New farmers require subsidies from government

By John Robertson



GOVERNMENT’S intentions to replace former freehold title to agricultural land with 99-year leases appears to offer political advantages that make

the concept attractive to political authorities, but no advantages to the lessees can be determined from the lease agreement, other than that it commits the lessee to separate yearly rentals for the land and improvements, rather than a single purchase price.


For any improvements on the land, the rental calculated by the authorities, or lessor, is payable by the lessee for the following 25 years, unless the lessee chooses to reach agreement with the Ministry of Agriculture for the outright purchase of these improvements. And, on signing the lease, the lessee is required to pay within three months, a one-off deposit equal to the sum of the annual rent on the land and the annual rent on improvements.


These outlays secure for the lessee the rights to occupy and farm the area specified in the lease. These rights bring with them a series of obligations and requirements that must be met at the lessee’s expense.
They include:


* Taking up permanent residence on the property, or appointing a manager who will move onto the property within three months;


* Fencing and farming the property in a sustainable manner acceptable to the lessor;


* Gaining approval for a five-year development plan that will have been submitted ahead of the signing of the lease and;


* Initiating minimum developments as required by the lessor within three months of signing the lease.


Minimum developments within the first three months include:


* Development of a permanent homestead and water supplies for personnel and animals;


* Provision of approved access roads;


* Erection of adequate accommodation for employees and;


* Initiating minimum production in terms of the approved plan.


A new five-year plan must be submitted for approval on the expiry of an existing plan or if the lessee is directed to do so by the authorities.


Other requirements include ensuring that no illegal tree-felling takes place, no noxious weed growth is left unchecked, no poaching of wildlife takes place, fire-breaks are maintained and measures are taken to prevent soil erosion as well as to prevent the development of plant and animal diseases.

Where lessees inherit plantations, they are required to rehabilitate and maintain them to the satisfaction of the authorities.


All lessees are required to assume full responsibility for maintenance, repairs and replacements required to ensure the upkeep all other improvements already on the property.

If the lessee fails to meet these responsibilities, the authorities will be entitled to carry out the work and recover the costs involved from the lessee.


While the duration of the lease is 99 years, the lessor reserves the right to terminate the lease if the lessee becomes insolvent, or fails to properly manage the leasehold, fails to meet the terms and conditions of the lease, fails to meet the rental or other financial commitments to the lessor or fails to pay the required rates, levies and other charges to local authorities.


If the authorities do not receive settlement or acceptable representations after giving the lessee 30 days notice of its intention to terminate the lease, the lessor is entitled to cancel the lease and repossess the leasehold after another 90 days.


From the point of view of the farmers, the leasehold terms and conditions suggest that they will have to have confidence in their abilities as well as courage to commit themselves to five-year plans, and will have to meet very high standards to retain their rights to continue farming.


Two issues arise from this: firstly, as a percentage of the population, the number of farmers who have skills of this order is very small. Secondly, even those who have the necessary skills are likely to find that profitability will still elude them on their small-scale leasehold operations.

Government’s intention is to have tens of thousands of farmers work to their A2 land resettlement format with the support of 99-year leases. If, for political reasons, the intention is that very nearly all of these farmers are to be defined as successful, generously low performance levels will have to be accepted when interpreting the terms of the lease agreement.


Concessions that permit farmers to be “successful” without being profitable will make subsidies a necessity. In effect, farmers will be invited to become reliant on subsidised input costs together with support prices for crops. Under such arrangements, the farmers’ need for loan facilities to finance their operations will be greatly reduced.


For farmers, this will be just as well, as their prospects of using their 99-year lease agreements as collateral in support of bank loans are extremely poor. This is true even though in Section 24 of the lease agreement government claims that, because the lease can be registered in a deeds registry and endorsed to the effect that certain sums are owed to certain lenders, the lease can serve as collateral for the loan.


While some banks might extend loans to certain farmers in token gestures to show compliance with government policies, given the government’s determination to see their land reform policy succeed, the lease agreements will be found to have no legal standing as collateral for several fundamental reasons:


* At the most basic level, the lease agreement does not qualify as collateral because the property referred to in the agreement cannot be bought or sold on an open market and it therefore has no market value;


* The lessor’s rights to terminate the lease after serving the lessee 90 days’ notice renders what is left of the 99-year duration of the lease irrelevant. While the lender’s debt recovery rights might remain intact, their prospects of recovering the debt will have been effectively demolished;


* The claim that borrowed money used to carry out improvements on the property increases the value of the property does not translate into a realisable sum of money that can be recovered by the lender in the case of the borrower defaulting on the repayment terms;


* Borrowers might default on repayment obligations at any time, but would certainly do so if evicted from the property by the lessor. In apparent recognition of these shortcomings, Section 24.3 of the lease agreement provides for amounts outstanding to be recovered from the person to whom the lease is ceded or transferred, and states that the final transfer of the property will not be permitted until the intending new lessee has settled the previous leaseholder’s debt or the new lessee has come to an acceptable arrangement with the lender.


This highly impractical provision is certain to cause every new applicant to seek an unencumbered property. Every property that is burdened by outstanding debt will remain vacant and every affected lender will be forced to forfeit the amounts owed. But as the lease documents will not be readily accepted as collateral in the first place, government will have to remain committed to support and subsidies, the costs of which will be borne by taxpayers and will impact on the whole country through inflation.


Direct government assistance to individual farmers so far has been typically confined to farm inputs, but the authorities have tried to encourage farmers to also become owners of their own farm equipment, rather than source the needed capital items from the state. Loan finance is usually essential for the purchase of such assets.


Lessees trying to buy farm implements might be able to borrow from banks on the strength of the security of a Notarial General Covering Bond that would put the bank’s claims ahead of concurrent creditors if the farmer went insolvent or was evicted from the leasehold for some other reason.


However, as these items of equipment would be moveable assets, the bank would face the additional risk that the assets could be moved beyond their reach ahead of the disclosure of financial difficulties.

For the government, the advantages centre on features of the arrangements that will permit the state to:


* Acquire and exercise ultimate control over the land;


* Make agricultural land an asset within the gift of the state;


* Eliminate pressure groups of farmers empowered by property rights;


* Re-allocate land that officials consider is not being efficiently used;


* Protect peasant communities from the harshness of market forces;


* Receive rental incomes from all lessees;


* Receive separate rental incomes from the improvements installed by previous property owners;


* Administer, regulate and control the initial selection of lessees;


* Directly influence the selection of successors when existing lessees choose to vacate their leaseholds or have their leases cancelled.


In its launch of the new 99-year lease agreements, government made no reference to these underlying objectives, but confirmation of their being intrinsic to government’s thinking is its basic distrust of market forces and its unwillingness to permit citizens to exercise freedom of choice.


As the initial beneficiaries of land redistribution are being given the land free of charge through the exercise of government patronage, the intention is that their successors will also take over the land free of charge through the transfer of patronage to them. However, they will be expected to pay a rental to the state for the use of existing improvements or pay the former lessee for improvements carried out during their tenancy.

In previous presentations in support of its 99-year leasehold propositions, government has cited the fact that considerable areas of land in certain developed countries are successfully leased to farmers.


Unfortunately, the conditions the government has entrenched in the leases make them distinctly different from conditions that apply in first world countries.

In the countries concerned, the leased land in question is not owned by the State; a property-owning individual, family or company owns it, each lease is on an identifiable piece of land, each lease has a market value and each lease is therefore marketable. Because of the marketability of the lease, it can be offered as collateral in support of a loan.


This protects the lessor, as a bank that is owed money that the lessee cannot repay has the legal right to place the lease on the market. When a new lessee pays for the remaining years covered by the lease, the bank will recover the funds owing. Laws governing tenant rights also protect lessees, but in exchange they are required to meet these fully acceptable obligations or forfeit their rights.


In the event of a lessee deciding to relinquish a lease, the market value of the remaining years will be established in the market, a buyer will be sought through the market and the transaction will be formalised and registered in the market by real-estate agents and conveyancers.


Other than collecting transfer duties registering the new lessee, the state plays no part in the procedures.


These features make all such lease agreements bankable in other countries, but the leases being issued by the Zimbabwe government are not bankable, simply because no mechanism exists that could be used to establish a market price and no market exists that will permit a normal transfer of ownership of the pledged security.


Government’s right to approve or reject any applicant wishing to take over an existing lease further distances the arrangements from the open market requirements of genuine, bankable collateral.Notes on the evolution of leasehold to freehold title leasehold arrangements first evolved from the earlier feudal systems in Europe, as landlords and tenants tried to find means of unlocking the capital value of land.


As the shortcomings of leasing became apparent and as the power of the landed aristocracy waned and as the need for capital and security of tenure increased, freehold ownership rights offered the required assurances.


When new areas of settlement and investment were being established in the Americas, the feudal systems of Spain and Portugal were transplanted into South and Central America. However, in North America, the evolving freehold land tenure systems were adopted. Today, hundreds of years later, South and Central America remains a collection of developing countries, but North America has become the most prosperous area in the world.


The essential difference between these two vast areas — and the essential difference between the former communal and commercial areas of Zimbabwe — is that, where they had individual title, the owners of the land used its capital value as leverage to raise the funds required to develop the land’s potential as well as their own. With access to the capital they needed and the confidence that came from security of tenure over their property, they achieved remarkable successes.

Property owners’ title deeds provided them with a bridge that led directly into the banking sector. Their ability to make long-term plans and their eagerness to repay their loans to preserve their ownership rights drew from them exceptional levels of resourcefulness, ingenuity and determination to succeed.


By contrast, where the occupants of the land were tenants, their ability to raise money to carry out development work or to augment their own skills was severely limited. Their uncertain hold on the land they occupied, but could not own, left them with neither the means nor the incentives to plan ahead, and they never felt inclined to shoulder the burdens of expense, risk and effort to invest in productive capacity that would enhance the value of someone else’s property.


Today, many South American countries are moving towards individual freehold property rights in an effort to accelerate development. China has accepted the need for individual property rights, and ownership rights are being restored to East European families that were dispossessed of properties after the USSR extended its territories after World War II.

Zimbabwe’s proposals are taking the country in the opposite direction.


The government’s declaration at the end of the lease agreement that “the lessee may use this lease as collateral in securing agricultural financial assistance from any financial or agricultural institution” is not enough to make the lease acceptable to lending institutions.

As the conditions created by land reform have effectively eliminated the collateral value of farmland, they have made development funding entirely the responsibility of the state and they have made each individual’s performance dependent on state subsidies and support. Personal progress within such a system has therefore become dependent upon political patronage, rather than upon resourcefulness, good management and hard work.


Although fixed assets of some value could be built with money loaned by a bank, the separation of land from the improvements on that land makes the recovery of the debt almost impossible if the borrower defaults. This is
because the farmer’s right to remain on the land is conferred, not by business procedures supported by market forces, but by a political act that the bank cannot challenge.


Investment is the first requirement for economic growth. By according a capital value to land, considerable capital sums are unlocked and made available to the investment process. Individual property rights, market prices for land, transfers of ownership through the market and the official registration of ownership rights make up the essential components of the market mechanism that releases this capital onto the market.


The responsibility, accountability and legal obligations that go with individual freehold property rights quickly help communities to accept the challenges of modern economic development and they place the means of achieving profound economic empowerment within reach of the majority. But because Zimbabwe’s authorities consider these levels of success to be a threat to the ruling party’s power-base, these advantages are being denied to Zimbabwe’s population. Zimbabwe’s current policies very clearly have nothing to do with empowering the people.
 
Government’s decision to revert to feudal state-ownership of land is already proving to be a massively retrograde step.


* Robertson is an independent economist.

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