THE signing of an agreement between the government and white commercial farmers whose land was dispossessed has sparked a debate on how the huge US$3,5 billion compensation would be financed.

The Brett Chulu Column

There is fear that government has taken debt, meaning the taxpayer would be effectively funding the compensation for a private benefit.

This writer is privy to the initial financing strategy that was proposed by the Compensation Steering Committee (CSC), the official body mandated by the former white commercial farmers to negotiate with the government on the farm compensation.

The initial request by the CSC was for a compensation of US$9,5 billion made up as follows: US$3,5 billion for the actual land, US$900 million for intangibles and US$5,6 billion for improvements. The CSC considered the option of not claiming US$3,5 billion for land in line with the constitution of Zimbabwe that allows only compensation for improvements on the farm land. The white farmers would seek compensation for land from the international community.

Judging from the US$3,5 billion compensation settled for, it is highly probable that the US$900 million claim for intangibles either fell off or did not pass as the constitution has no provision for settling claims for intangibles. That left US$5,6 billion for improvements as the figure to be negotiated. This figure was arrived at through a valuation exercise that has been going on from the early 2000 period, spearheaded by a consortium of real estate firms contracted by the white farmers.

Government started its valuation exercise well after the farms had been expropriated, leaving the older, more accurate and more complete valuation database from the consortium as the source of the compensation figure for improvements. The compensation figure of US$3,5 billion suggests a huge discount from the US$5,6 billion was taken.

The actual financing strategy that was first proposed was that the beneficiaries of the expropriated farms would pay for farm improvements from which the compensation figure was based. The proposal was made with the realisation that government was already saddled with a huge debt owed to international financial institutions. It would have been foolhardy to expect a government struggling to pay its international debt to fund the equally humongous farm compensation. It was realised that an innovative financing model would be needed.

In that regard, the current farmers who benefited from the expropriation of farms would carry the burden of financing the compensation through a holistic business development programme.

Government would not carry the financial burden of compensation. The question to be answered was: how do land beneficiaries get the money to pay for their compensation share given that their land had no market value due to lack of collateral?

This is how the formation of a land bank became a central pillar of the compensation finance strategy.

A land bank would be formed in the mould of the erstwhile Agriculture Finance Corporation (AFC) shut down by government in 1999 to make way for Agribank. The AFC used to provide long-term finance for the purchase of farms as well providing medium term loans for the purchase of farm equipment. This is the model the compensation finance strategy wanted re-introduced.

Farmers who took over the expropriated assets would get loans from the land bank to pay for the improvements that make up the compensation figure.
The land bank would be owned by private investors, with government getting a stake in the bank if it so wished. The huge potential of Zimbabwean agriculture based on a free market model is known to both domestic and international investors.

On that strength, the land bank would raise a low interest 25-30-year bond for the equivalent of the compensation figure (US$3,5 billion in this case). This would ensure that government already choking from debt would not be saddled with more debt. The way out was for an innovative financing model where the taxpayer would not carry the burden of paying for compensation for farms.

Instead, the capacity of farmers to service loans at low interest rates would be built via a business incubation model. The farmers who took over the farms would carry the debt. But how would the proposed land bank get security for the loans? Tradable or transferrable long-term leases would be issued by government.

The land bank would be the one to mobilise the long-term bond. The white farmers would immediately get their compensation from money raised through the bond.
Data on each acquired farm is known and so the amount of compensation for the improvements on the farm would be the one the land bank loans out to the new farmer to pay for their debt (farm improvements).

The farmers would be given a grace period of five years before they start servicing the loans. In those five years, the former white farmers would mentor the current farmers and help them get short and medium term loans from banks. The track record of the experienced farmers would be used to underwrite the loans during five year mentorship/incubation period.

The idea was that when the servicing of loans would start in year six, the current farmers would have built sound technical and production capacities to stand alone.

The business incubation programme would capacitate the farmers who got farms to service their portion of the compensation bill from their agro-business since they would be skilled farming business people.

Transferrable or tradable 99-year leases would be the central instrument that would make these loans bankable. So farmers who would fail to produce profitably would have their leases foreclosed on by the land bank and transferred to other farmers. So the market would weed out chancers and ornamental farmers. The lease market was seen as a way of eliminating the moral hazard (unproductive farmers serially benefitting from partisan or non-market farming assistance schemes).

The land back route remains a good option. Its viability is based on political capital. If investors discount the political stock, two challenges will arise. First, the leases would not be accepted based on the fear of future policy shifts. Second, the land bank would fail to successfully raise the bond.
The compensation for farms is highly dependent on domestic political behaviour that the international community can accept. Politics is part of the financing strategy, whichever financing model government will settle on.

In essence, what government signed, in reality could effectively have been an acknowledgment of debt. We will soon know. If our political stock was high enough, the farmers who benefitted from acquiring the farm would be assisted by the market to pay for the compensation.
Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — [email protected].