Weasel clause reappears – undermining property rights – BizNews, 26 November 2015

By Anthea Jeffery 

The weasel clause that was taken out of an earlier version of the Promotion of Investment Bill of 2015 (the Investment Bill) has effectively reappeared in the latest version of the Expropriation Bill of 2015 (the Expropriation Bill).

The earlier clause in the 2013 Investment Bill said there would be no expropriation (and so no compensation to be paid) if “the State did not acquire ownership” of an investor’s property. This indicated that no investor, either local or foreign, would be entitled to any compensation if the State took its property as “custodian” rather than as owner, or if the State’s actions amounted to a “regulatory” or “indirect” expropriation.

With public objections mounting, this clause was removed from the Investment Bill. Now, however, a similar provision has been inserted into the revised Expropriation Bill. This new weasel clause defines expropriation as meaning “the compulsory acquisition of property by an expropriating authority” (emphasis supplied).

This wording has its origins in a contentious majority judgment (in Agri SA v Minister of Minerals and Energy) handed down in April 2013. Here, the Constitutional Court said that there was no expropriation – and so no compensation to be paid – in a case where the State had acquired an unused mining right under the provisions of the Mineral and Petroleum Resources Act (MPRDA) of 2002. There was no expropriation in this instance, the majority of judges said, because the State had merely taken “custodianship” of the mining right, rather than ownership of it.

In this case, the court was dealing with the particular facts before it, while Chief Justice Mogoeng Mogoeng noted that future cases would need to be assessed and decided on their own merits.

Two of the court’s judges warned against the majority’s ruling, saying it could lead “to the abolition of the private ownership of…all property” without compensation. “Any legislative transfer of property from existing property holders” would no longer be “recognised as an expropriation” if it was “done by the State as custodian”, they cautioned.

The new definition of expropriation in the Expropriation Bill is close enough to the majority perspective to raise precisely this danger. It also shows an intention to turn this ruling, from a single judgment based on the facts of one particular case, into a general principle of law.

This will affect not only commercial investors, as defined in the Investment Bill, but all those who own farms, houses, mines, and other property in South Africa, both black and white.

The risk applies particularly to those whose homes or other properties are already subject to land claims, or might still be claimed between now and June 2019 (when the current window period ends). Land claims affect not only farmers but also a host of other property owners, as shown by a claim recently gazetted over much of Pretoria North. This claim covers large swathes of commercial, industrial, state, and residential property across the city, plus the whole of Mamelodi.

In the past, the Government was reluctant to expropriate land that was under claim as compensation had to be based on full market value. It also had to include compensation for losses resulting from expropriation, such as moving costs or the loss of income from land used for business purposes.

Under the Expropriation Bill, by contrast, compensation is likely to be significantly less than market value and will not cover resulting losses. Moreover, if the State takes land under claim as “custodian”, then the new definition of expropriation could well mean that the compensation payable will be zero.

Important too is the fact that the State has already drawn up a bill seeking to vest all agricultural land in the “custodianship” of the Department of Agriculture, Forestry, and Fisheries. On this basis, farmers could effectively lose their ownership rights without this counting as expropriation or meriting compensation. This will harm not only South Africa’s shrinking pool of commercial farmers, but also farm workers, the rural economy, and the country’s food security.

Many businesses may also be badly affected by the new definition of expropriation, which will exclude compensation for what is widely known as “regulatory” or “indirect” expropriation. This arises where the State itself does not acquire property, but its regulations result in the owner losing many of the powers and benefits of ownership.

If the Government raises the current black economic empowerment (BEE) ownership requirement from 25% to 51%, this would be an indirect expropriation. This is also not a mere academic possibility, for various BEE procurement rules are already pushing companies in this direction. Where these rules apply, companies are required to transfer majority control to BEE partners at heavily discounted prices. Under the Expropriation Bill, they will simply have to absorb these losses and will have no claim to compensation from the State.

Indirect expropriation will also result from the indigenisation requirement in the Private Security Industry Regulation Amendment (PSIRA) Bill of 2012, which requires all foreign-owned security companies to transfer 51% of their assets or equity to South Africans. This Bill has already been adopted by Parliament and needs only the president’s assent to be enacted into law.

Once this occurs, companies ranging from ADT and G4S to Fedex (which is also covered by PSIRA because it transports security equipment, such as closed circuit television cameras), will have to sell majority stakes to South Africans at fire-sale prices. Again, they will have no claim to compensation from the State under the Expropriation Bill.

The new definition in the Expropriation Bill far outweighs the various improvements that have been made to the text in the parliamentary process. In many instances, these improvements will never come into play as they apply solely to expropriations that meet the new definition in the Bill. The State may thus be able to avoid having to comply with them through the simple expedient of taking property as “custodian” rather than as owner.

The definition also casts fresh light on another change to the Expropriation Bill. The purpose of the Bill was initially worded as: “To provide for the expropriation of property for public purposes or in the public interest, subject to just and equitable compensation”. The words “subject to just and equitable compensation” have been deleted.

State or regulatory takings should not leave South Africans (or foreign investors) with no compensation at all. Yet this is likely to be the outcome of the Expropriation Bill as currently worded.

By comprehensively undermining property rights, the Expropriation Bill will limit investment, curtail economic growth, and make it still more difficult to overcome the unemployment crisis. With the growth rate per capita already down to zero (it was 0.1% of Gross Domestic Product in 2014), it is time for elected MPs to put the interests of the country before those of the communist ministers who are pushing for the Bill’s adoption, and decline to adopt the measure.

Anthea Jeffery is Head of Policy Research at the Institute of Race Relations.

http://www.biznews.com/thought-leaders/2015/11/26/anthea-jeffery-weasel-clause-reappears-undermining-property-rights/Read the article on BizNews here.