whereas the Constitution does. Second, the Act leaves out four of the five factors listed in Section 25 of the Constitution (the property clause) as relevant to the amount of compensation payable.

One of the five factors listed in the Constitution is market value, which the Act incorporates. But the Act omits the other four factors in Section 25, which include the ‘current use’ of the property, the ‘history of its acquisition’, and ‘the purpose of the expropriation’. These four factors are often called the ‘discount’ factors, as the monetary value assigned to them is generally deducted from market value in deciding what compensation would be ‘just and equitable’.

The ANC is correct in highlighting these two contradictions between the Act and the Constitution. However, it overlooks the most important contradiction of all.

The Act’s provisions allowing the minister to take ownership of property by serving a notice of expropriation on the owner could not be challenged in 1975, when the principle of parliamentary sovereignty applied. However, they are now clearly in conflict with South Africa’s Constitution. Instead of recognising this reality, the Bill repeats these contentious provisions and seeks to extend their life.

The Bill’s bypassing of the Constitution 
As noted, when the 1975 Act was adopted, there was nothing to prevent the government from giving the minister the power to expropriate property by:

completing certain preliminary steps, and then
serving a notice of expropriation on the owner, under which both the ownership of the property and the right to possess it would automatically vest in the minister on the dates specified in the notice.
However, since the final Constitution took effect in 1997, South Africa has had the benefit of an entrenched Bill of Rights. This lays down binding criteria for a valid expropriation, guarantees that administrative action will be reasonable and procedurally fair, gives everyone a right of access to the courts, requires judicial authorisation before people can be evicted from their homes, reinforces the principle of equality before the law, and guarantees the supremacy of the rule of law.

The Bill nevertheless seeks to bypass these constitutional guarantees by giving all expropriating authorities the very same power to expropriate by:

completing certain preliminary steps, and then
serving a notice of expropriation on the owner, under which both ownership and the right to possess the property will automatically vest in the expropriating authority on the specified dates.
A longer list of preliminary steps in the Bill
The Bill’s list of preliminary steps is longer than that in the Act, and often reflects the impact of the Bill of Rights. However, these increased safeguards matter little because no equivalent protections apply at the point of expropriation – which is when they matter most.

To comply with the Bill’s preliminary steps, an expropriating authority must:

begin by negotiating to buy the property on reasonable terms (such negotiation is possible but not mandatory under the Act);
in the absence of the owner’s agreement, obtain a court order allowing it to enter on to the property it wants to investigate with a view to its expropriation (under the Act, all that is needed is 24 hours’ notice of the intended entry to the owner);
serve a notice of intention to expropriate on the owner (this step is not required under the Act);
invite affected people to raise objections to the proposed expropriation, which the expropriating authority must consider and acknowledge, but to which it need not otherwise respond (there is no equivalent obligation in the Act);
allow reasonable time periods (70 days in total) for the owner to stipulate the compensation he wishes to claim and for the expropriating authority either to accept this claim or to propose a different amount (again, there are no equivalent clauses in the Act).
These provisions are important improvements on the Act, but they apply only during the preliminary stages. Once the expropriating authority decides to proceed with an expropriation, necessary safeguards of this kind fall away.

Expropriation procedures under the Bill
Under the Bill, once a municipality (or other expropriating authority) decides to take the property, all it need do is to serve a notice of expropriation on the owner. Under this notice, both ownership and the right to possess the property will pass to the municipality on the specified dates – which could be very soon.

In the Act as first drafted, ownership could not pass for 180 days after the service of the notice (though this limit was later deleted). By contrast, the only time limit in the Bill is that ownership cannot pass before the service of the notice. This implies that ownership can pass at any time thereafter – and hence within a week, a fortnight, or a month of the notice being served.

As regards the right to possession, the original Act stipulated that this could not be transferred to the minister until 60 days after the transfer of ownership (though this clause too was later removed). The Bill has no time limit here, but the short period it allows for the transfer of ownership sets the tone for the period in which possession may pass. Hence, the right to possess the property could vest in the municipality within a week, a fortnight, or a month of the transfer of ownership.

Under the Bill, the transfer of ownership and possession to the municipality happens automatically on the dates stated in the notice of expropriation. This will occur irrespective of any dispute regarding the adequacy of the ‘nil’ or other compensation being offered.

Often, moreover, ownership and possession will pass to the government long before any compensation has been paid. An expropriating authority is supposed to pay the full amount of compensation when it takes possession – but the Bill allows it to circumvent this obligation by the simple expedient of proposing ‘a later date’ for payment.

A later payment date must either be agreed by the owner or approved by a court, but any such litigation may be costly for the expropriated owner. In addition, if the municipality is waiting for court approval, it is unlikely in practice to pay on the date it takes possession.

An owner with sufficiently deep pockets will be able to seek a court order declaring the expropriation invalid (as not truly ‘in the public interest’), setting aside unreasonably short periods for the transfer of ownership and possession, and/or increasing the compensation to a more appropriate amount. In practice, however, most owners will lack the means to go to court. This will be particularly difficult for people who have already lost ownership and possession of their key assets and have not yet received any compensation.

Particularly significant too is a provision in the Bill that seeks to put the onus of proof in any such court challenge on the expropriated owner. This greatly increases the risks of embarking on litigation, as owners who fail to convince presiding magistrates or judges that the compensation should be higher (for example) will have to pay much of the state’s legal costs in addition to their own substantial expenses.

This is a daunting burden. It also undermines the Bill of Rights and the protections it is supposed to offer the puny citizen against the enormous power of the government. If fundamental freedoms are to be effective in practice, it is the state that must bear the onus of proving its compliance with guaranteed rights. Putting the burden on the citizen instead makes a mockery of the Constitution’s checks and balances on power.

Under the Bill, a municipality or other expropriating authority will know how difficult and costly it will be for expropriated owners to turn to the courts for relief. This knowledge will encourage the municipality to act as judge and jury in its own cause. Its real motive for an expropriation may be to replenish its depleted coffers, but it will nevertheless be able to claim that its expropriation is ‘in the public interest’ and that the compensation it offers is ‘just and equitable’. In most instances, its unsubstantiated claims will remain unchallenged because owners reeling from the loss of their key assets will be reluctant to compound their woes by risking the high costs of litigation.

Safeguards against abuse in the Act, but not the Bill
The Bill also jettisons the various practical safeguards against any abuse of the power to expropriate that are currently contained in the Act.

The Act limits expropriations to those necessary ‘for public purposes’, whereas the Bill also allows them ‘in the public interest’. In this the Bill is, of course, following the Constitution, as it must. However, the wider ambit for expropriation increases the scope for its abuse, making adequate safeguards all the more important.

The Act’s provisions on compensation provide a particularly important constraint. Under the Act, compensation must include both market value and damages for all resulting financial loss – so expropriation generally costs the state more than a negotiated purchase would do. (The expropriated owner is also largely restored to his previous position, which protects him from having to bear a disproportionate share of the costs of meeting a broad societal need.)

By contrast, the Bill allows a municipality to pay either ‘nil’ compensation or an amount that is well below market value. When expropriation becomes so cheap for the state, there is a great temptation to use it very often and no longer as an instrument of last resort.

The Act further safeguards expropriated owners by laying down criteria for compensation – market value and damages for resulting financial loss – that are certain, clear, and easily quantified on the basis of objective evidence.

Under the Bill, by contrast, the circumstances in which ‘nil’ compensation may apply are vaguely worded and open-ended, making it difficult for the owner to contest the municipality’s interpretation of these rules.

In addition, if some compensation is to be paid, the Bill requires this amount to be based on market value and the four discount factors, as earlier described. But there is no objective way of putting a monetary value on factors such as ‘the history of the acquisition of the property’ or ‘the purpose of the expropriation’. Hence, the expropriated owner – who bears the onus of proving that the compensation offered is too little – has no firm ground on which to stand in trying to establish this. This uncertainty adds greatly to the risks of resorting to litigation.

The Act’s provisions on legal costs also limit the potential for abuse. Under the Act, if the minister sets the compensation too low – ie, below market value and resulting financial loss, as objectively determined – the courts must penalise the minister by awarding costs against him. This too provides an important incentive for the government to act reasonably, while making litigation far less risky for the expropriated owner.

Strengthening the procedural safeguards in the Bill
Commentators who praise the procedural fairness of the Bill seem blind to these crucial shortcomings. They also brush aside the Constitution and the safeguards it is supposed to provide against abuses of state power.

If the Bill is to be brought into line with the Constitution, various amendments are essential. The IRR has developed an alternative and much better bill, which proposes a number of necessary changes. Of these, three core improvements are particularly vital.

First, a municipality or any other organ of state wanting to expropriate land or other property must, in the event of a dispute, obtain a high court order confirming the constitutional validity of a proposed expropriation before it issues a notice of expropriation.

If the Constitution is to be effective in protecting the property rights of all South Africans, the onus of proof must lie on the municipality to prove that its intended expropriation meets all relevant constitutional requirements. The municipality must also discharge this onus – and obtain a court order confirming that it has done so – before it embarks on an expropriation. In addition, where an intended expropriation will result in a person’s eviction from his or her home, the prior court order must authorise this eviction, as required by Section 26(3) of the Constitution.

Second, the just and equitable compensation payable must include damages for all direct losses resulting from the expropriation, including moving costs and loss of income. The Act, as earlier noted, allows damages for direct losses of this kind – and there is no sound reason for excluding a similar provision from the Bill.

The Bill must, of course, follow what the Constitution says about the compensation to be paid. But the Constitution states that all relevant circumstances must be taken into account in deciding compensation, including the five it lists. Hence, non-listed factors may also be considered in striking the ‘equitable balance between the public interest and the interests of those affected’ that Section 25 requires.

Expropriation is a drastic measure that places an inordinately heavy burden of redress for past societal wrongs on the shoulders of particular individuals. If justice is to be done to those affected, the full extent of their consequential losses must be taken into account, not disregarded.

Third, the Bill must be amended to provide that the compensation due the owner (as decided by the high court prior to the service of the notice of expropriation), must be paid in full before ownership passes to the municipality. The Bill must also make it clear that, if the compensation is not paid in time, the notice of expropriation will automatically fall away and have no further legal force.

This is necessary to safeguard owners and ensure that expropriating authorities cannot take ownership or possession without the prior payment of compensation. By contrast, the current wording of the Bill is neither just nor equitable, for people who have already been deprived of their key assets should not be left dependent on inept and often cash-strapped organs of state to make due payments long after the event.

The wrong debate
The economic crisis is by far the most crucial problem confronting the country. That crisis has many dimensions, ranging from pervasive lockdown damage to the Eskom logjam, burgeoning public debt, and a surge in unemployment over the past year. How best to solve that crisis in all its aspects is the vital question South Africans need to be debating. Instead, the ANC has succeeded in diverting attention away from this core issue and putting the pros and cons of the Bill at centre stage.

This debate does nothing to address the economic crisis. On the contrary, the mere threat of widespread expropriation, especially for ‘nil’ compensation, is enough to deter most direct investment and stall any prospect of economic recovery. This makes it all the more vital to defeat the Bill – or, at the least, to improve its terms in the ways earlier outlined – so that it becomes far more difficult for the government to damage the economy still further by abusing its expanded expropriation powers.

Dr Anthea Jeffery holds law degrees from Wits, Cambridge and London universities, and is the Head of Policy Research at the IRR. She has authored 11 books, including People’s War: New Light on the Struggle for South Africa and BEE: Helping or Hurting? She has also written extensively on property rights, land reform, the mining sector, the proposed National Health Insurance (NHI) system, and a growth-focused alternative to BEE.
This article was first published on the IRR's online platform, Daily Friend

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