Section 25 amendment: South Africa’s historical moment in the land debate

Hot on the heels of President Ramaphosa telling the European Parliament on Wednesday that South African land reforms will be enacted in adherence to the country’s Constitution, the joint constitutional review committee has formally recommended today that section 25 of the Constitution be amended to allow for expropriation of land without compensation.

This comes in the face of strong objections that have been put forward by opposition parties including the DA, Cope, IFP and Freedom Front Plus.

The Institute of Race Relations (IRR) had already indicated that it would take legal steps to prevent what it terms as a “procedurally flawed process” resulting in the amendment of section 25.

However, the ANC with a majority gained with support by the EFF and UDM have been able to push through the recommendation in the committee.

Before Thursday’s announcement, a senior World Bank group executive had warned that proposed changes to the Constitution to allow the expropriation of land without compensation has unnerved investors.

Sérgio Pimenta, the vice president for the Middle East and Africa at the International Finance Corporation (IFC), the World Bank’s private investment arm was also vocal on the issue, telling media on Wednesday that if there is uncertainty in a jurisdiction which includes land tenure, this will certainly be an aspect that would influence investment negatively.

Certainty gives way to risk

Ian Matthews, Head of Business Development at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions, previously warned against the systemic impact that land expropriation policies would have on South Africa’s broad banking system.

“There was always a strong possibility that Section 25 would be changed, and now this has been confirmed. While the fact that a decision has been made is good news because it now provides more clarity on the situation, it will be critical to see exactly how the amendment will be handled.

“There is a great deal at risk should the amendments overstep its purpose, which is to articulate that in some instances, but not necessarily all instances, expropriation without compensation can be undertaken to benefit South Africans,” Matthews said.

In the Land Bank’s 2018 Annual Report released earlier this year, the top risk on a list of 18 principal risks was the issue of land reform and the impact that expropriation without compensation could have on the economy.

This risk was described as potentially having an impact on national food security, sustainable farming, the economy and the Land Bank’s sustainability.

Matthews also warned of the knock-on policy effect that this could have on the Protection of Investment Act 22 of 2015 that was activated in July this year.

“The Protection of Investment Act replaces BITs which are the bilateral investment treaties designed to ensure countries are bound to treat investors from other countries fairly, and which have their own expropriation clause.”

“The Act’s expropriation clause 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 will possibly have to be amended in light of subsequent changes to Section 25.”

Impact on foreign investment

Matthews said now that foreign investors face the risk of expropriation of their assets without compensation, there is the concern that foreign direct investment (FDI) might contract, thus counteracting Ramaphosa’s commitment to attracting significant foreign investment.

“Already there were concerns in the international investment community regarding the replacement of BITs with the Protective of Investment Act, and these could now be exacerbated by the fact that there will be a constitutional change,” said Matthews.

“Despite the Department of Trade and Industry claiming that there is very little to no correlation between investment inflows and BITs, the South African Reserve Bank’s statistics indicated that FDI into South Africa declined from R76 billion in 2008 to just R17.6 billion in 2017.

“A UN report, the ‘Global Investment Trends Monitor’ indicates that in 2015 FDI into South Africa fell by 74% to $1.5 billion.”

President Cyril Ramaphosa’s party has made the acceleration of land redistribution a key issue ahead of 2019 elections, while pledging to carry out land reform in a way that does not threaten food security.

“It is hoped that the constitutional change will be worded to reflect president Ramaphosa’s sentiment,” said Matthews. “Undoubtedly this change, which will mark a seminal moment in our constitution, must be undertaken with extreme care to ensure that while enabling fair distribution of land, it also rigorously protects the economy from negative impacts.

“This will ensure a sustainable agricultural sector that provides strong agricultural production, employment creation and food security.”

Where to next?

Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions said that with regards to the issue of land expropriation without compensation, the key question still remains as to how exactly Section 25 of the Constitution will be amended, or even whether it should be amended.

Glynis Breytenbach, who serves on the review commission, recently stated that although some political parties are pushing to have the section amended before the upcoming elections, there is still a great deal of work to be done in order to comply with legal requirements for any changes to the constitution – including working through some 700,000 public submissions on the topic.

“If the amendments are passed without the necessary processes being followed, the issue would almost certainly be challenged at the Constitutional Court,” Botes said.

For the time being, the market seems to be relying on president Ramaphosa and lawmakers to act in an economically responsible manner when addressing the issue, the analyst said.

“However, considering the number of investment pledges recently obtained during the Investment Summit, the market seems to be relatively at ease with the approach that government is taking to economic reform, and investors are still confident that we will not see a Zimbabwe-style dynamic play out.”

“As long as we continue to experience policy uncertainty, local political events and the relative strength or weakness of the US dollar will continue to drive the direction of the local currency,” Botes said.

Bloomberg reported that a battle over how exactly the wording of the constitution should be amended is also likely to unfold in parliament. Changes must be drafted by another yet-to-be-established panel and approved by two-thirds of lawmakers in the National Assembly. That means the ANC will need backing from the populist Economic Freedom Fighters to push them through, it said.

“While the two parties see eye-to-eye on the need to accelerate land reform to address racially skewed ownership patterns, their proposed solutions are poles apart: The ANC favors seizing land in very specific circumstances, such as when it has been abandoned, while the EFF wants all land to be nationalized.

“Even if the two parties do reach consensus, another round of lawsuits is likely to challenge the validity of any amendments they adopt.”

The news agency reported that rand traders appeared more concerned about Brexit than the land reform issue. For now, anyway.

Market reacts

The rand reached R18.25 or 2.5% stronger against the pound as British prime minister Theresa May faced mounting opposition to her Brexit deal. It also extended gains after lawmakers in Cape Town backed constitutional changes to allow land seizure without compensation, though it pared its advance against the dollar.

Bloomberg warned that focus is likely to soon turn back to the controversial land-reform process. It said that the ANC’s plan to expropriate land for redistribution to blacks was flagged as a credit risk by Moody’s Investors Service, which said in a report on Thursday that government policy predictability is becoming less certain ahead of elections in May next year.

“The land issue will be the ANC’s ‘Brexit moment’,” Marius Oosthuizen, a member of faculty at the Johannesburg-based Gordon Institute for Business Science, predicted in a recent opinion piece in the the Daily Maverick.

“Handle it wrong, and South Africa leaves the global economy in a hard exit without any clear path to recovery.”

The rand was trading at the following levels against the major currencies:

• Dollar/Rand: R14.30  (-0.46%)
• Pound/Rand: R18.26  (-2.32%)
• Euro/Rand: R16.15  (-0.63%)

Read: South Africa’s land-seizure debate: what farmers, banks and citizens have to say