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LREAD Perspective March 2017

LREAD Perspective March 2017

Unintended Consequences

Gugile Nkwinti, Minister of Land Reform and Rural Development, announced the Regulation of Agricultural Land Holdings Bill earlier in March this year. The Bill is now open for comments from interested parties after which it will be presented to Parliament for promulgation as an Act. If successful in its current form, this Bill holds the potential to fundamentally alter the manner in which we look and think about land ownership in South Africa. 

Amongst other things, the Bill proposes: 

  • Agricultural land will be classified according to its geographic location and usage.
  • Land categories will be created according to location and usage with prescriptive maximum sizes, as determined on a district level.
  • Land owners with more land than allowed according to their specific category, will have to make the ‘extra’ land available for redistribution, which will be done within the framework of the Constitution.
  • Foreign nationals will not be allowed to buy agricultural land in South Africa anymore.
  • Foreign nationals will be allowed long term leases on land.
  • Foreign nationals wishing to sell their land, should give Government a right of first refusal for a specified period of time.
  • Foreign nationals will be required to have a majority shareholder South African partner to be allowed to invest in the agricultural economy.
  • Racial and gender profiling of South African land owners will be reintroduced.
  • A Land Commission will be established. This new structure will oversee all information collection on agricultural land.

Minister Nkwinti said this bill is aimed at “reversing the legacy of colonialism and apartheid and to ensure just and equitable distribution of land to Africans”

But will it? Obviously hindsight is perfect, but there is also much truth in the saying that the road to Hell is paved with good intentions…… Commentators have raised their concern over various aspects of this Bill. The main concerns are about the proposals of land size capping, and the proposed restrictions on foreign land ownership.

It is feared that land caps could lead to a fragmented land market which will be detrimental to productive land usage. This could lead to declining land values; bank defaults on mortgages, and ultimately a decline of our rural economy, with job losses being the foremost concern.

The second concern is that this Bill is sending a confusing message to potential foreign investors. On the one hand, foreign nationals owns a very small percentage, estimated at between 1% and 3% of South African agricultural land, so it is debatable whether targeting them is going to have any meaningful impact on land reform.

And on the other hand, potential investors would be confused about the real intention behind this legislation: If I cannot buy agricultural land, should I still invest in the value adding factory I need to process the crops from the land I wished to purchase? Is my investment safe in South Africa? Is South Africa really open for business? This confusing message on investment is not promoting foreign direct investment into our economy in general, and the combined negative impact could be far larger than the perceived advantage of securing South African land for South Africans.

There are many examples of unintended consequences from around the world, and now, with hindsight, one can even laugh at some. Take the Cobra Effect, which is based on an anecdotal story set in colonial India: The Governor of Deli abhorred snakes. He planned to get rid of the snakes through an incentive programme where people where paid to present the authorities with dead snakes. The local population responded with enthusiasm. It did not take long before people started breeding snakes for the sole purpose of killing them and collecting the due payment. And obviously, once the colonial masters caught up with this situation, they responded by cancelling the incentive scheme, so, with bred snakes now being worthless, the snake farmers simply released them, resulting in the Governor’s bad dream turning into a nightmare!

Similarly, in colonial Vietnam the French rulers where upset about the vast numbers of rats roaming around in Hanoi. In this case, each rat tail presented was rewarded with money. It did not take long before the colonial authorities started seeing increasing numbers of tailless rats roaming the city. People where simply releasing the rats after cutting their tails in order to keep on breeding to produce more tails…..

Land reform is crucial for South Africa’s stability and if not addressed successfully, our future prosperity is at risk. One cannot make light of any genuine attempt to address and move the process forward. But we must also acknowledge that our best attempts will have unintended consequences, no matter how hard we plan or how brilliant we think our interventions are.

With this in mind, maybe we could proceed with more caution, and not promulgate new legislation without careful and honest reflection on what we are aiming to achieve. Some advice from investment genius Warren Buffet might be appropriate at this stage: “When testing the depth of a river, never do it with both feet at once”.

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