Minister’s devilish formula for property valuation in restitution cases unpacked - BizNews, 16 May 2017

By Anthea Jeffery 

Under a formula devised by Gugile Nkwinti, minister of rural development and land reform, the value the state assigns to property targeted for land reform will generally be about half of market value. It could often also be zero.

This formula is to be found in draft regulations recently gazetted by Mr Nkwinti under the Property Valuation Act of 2014, which took effect on 1st August 2014. Under this Act, the Valuer General – a state official appointed by the minister – is responsible for ‘determining’ the value of all property identified for ‘land reform’ purposes.

Property targeted in this way may include both land and ‘any movable property which is contemplated to be acquired’ with it. Farms are the first assets likely to be targeted by the state for land reform purposes. However, the formula could equally apply to any residential, commercial, or industrial land which is already under claim – or which might in future be claimed once the restitution process is re-opened under a bill soon to be put before Parliament.

To illustrate how Mr Nkwinti’s formula would work, let’s consider how it would apply to a farm. The Valuer General would start by taking the market value of the farm and adding that figure to the farm’s ‘current use value’. The latter is defined as any positive balance that remains when cash (and other) inflows are weighed against cash (and other) outflows. The sum of these two figures must then be divided by two.

Say, for instance, that the farm has a market value of R1 million and a net profit of R100 000 a year. Under the formula, its value will be R1.1m divided by two – or R550 000. This is roughly half its market value. If for any reason there are no net profits to take into account, the farm’s value will be even less.

If movables on the farm are also targeted for land reform, then their market value is relevant too. According to the formula, the market value of the land and the movables must be added together, net profit must then be taken into account, and the total thus reached must be divided by two.

Say then that the farmer has 50 head of cattle, with a market value of R500 000, which are also needed for land reform. This R500 000 must be added to the R1m, giving a sum of R1.5m. To this net profit of R100 000 must also be added. The resulting total of R1.6m must then be divided by two, yielding a value of R800 000.

Say, however, that the farmer did not buy the farm but rather inherited it ten years earlier, when its market value was R300 000.  This ‘acquisition benefit’ must be ‘escalated’ to the valuation date, ‘using an appropriate cost or price index’. Assuming that inflation would have brought the farm’s market value from R300 000 to R1m over this decade, then R1m is the ‘acquisition benefit’ to be taken into account.

Under the formula, this acquisition benefit must be ‘subtracted’ from the value as previously ascertained. So, whereas the value of the farm, plus the cattle, previously stood at R800 000, now the acquisition benefit of R1m must be subtracted from this. That yields a negative value of minus R200 000.

The farmer who has inherited his farm will thus be hit particularly hard. Had he bought the farm ten years before and paid its market value at the time, the relevant value would still be R800 000.

A similar deduction will apply where a farmer has previously benefited from ‘any direct state investment and subsidy in the acquisition and beneficial capital improvement’ of the farm. Here, ‘the historical cost’ of the state’s aid must be determined and ‘escalated’ to the present time in the same way. If relevant state subsidies have a current value of R1m, then this amount must be subtracted from the R800 000 that would otherwise apply in our example. Hence, the farm and cattle would again have a negative value.

Mr Nkwinti has gazetted the draft regulations in order to spell out the ‘criteria, procedures, and guidelines’ which the Valuer General must follow. Under the Act, the minister must give the public 30 days to comment on his regulations, but 60 days have in fact been allowed. Hence, the period for comment expires on 19th June 2017.

If the minister decides to ‘alter the draft regulations as a result of any comment received’, he need not publish these alterations in advance. Instead, he can simply gazette the regulations in their final form, so bringing them into operation. No parliamentary scrutiny of his regulations is required.

Under the formula Mr Nkwinti has devised, the value of property targeted for land reform will generally be about half of current market value. Sometimes that value will be zero or a minus amount.

Is this formula constitutional? The property clause (Section 25) in the Constitution says that compensation on expropriation must be ‘just and equitable’, taking account of market value plus four other factors. These four factors are the ‘history of the acquisition of the property’, its ‘current use’, the extent of ‘direct state investment and subsidy’ in its acquisition and capital improvement, and the purpose of the expropriation.

Mr Nkwinti’s formula is clearly based on these factors. However, there is nothing in the Constitution to suggest that ‘current use’ should be turned into ‘current use value’, that this should be defined as net profit – and that net profit should be added to market value and then divided by two.

In most instances, the outcome will be far from ‘just and equitable’. However, the ANC’s persistent rhetoric around ‘radical economic transformation’ and ‘stolen’ land is no doubt aimed at persuading the country – and the Constitutional Court – to endorse it nonetheless.

Dr Anthea Jeffery, Head of Policy Research, Institute of Race Relations, a think that promotes political and economic freedom. 

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