Submission Review of Section 25 of the Constitution

Submission: Review of Section 25 of the Constitution1. IntroductionThis document expresses the view of the board of directors and senior management ofSuidwes Holdings (RF) Proprietary Limited (“Suidwes”). Suidwes, with its head office inLeeudoringstad in the North-West Province (NWP), is one of the larger and well-knownagricultural businesses in South Africa, serving clients across the country through variousbusinesses in the agricultural value chain. Business activities in the Suidwes Group areconducted under two separate subsidiaries namely Suidwes Landbou and Africum. SuidwesLandbou houses the traditional primary divisions of finance, grain storage, trading andmechanisation while Africum represents our secondary businesses in the value chain.Combined, the Group’s turnover totals around R2.5 billion per annum. With its headquarters,retail outlets and grain storage facilities in the rural areas of the North-West Province, the FreeState and Mpumalanga, Suidwes provides employment to no less than 1640 people. TheGroup is also actively involved with social upliftment and transformation initiatives whichinclude amongst other sponsorships, community projects, apprenticeships as well as otherformal and skills training initiatives. In addition, through Kimama Investments (Pty) Ltd,employees are also presented with the opportunity to acquire shares in the holding company.At this point in time, Black employees are the majority shareholders in Kimama investments,owning 75.1% of the shares. Kimama owns 9.92% of Suidwes Holdings.With the aforementioned in mind, the debate on land reform and specifically land expropriationwithout compensation is an important concern to Suidwes. The aim of this presentation is toengage the committee in a constructive spirit trusting that it might assist the committee inmaking prudent recommendations to Parliament.Our submission engages the committee on some of the economic and financial issues at stakein the proposed amendment of section 25 of the Constitution. Our central argument is thatexpropriation without compensation will not yield the desired outcomes, not in terms of theland reform objectives nor the creation of an inclusive economy. In fact, countries such asVenezuela and Zimbabwe are still grappling with the negative consequences of underminingproperty rights. The attrition of property rights is the reason for the obliteration of, for example,the Zimbabwean economy. A similar fate most arguably awaits the South African economy ifgovernment proceed with the notion of expropriation without compensation. Besides, thereport compiled under the leadership of former President Mothlanthe, as well as, the recentstudy of Beinart et al., (2017) clearly state that the perceived slow pace of land reform is notdue to legal factors but to a lack of political and social will, poor staff resourcing, thedysfunctionality of several government departments, inadequate implementation of legislation,and insufficient funding. Suidwes is of the view that, if these factors are successfullyaddressed, it will not only increase the tempo of land reform but will also make a significantcontribution towards achieving an inclusive economy.Suidwes further argues that there exists no need to amend section 25 of the Constitution.While section 25 protects property rights that are essential to a constitutional democracy andthe rule of law, it also contains a strong transformative thrust and imposes a duty on the Stateto take the steps that are necessary for land reform (Pienaar 2015). As stated by Ruth Hall(2007), when applied correctly the property clause should not inhibit the land reform programnor the creation of an inclusive economy.To fully comprehend the potential impact of amendments to the constitution to allow forexpropriation without compensation or changes to the land tenure regime, a clearunderstanding of the role and contribution of the agriculture sector in the South Africaneconomy, is needed. Consideration should also be given to other aspects such as the

institutional environment (specific reference to financiers), affordability and the rule of law.The following sections will deal with these aspects. In the closing section, recommendationswill be made on how land reform can be expedited to address the plight of poverty, inequalityand the historical injustice of land dispossession.2. Role and Contribution of AgricultureThe decline in the agricultural sector's contribution to Gross Domestic Product (GDP) from9.1% in 1960 to 2.6% in 2017, is by no means an indication that the sector makes a smallercontribution when compared to the contribution in the past. On the contrary, it is only anindication that, over time, the growth in other sectors where higher when compared to that ofagriculture. This is mainly a result of an increase in factor productivity on the back oftechnology developments in the non-agricultural sectors (Van Rooyen & Machethe, 1991).The trend is not unique to South Africa, with most developing economies that follows a similartrend. The agricultural sector, based on the remaining nature of the direct contribution, is oftenregarded as a sector that does not make a significant contribution to the country's economy.The misperception in terms of the contribution of agriculture is further exacerbated by onlyconsidering the direct contribution or extent of primary agricultural production. Thecontribution of agriculture extends beyond primary production, with agriculture serving as bothan input supplier and a consumer of products produced in other sectors of the economy. Thisis referred to as the inter-industrial linkages of a particular industry to other industries or theimpact (contribution) of the sector on the economy as a whole. Multiplier analysis andspecifically, the production, value added (GDP) and employment multipliers, are a commonlyused method to determine the extent of inter-industrial linkages. Normally, the results fromthe multiplier analysis are portrayed in terms of the direct, indirect and induce effects. Thedirect effects are the initial immediate effects caused by a specific activity that willsubsequently initiate a series of iterative rounds of income creation, spending and re-spending, resulting in indirect and induced effects (Hussain, et al., 2003).Conningarth (2005) explains that the economic term “production” refers to the total turnover(i.e. quantity produced multiplied by the corresponding price) generated by each activity/sectorin the economy, which can be measured as the sum of the intermediate inputs plus the totalvalue added by a specific sector.Agriculture has a total production multiplier of 2.94, with the indirect and induced impactsaccounting for 0.73 and 1.21, respectively. This implies that a R1 increase in the agriculturalproduction will have a backward effect of R0.73 (i.e. increase in sales) on the economic sectorsupplying inputs to the agricultural sector while consumer spending is likely to increase byR1.21 because of additional wages and salaries (Taljaard, 2007).The value added or GDP multiplier is a measurement that indicates how much value is addedto a specific product during the different stages of production. On average, R500,000 directvalue and R280,000 indirect value (in input supplying industries) is added for every R1 millionworth of primary agricultural production. Given an induced effect of R510,000 (i.e. increasedconsumer spending resulting from the increases in salaries and wages paid in the specificsector as well as the input-supplying sector), the total value-added multiplier for agricultureamounts to R1.29. In more direct terms, R1 million worth of primary agricultural productionresults in R1.29 million worth of additional value added (Taljaard, 2007).The labour multiplier provides an indication of each sectors contribution towards the creationof full-time employment opportunities and, ultimately, each sector’s contribution towardsdistributing salaries and wages amongst various types of labourers which, in turn, shouldimpact positively on the alleviation of poverty. In terms of agriculture, 29 full-time employmentopportunities will be created for every R1 million worth of agricultural production. Of the 29

full-time opportunities, almost 18 will be created within the agricultural sector itself, with nearly4 full-time employment opportunities that will be created in the input supplying sectors. Theremaining 8 full-time employment opportunities will be accounted for in the broader economy(created as a result of additional salaries and wages that will lead to an increased demand forvarious consumable goods that need to be supplied by various economic sectors). It is alsoimportant to note that the labour multipliers for the agricultural sector are notably higher whencompared to the weighted average for the other economic sectors (Taljaard, 2007). It shouldalso be acknowledged that most of the direct employment opportunities are in the rural areas,with the majority of households in the rural areas that depends on agriculture for theirlivelihoods. At the same time, the sector also plays an important role in stemming the rate ofurbanization which, if not controlled, can lead to increase inequality, urban poverty, and theproliferation of slums (World Bank, 2015).A contribution is also being made in terms of labour and capital transfers to the rest of theeconomy. According to Greyling (2012), the agricultural sector has been releasing labour tothe rest of the economy since 1962, thereby fulfilling a major role in terms of the requirementsfor economic development. Similarly, the sector made a net transfer of capital to the rest ofthe economy since the mid-2000s, which contributed towards the accelerated pace ofindustrialization (Greyling 2012).In addition to the direct economic and socio-economic contributions, the agricultural sector isalso the basic source of food supply. In other words, it plays a strategic role in terms of foodsecurity. In general, food security is defined as having reliable access to a sufficient quantityof affordable, nutritious food. Note that this does not imply food self-sufficiency as oftenimplied in political debates (Grain SA, 2015). In fact, South Africa’s food self-sufficiency,based on the four main food groupings (i.e. meat, bread and cereals, milk, cheese and eggs,and vegetables), is on a gradual decline since the mid-1970’s. Theoretically, lower self-sufficiency and import substitution could lead to higher food inflation which is negative from afood security perspective.Despite a decline in food self-sufficiency (increase in primary food imports), the sector remainsa net exported of agricultural products by value. In 2017, agricultural exports broke the US$10 billion mark for the first time, a 15% year-on-year increase. This resulted in a record tradebalance surplus of US $3.3 billion for the agricultural sector. The sector is therefore not onlya net earner of foreign exchange but, through its positive trade balance, also plays a balancingrole in the economic development of South Africa (Greyling, 2012).Conclusively, the agricultural sector in South Africa does not necessarily play a growth-leadingor initiating role, but rather a growth-permissive role. This is evident from the relatively smalldirect but, significant indirect contribution of the sector. Careful consideration should thereforebe given to any policies or action that could potentially have a negative impact on the sector.Zimbabwe is most arguably the most recent example of the unintended consequences ofpolicies or actions that undermine private property rights in the agricultural sector of a country.3. Institutional Environment (Financiers)In addition to the potential impact in terms of the economic and socio-economic contributions,expropriation without compensation will also negatively impact on land values, an aspect thatwill result in a substantial weakening of the solvency ratios of all agricultural producers.Solvency is one of the factors considered when determining the creditworthiness of a legalentity. Weaker solvency ratios will hamper the ability of producers to access credit, the impactof which will be visible throughout the broader economy. Tiwary and Thampy (2014) is of asimilar view, arguing that there is a positive relationship between the availability of credit andeconomic development and growth.

This is also of importance to the banking sector. Agricultural debt amounts to an estimatedR160 billion, 60% of which is financed by the commercial banks and a further 29% by the Landand Agricultural Development Bank of South Africa (Land Bank). In total, agricultural propertyworth about R230 billion have been presented as security to banks in South Africa. Evidently,expropriation without compensation will force banks to either write off loans (which will causegreat harm to the banking sector), or to procure the outstanding debt from the land owners(which will inevitably lead to many liquidations). Besides, this will contribute towards largescale disinvestment and irreversible harm to the broader economy.The consequences of any changes to the constitution will also be visible in terms of investorconfidence. At the end of the day, like political rights, economic rights are a bundle of freedomsand protections governing ownership and exchange (Goldsmith, 2007). If these rights areeroded, so will confidence and successively, economic development and growth. Acemogluet al., (2005), Everest-Philips (2008) and Besley and Ghatak (2009) were of a similar view,arguing that ownership and the role of government in terms of the formalisation and protectionof property rights are important aspects to improve investor confidence, private investmentand economic growth. This is also relevant to South Africa, with business confidence andprivate investment that are closely correlated. Again, any changes to the constitution will resultin a decline in investor confidence (disinvestment) and successively, lower levels ofcompetitiveness and production.4. Affordability of land reformThere is a perception that land reform is slow because agricultural land is too expensive.Suidwes however agrees with Beinart et al., (2017) who argues that the slow pace of landreform is a result of the lack of political and social will, dysfunctionality of several governmentdepartments, corruption, inadequate implementation of legislation, etc. and not affordability.This is also evident from the government’s land reform budget. Since 2009, only around 50%of the budget that were earmark for land acquisitions were used. In the 2016/17 land reformbudget, the majority of the funds were redirected towards competing priorities such as Recap,50/50 policy and Agriparks (Kepe and Hall, 2016). According to Agbiz (2018), governmentacquired 1.75 million out of a potential 4.7 million hectares since 2009, mainly because of thecontinues siphoning of the land reform budget to other competing priorities. Besides, thecapacity of government to implement its programs is also constrained by operational budgets(Kepe and Hall, 2016). The slow pace of land reform can therefore not be ascribed to theaffordability, but rather the administration of the budget.It should however be acknowledged that the budget for land reform is small considering thetotal national budget. The budget for the Department of Rural Development and Land Reform(RDLR) has never exceeded 0.4% of the national budget, with funds that are earmarked forland acquisitions that has never exceeded 0.1% of the national budget.It is also likely that government has paid inflated prices for land in the past. It is however notnecessary to amend the constitution to expropriate land without compensation to prevent theDRDLR from buying land at inflated prices. Amongst other, government can partner withcommercial banks to ensure a more accurate valuation and that a fair price is paid foragricultural land.5. Rule of lawSuidwes supports the Rule of Law as the most fundamental concept upon which theConstitution of South Africa is founded. As the Constitutional Court has remarked onoccasion, the exercise of public power must comply with the constitution, which is the supremelaw, and the doctrine of legality, which is part of that law. The doctrine of legality, which is anincident of the rule of law, is one of the constitutional controls through which the exercise of

public power is regulated by the constitution. It entails that both the Legislature and theExecutive are constrained by the principle that they may exercise no power and perform nofunction beyond that conferred on them by the law. In this sense the Constitution entrenchesthe principle of legality and provides the foundation for the control of public power.Suidwes also supports the concept of land reform, provided such is implemented within theambit of section 25 of the Constitution and the law of general application. Section 25 sets outthe requirements that must be met when government interferes with private property rights. Italready gives the government the power to expropriate property, provided it is for a publicpurpose or in the public interest. We submit that land reform initiatives will fall under the ambitof public interest and to such extent any consideration to amend the Constitution isunnecessary. Therefore, the legal framework (the Constitution and the law of generalapplication [such as the Expropriation Act of 1975] exists. We believe that Government shouldrather focus on the Land Reform implementation methodology, which until now, was plaguedwith controversy and mixed results.Suidwes believes that the legality, validity and legal implications of the proposed landexpropriation without compensation will be duly ventilated during the course of the committee’ssessions and this submission accordingly does not aim at duplicating vigorous argumentswhich will no doubt be presented.6. Conclusions and RecommendationsSuidwes acknowledge the need and urgency for land reform and transformation to right pastwrongs and in the process, contribute towards a safe and equal society. Suidwes alsoacknowledge that despite more than a decade of reforms, the dualism that characterised theapartheid-era in South African agriculture, remains. However, the challenge of reform forSouth Africa is complicated by factors and developments that are exogenous to the systemand inevitable fall-outs of the greater openness that liberalisation and democratisation broughtabout. Land ownership, though a serious matter and obvious politically-sensitive and highlyemotive given the history, is only one dimension of the problems facing decision and policy-makers in South Africa (Van Schalkwyk et al., 2012). According to Lyne (1996), Ortman andMachethe (2003) as cited by Van Schalkwyk et al., (2012), access to markets, finance,infrastructure, information, training, etc. are all amongst the factors that inhibit the success ofreforms and specifically, land reform. Addressing the issue of land ownership throughexpropriation without compensation will therefore not yield an outcome different to what hasbeen achieved by governments comprehensive land reform program to date. In actual fact,Suidwes is of the view that expropriation without compensation will result in the obliteration ofthe South African economy.With this being said, the following recommendations are made:1. That the Committee recommends to Parliament that section 25 of the constitution must not be amended;2. That the Committee advises Parliament and the Executive to undertake the following measures to improve the implementation of section 25: a) That a proper land audit be launched that takes into account existing data verifying current ownership of land including that of the state; b) That legislation be promulgated that transfer a certain percentage of state owned land and government owned farms to previously disadvantaged communities for the purpose of agricultural production or livestock farming. Programs launched under such legislation ought to ensure that benefactors have sufficient access to financing, support structures, markets and infrastructure such as water and seed.

Beneficiaries should also receive full property ownership after a designated period of time; c) That current legislation be revised or new laws be promulgated to secure and extend the private property rights of black South Africans who live on communal land, urban and in peri-urban areas; d) That the Committee informs Parliament and the President of the need to address the dysfunctionality of several government departments that are mandated with land reform issues; and that these challenges be addressed as a matter of urgency. In this regard the possibility of involving the private sector to improve processes should be considered. e) Create a Land Ombudsman that manages disputes around land reforms; f) Create a platform that will allow for improved dialog and participation between agribusinesses and government.3. Implementing a proper and enabling Land Reform and Development programme that will include the following: a) Need-driven empowerment and support systems that includes a well administrated training and skills development program; b) Investment in the rural infrastructure and support services; c) Timely access to adequate production inputs, including but not limited to land, finance and information; d) Institutional arrangements that will promote collective action, value-added, adequate access and market transparency; e) Multi-institutional collaboration to initiate, coordinate, and monitor proper activities preferably in joint or bilateral actions.

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