Deal where govt pays nothing.

Deal where govt pays nothing. 

Independent – 2/11/2018

Brett Chulu Column 

LAST week at the invitation of the Compensation Steering Committee (CSC), the official body representing farmers who lost land during the fast-track land reform programme, I met the committee to debate the matter of compensation with a view to finding a way to fund compensation without increasing government’s already un­tenable public debt burden that is cur­rently sitting at close to US$17 billion.

This will be a two-part series.

Let me state upfront that I engaged with the CSC as a researcher and not a consultant, thus I do not derive any monetary benefits from the CSC. Simi­larly, I do not expect any direct per­sonal financial benefit from the CSC. I hold no brief from the CSC.

The CSC is mandated to negotiate with government pertaining to com­pensation. The CSC comprises of top-notch real estate valuation experts, representatives of farmers’ unions and former commercial farmers. The de­bate was robust, engaging and creative, but done in a respectful and progres­sive manner.

In my presentation, I proposed three principles to guide the compensa­tion approach. First, government does not have to pay a single cent from the fiscus and does not have to borrow to fund the compensation. Second, com­pensation should not derail govern­ment’s vision 2030, but help towards its attainment. Third, the acquired land itself must be turned into a productive asset that generates positive cashflows to finance the compensation. These principles were gladly embraced by the CSC. This article captures the key ideas emerging from that debate in ap­plying these three guiding principles.

Amount background

Some background on the compensa­tion figure the CSC is asking is neces­sary before we unpack the ideas on how the compensation will be done without government having to pay a single cent.

The valuation experts on the com­mittee representing a local valuation consortium that has done an incredible job of creating and maintaining a data­base of dispossessed farms disclosed that a total of 5 454 farms totalling 7 500 719 hectare were compulsorily acquired. Of these 5 454 farms, 43 (to­talling 39 425 hectare) received some form of compensation from govern­ment. A total of 735 farms totalling 886 218 hectare are not registered on the CSC valuation or compensation database, though the dispossessed farmers are known. As at the end of September this year, 4 676 (totalling 6 575 076 hectare) were on the CSC-run database, representing 88% of acquired farms not yet compensated that are in the valuation database. It is this 88% that the global compensation fig­ure is based on.

The global figure for compensa­tion is USS10 billion, which includes improvements, the land itself and in­tangibles. Compensation for land it­self is USS3.5 billion. The CSC made it categorically clear that it will not be asking government to foot this bill, but will try and source a grant from the international community. Intangibles amount to USS900 million. It is very heartening that the CSC recognises and respects the constitutional provi­sion that only improvements on the acquired farms are compensatable, not the land itself. The compensation that the CSC is expecting from our govern­ment is USS6.5 billion (improvements and intangibles),

Government pays nothing

The consensus is that government does not have to pay a single cent of this USS6,5 billion compensation. How should this happen? The key is lever­aging on what government is already planning to do. Government has the master key: the 99-year leases.

The CSC does not want to dictate the land tenure system government wants to have in place, but wants to work within the confines of existing government policy. During the de­bate, it was agreed that the proposed compensation solution should not re­sult in the current land occupants los­ing land. If government can make the 99-year leases (technically known as ground leases) financeable or market­able, then the acquired land will create a powerful multi-billion dollar finan­cial asset. The 99-year leases will have to be paid for upfront by the occupants of the land. This necessitates the crea­tion of a land bank to finance the ac­quisition of ground leases on behalf of the land occupants. The ground lease becomes the collateral itself not the land as would be the case in mortgage financing.

It is suggested that the land bank be capitalised through private local and international equity investors, with government being allowed to have an equity stake in that land bank. With ground leases being fully financeable or marketable financial instruments, the land bank “becomes a highly at­tractive investment. A 25-year bond at no more than 2% per annum inter­est rate can be successfully raised to finance the USS6.5 billion compensa­tion bill. This will be guaranteed by the land bank based on collaterising the grounded leases. Alternatively, a USS1 billion bond can be raised and this can act as seed that will multiply itself manifold and create annuities (guar­anteed regular payments) to those to be compensated. It was realised during the debate that the untapped potential of bur land can raise close to USS100 billion in the long-term once ground leases become fully financeable. The potential of our land in contributing to­wards Vision 2030 is much higher than we are; currently imagining.

The risk of government losing Ian is zero in that, technically speaking, an unsubordinated grounded lease which does not transfer title of land to the lender will be recommended foreclosure only transfers lease rights to the lender. It is suggested that a five year moratorium for payments by the leaseholders to the land bank be issue to allow the leaseholders to plough resources into making their farming enterprises productive and profitable. Effectively, the bond would be amortised over 20 years, which is commercially acceptable. The leaseholders still need funding for operations and purchase of equipment in addition to the lease fees. The solution is for the land bank to provide short and medium loans in addition to long-term financing (of which lease purchase is the major one).

For the leaseholders to successfully acquire short and medium-term finance for operations and capital purchases, they have to submit proposal to financiers that show their ability to generate adequate cash flows to finance loans. This has to do with skill and a track record, of which many prospective leaseholders do not have The CSC has a way around it; they are willing and ready to incubate emerging farmers so that the hundreds of years of experience and track, record will reduce the risk profile of leasehold­ers, making it possible for risk levels to fall within the risk appetite of the Land Bank and other lenders. Thus the CSC is pledging to systematically transfer skills to emerging farmers while in­creasing their creditworthiness at the same time.

 As is the norm with ground, leas­es, our government can make lease fees tax deductible. As with stand­ard ground leases, any improvements done on the land will revert to the government (as the lessor) at the ex­piry of the 99-year leases. To discour­age speculation on land, government can introduce a differentiated land tax based on the agronomic peculiarities of a province to take into account exten­sive and intensive farming areas. This land tax can be ploughed back into the land bank and/or finance govern­ment’s equity stake in the land bank.

 Government has a lot of unutilised state land. An idea that emerged from the debate is that government can in­vite countries that need to boost their food security. Our government can en­ter into Build-Own-Operate-Transfer (Boot) agreements with such bilateral investors. In line with government’s Vision 2030 thrust of increasing area under irrigation from 220 000 hectares to 2, 5 million hectares. Boot agree­ments can be a creative way to finance the envisaged massive 12-year irrigation infrastructure roll out. A home-grown solution is within our reach.

Chulu is a management consult­ant and a classic grounded theory researcher who has published research in in academic peer-reviewed international journal.  brettchuluconsultant@gmail.com