www.bizcommunity.com 01 April 2015, Derick van der Walt

The Agricultural Business Chamber (Agbiz) and the Banking Association South Africa’s (Banking Association) model to finance land reform is currently in the spotlight. Will this be the answer to the many complex issues surrounding the financing of land reform in South Africa? And could it protect South Africa’s food providers and in turn save the entire population from food shortages – let alone prices that could go through the ceiling?

The model is the result of government’s request that commercial lenders propose a mechanism for the commercial financing of land reform. It suggests a mechanism and process for the commercial financing of land reform as detailed in Chapter 6 of the National Development Plan (NDP), explains Dr John Purchase, CEO of Agbiz.

“Agbiz and the Banking Association formed a task team to respond to government’s request, as we support land reform in order to address the historic inequalities created by South Africa’s past. Several workshops were held to arrive at our proposed model,” Purchase says.

Central to the model is that the model’s principles are aligned to the NDP’s model for land reform; that market principles underpin it; and that the model recognises that commercial farmers should be incentivised to participate in joint ventures.

“The NDP model on land reform is essentially a proposed framework for land reform and not a one-size-fits-all model or plan. It does, however, provide a number of principles for orderly land reform implementation. Both Agbiz and the Banking Association support it, as it is underpinned by market principles that support the retention of commercial agriculture. At the same time it does not undermine agricultural property values on which lenders place reliance for loans that are afforded to commercial farmers,” says Purchase.

District Land Committees

The model recognises the role of District Land Committees (DLCs) in assisting with the commercial financing of land reform by serving as a source of information and by offering to monitor the processes, explains Purchase.

“The NDP proposes that each district municipality in South Africa, with commercial farming land forming part of its territory, should convene a committee (a DLC), involving all agricultural land owners in the district, as well as key stakeholders. The latter include the private sector (agribusinesses), government (the national department of water affairs and provincial departments that deal with rural development, land reform and agriculture), as well as government agencies (the Land Bank and the Agricultural Research Council),” says Purchase.

This committee will be responsible for identifying 20% of the commercial agricultural land in the district and giving commercial farmers the option to assist with its transfer to black farmers.

Agbiz and the Banking Association envisage that the DLC’s will retain overall responsibility for rural development within their respective districts. With regard to the commercial land reform transactions as described in the model, the DLC’s responsibilities would be limited to the identification of land and the monitoring of progress.

Grant allocations

A Grant Allocation Committee (GAC), comprising representatives of the Banking Association, Agbiz and the Department of Rural Development and Land Reform, will assess and approve applications submitted by authorised and registered credit providers for grant allocations relating to land transformation of up to 50% of the full transaction value for all land reform transactions meeting certain criteria. Government is expected to contribute R1 billion towards the grand portion of the proposal. Essentially the role of the GAC is to ‘be the gatekeeper’ in ensuring that transactions meet the minimum scheme requirements that Black beneficiaries will receive and that Governments money is being spent well. On the other hand, commercial lenders, who will be at risk, will scrutinise applications to ensure their commercial viability and that such applications meet the aforementioned minimum scheme requirements.

Transfer of title deeds to any legally accepted entity, such as a trust or company, which is no less than 50% black-owned, is a prerequisite. State-owned land, communal land, lifestyle properties and other land transactions not meeting normal commercial agricultural lending criteria are excluded from this model. Separate funding models for such transactions will have to be developed by government.

A land audit is imperative, says Purchase, and all available knowledge on who owns what needs to be consolidated and maintained on one database, run by the Deeds Office. These include state and parastatal entities, as well as municipalities.

“It is a practical model and it is in line with the NDP. Government should therefore support the model in principle. At Agri SA’s congress in October last year, the majority of farmers also agreed to participate in the NDP’s land reform framework. Even farmers outside Agri SA’s structures indicated that they were willing to participate in such a scheme,” says Purchase.

Places the farmer at the heart of the transaction

Pierre Venter, GM Human Settlements: Market Conduct Division of the Banking Association South Africa, says the model should succeed as it places the farmer at the heart of the transaction. “A farmer who wishes to participate will do so on a voluntary basis and he/she will choose the beneficiary/ies who will become his/her long-term business partner. It is important that the farmer makes this choice and that the deal will be commercially viable so as to benefit both the farmer and the beneficiary/ies. Further, as the farmer is also at risk, he/she will have a vested interest in the partnership being successful, and therefore from a mentorship, upskilling and involvement perspective, one can expect the farmer to be actively involved in ensuring that the partnership provides commercial returns to both him/herself and the beneficiary/ies alike.

“As lenders will make the lending decision, which is their core competency, and as lenders will be at risk on the commercial loans that they afford to the farmer, the model should also provide government with the comfort of knowing that no more than market value will be funded. Commercial lenders will continue to apply their respective valuation, risk assessment and extension methodologies in respect of agricultural finance.

“Furthermore, commercial lenders’ credit approval processes provide many self-regulating checks and balances that will address government’s concerns about land reform failures or the potential abuse of the intended grant funding mechanism.

“There is already a regulatory framework in place which governs all registered financial service providers. It includes acts such as the National Credit Act (NCA), the Consumer Protection Act (CPA) and the Banks Act, which govern good lending principles. Freedom of choice of a financier is endorsed, as this will promote competition amongst lenders. For competition to thrive, it is also important that there is a level playing field between commercial lenders and state owned lenders,” says Venter.

He also points out that commercial farmers (those who derive their primary income from farming ventures on a sustainable and profitable basis) need to have both long-term certainty and to also be incentivised to participate in these joint ventures. There should also be measures in place, such as protection from risks, i.e. land claims and exemption from further land reform obligations; benefiting from incentives, such as access to grants; BEE ratings; and recognition to be afforded to farmers who participate in this model. All existing and future land claims will have to be settled through either financial restitution or the award of alternative suitable land to land claimants.

In line with, and affordable within existing fiscal policy

Purchase points out that another major reason why the model should succeed is that it is in line with, and affordable within existing fiscal policy. The success of the policy will be determined by two factors – and here the ball is in government’s court, he says.

“Government must identify and allocate the necessary funds and it must create a mechanism within government to make funds available to beneficiaries. A significant part of the current PLAS funds could already be made available. We also believe that the Land Bank could play a significant role to manage the distribution of funds. Although it could take some time to implement the model, we believe that it could be operational within six months.”

Annelize Crosby, Agri SA’s advisor on legal and land affairs, says that the Agbiz/Banking Association proposal is sustainable and that the model has been well received by farmers. “Its success, however, depends on farmers’ willing participation and this should not be forced onto them by means of an Act.” She says that farmers would, however, also like to have access to “soft loans” to assist them with land reform proposals.

Aggrey Mahanjana, secretary general of the African Farmers’ Association of South Africa (Afasa), says he fully supports the Agbiz/Banking Association model, as it will transfer ownership to land reform beneficiaries. “Ownership will ensure commitment by beneficiaries. We, however, believe that this should not be the only model. There are others. We also believe that the model should not only apply to white farmer partnerships. Individuals should also qualify for loans.”

Venter says it should be noted that Agbiz and Banking Association members do not view the proposals contained in this document as the solution to all land reform objectives. Commercial lenders have a commercial mandate and can only be active and participate in land reform within this mandate. Therefore, they cannot provide lending outside of normal commercial lending criteria, nor can they solve many of the other aspects of land reform that need to be addressed, such as previously failed projects; land held by government; tribal or communal land; the land audit; land claims; and legislative amendments.

“Furthermore, government’s responsibility in respect of land reform cannot be delegated to commercial lenders. Agbiz and Banking Association members view it as crucial that the numerous other aspects of land reform, which fall outside of normal commercial lending practices, should be addressed by government. Where possible, commercial lenders will support Government by leveraging such initiatives through the distribution outlets, payment control systems and skills/capacity. This is necessary in order for the collective effort of all role-players in the South African Agricultural sector to be a success.”

Purchase concludes by stating that Agbiz is still seriously worried about government’s proposed 50/50 model between farmers and their workers, as well as about the proposed legislation on land ceilings. “If we, however, could implement more workable and logical land reform models, we could remove the sting from these models that are highly unlikely to be successful. I remain positive, although there is still a difficult road ahead. We must remember that land reform is an emotional issue, which must be handled with circumspection by all. We must, however, start somewhere and do so now.”

An Agbiz and the Banking Association focus group was established to look at details with regard to the implementation of the model.