Summary: Expropriation Bill No. 23, 2020

The Banking Association is fully supportive of the state’s initiatives to rectify past racial injustices, to correct current land ownership patterns and to alleviate poverty. We remain committed to playing a leading role in working with key stakeholders, including government in finding all-inclusive solutions to this and other economic challenges to create a better life for all South Africans.

Banks are very mindful of the need to protect the interests of their customers, both depositors and borrowers alike, some of whom could benefit from land reform. BASA’s concerns include:

• Property owners with mortgages and other bonds on property that may be expropriated at below market value or without compensation face severe liabilities. Borrowers will still be liable for the full debt on a property, even if the underlying asset has been expropriated at below market value or without compensation. This is because loan agreements with banks are secured by mortgages over the property. These loan agreements remain valid and binding irrespective of the value realised for the property used as security in support of the loan.
• Banks have extended R1,6 trillion in residential, commercial and agricultural mortgages to borrowers. Many other forms of credit are premised on a customer’s financial standing, which in the majority of cases is supported by the equity in their property. Currently, the market value of land- based property in South Africa is estimated at R7 trillion, representing the homes and savings of ordinary people. Any legislation that threatens the repayment of loans owing to banks will undermine a critical sector of the economy and put depositor’s funds at risk.
• Banking crises often start with a decline in the value of land-based property and the impact this has on market confidence, as was evident in the global financial crisis of 2008. A sound banking and financial system is essential for inclusive economic growth.
  • The South African Banks Act and regulations thereto (these are in turn aligned to the global Basel framework for the financial sector – South Africa as a member of the G20 is obliged to adopt this framework) require that banks have sufficient capital and liquidity to return depositors and investors funds – with interest – on demand. If the value of land is reduced by expropriation to nil compensation, or at below market value, banks will have reduced capital against which to extend credit for entrepreneurs and personal development. They will have to adopt more conservative loan policies, which will affect all credit extension, not just property.
  • ‘Just and equitable’ compensation for expropriated land may be below market value. This will inhibit the ability of banks to provide credit where property serves as security for a loan. To mitigate this, government should automatically guarantee the difference between ‘just and equitable’ compensation and market value. The difference should be paid to affected financial institutions to eliminate losses. This approach was approved by Cabinet, in October 2012, when it adopted the Department of Rural Development and Land Reform (DRDLR) policy: ‘A framework for land acquisition and land valuation in a land reform context and for the establishment of the Office of the Valuer General’. However, this has since been ignored in subsequent versions of the Expropriation Bill and the Property Valuation Act and Regulations thereto (despite BASA’s requests for this to be included).
  • The possibility of expropriation at below market value or without compensation has already started discouraging essential investment by farmers into their property, increasing food insecurity, as well as investment into the general economy and in particular into property. It must be made clear as soon as possible what land may be subject to expropriation, and which will be excluded.
  • We recognize the need for the State to align the Expropriation Act (No. 63 of 1975) to Section 25 of the Constitution of the Republic of South Africa (No. 108 of 1996). We are also cognisant of proposed changes to this section of the Constitution ((Amendment of Section 25 of the Constitution of the Republic of South Africa, 1996 (Constitution Eighteenth Amendment Bill) dated 19 February 2019 refers). The process of amending Section 25 of the Constitution has however not been finalised, which may have substantial implications for this Bill, as the Expropriation Bill needs to give effect to the gazetted finalised amendments to this section of the Constitution. The Bill is therefore pre-supposing that Section 25 will be amended and that public consultation on the need for this to take place and perhaps even amended wording recommendations will be inconsequential. We are therefore of the view that the finalisation of the proposed amendment to Section 25 of the Constitution should have been finalised before this Bill was gazetted for public consultation.
  • Of concern is that South Africa’s definition of expropriation excludes the deprivation of property for the benefit of the nation where it is not transferred into the name of the state (Constitutional Court ruling) as well as compensation below market value. This conflicts with global norms, including that of the OECD. As the Protection of Investment Act (2015) subjects’ international investors to the prescripts of South African legislation, and as aggrieved parties are now prevented from turning to the international arbitration court, the Bill in its current format may discourage international investment into South Africa and result in capital flight should international investors incur losses due to expropriation at below market value. The Bill is also at variance to existing Trade Agreements.
  • There are key definitions which have not been clearly defined within the Bill, namely “just and equitable” compensation, “public purpose” and “public interest”, which introduces policy uncertainty and opens the Bill for injudicious expropriation.

Further, the definition of property is viewed in the broadest sense within the Constitution and so the Bill is aligning to this definition. Property can therefore include intangible property (intellectual property, patents etc.). The definition of property within the Bill should therefore be restricted to tangible property only and this should be further confined to only include the country’s resources (land, water, mineral resources).