Donations To Land Reform Fund Will Take Burden Off Farmers

In a previous article I highlighted a specific role for commercial farmers and other landowners to donate land by introducing nudges and incentives. It would, however, be unfair for farmers to have to take all the responsibility for the redistributive process. There should also be a role for those in the established nonfarm economy.

White farmers were not the only white people who benefited from the old regime – most of the beneficiaries of apartheid live in urban areas. The presidential advisory panel on land reform therefore came up with the idea to spread the burden by creating a land reform fund. This concept was central to the report of the panel and is discussed in detail on page 82 of the report. In this essay, I discuss the argument for, and the mechanics of, creating such a fund.

I believe that there is a moral and economic argument for the establishment and contributions to the fund. First the moral argument: all white people in SA have to acknowledge the history of dispossession of land and livelihoods during the years of colonialism and apartheid. In the spirit of social justice, redress and reconciliation white people as a collective should implement mechanisms and solutions to facilitate the redistribution of land to the majority. Therefore, the fund provides a vehicle for voluntary financial donations from the financial services industry and other nonagricultural sectors.

This is specifically relevant to businesses that do not own large tracts of land. The personal wealth of the urban elite, including business leaders and professionals, and various financial assets, could be a valuable source from which voluntary contributions can be requested (in exchange for recognition or other incentives) to fund the implementation of land reform. In this process opportunities are created for other investors to contribute to the challenge of restoring social justice, equitable land ownership, decent housing and equitable economic opportunities.

Next, the economic argument: the creation of the fund should be a process whereby government funds, capital raised through land reform bonds, foreign donor funds and the individual contributions mentioned above are merged into one fund that should be easily accessible by implementing agents and beneficiaries of land reform.

By combining the various sources of capital in one fund the cost of capital is reduced, which should allow the fund to on-lend to beneficiaries and benefactors (of land donations) at far below-market interest rates. In the process it will ensure the successful establishment of new enterprises. (This is also what we expected agribusiness and commodity organisations to do when they receive grant funding from the jobs fund or development funding from the Land Bank. It is not morally correct to on-lend to new farmers at 12% when the cost of capital is 0%).

The hope is that the fund will facilitate the funding of land reform (and the establishment of farming enterprises) in a much quicker and cheaper way without placing an additional burden on the fiscus. At the same time the fund should make it possible to reduce the risk of default for farming enterprises by providing finance at beneficial terms.

The various sources of funding (most of it bearing no interest), combined into one fund, should make it possible to provide finance to beneficiaries (and commercial farmers donating land) at subsidised interest rates and beneficial terms such as deferred repayments or deferred interest payments.

Establishing a farming business from scratch is very difficult given the large land and capital costs. It is unlikely to be achieved successfully without the assistance of the state. It was not possible in 1920 and will not be in 2020. During the apartheid years white farmers were able to establish their farming operations under beneficial terms via the Land Bank and the Agricultural Credit Board, which gave mortgages of up to 40 years under the old regime (and for up to 65 years in the original irrigation settlements).

Coupled with intensive support, guaranteed markets and guaranteed prices, farmers were given a reasonable chance of success, but still many failed. If the land reform process is supported by access to bridging finance and seasonal finance at affordable rates (via the land reform fund) there is a good chance that beneficiaries of redistributed farmland can establish sustainable enterprises.

The land reform fund could also be accessible to farmers donating land for the land reform process. They could use this capital to intensify, modernise existing production on their remaining land and also finance joint ventures with beneficiaries in exchange for an in-kind contribution of land.

The advisory panel did not specifically recommend where the fund should be established, but given that voluntary donations would be hamstrung by government bureaucratic processes it might be efficient to establish it outside the government.

The land reform fund would not on its own be a sufficient guarantee for sustainable redistribution of farmland because all the complementary inputs should also be in place. Therefore, agribusiness firms and established farmers should contribute some of the elements of a full support package on behalf of the government – mainly related to information, expertise, extension services and market access. Again, these contributions can be incentivised through access to the land reform fund. It is critical that land reform beneficiaries are integrated into modern value chains, and that is why larger commercial farmers and agribusiness should focus on implementing joint ventures with beneficiaries all financed by the land reform fund.

However, the state retains an important role to create a decent chance of success for newly settled farmers. The main elements of a successful farmer support programme could include:

  1. Mechanisms to subsidise capital needs. This includes full or partial direct subsidies, delayed payments and phasing provisions as explained earlier;
  2. The annual payment for land acquisition should be spread over a longer period — perhaps 40 years (and not the standard 10 years prevalent in agriculture). It is also possible to include elements such as deferred payments whereby beneficiaries are given a five- to seven-year grace period before repayment of capital and interest (at subsidised rates) kicks in; and
  3. Subsidies for on-farm improvements and infrastructure (fences, conservation works, reservoirs, boreholes, pumps, cattle pens). The current programmes (Comprehensive Agricultural Support Programme, etc) should change to a cofunding model. Farmers will pay for the improvement (using their own resources or a loan from the land reform fund) and then claim a refund (subsidy) from the relevant government office based on proof of expenditure and on-site inspection to verify actual expense.

This approach to a land reform fund speaks to the commonly cited view that land reform is SA’s challenge, not the government’s alone, and business and society also have a role to play. This would provide an avenue for South Africans to make contributions for the good of the country.

  • Prof Kirsten is director of the Bureau for Economic Research at Stellenbosch University.

OPINION: Johann Kirsten