It is incredibly important that the State resoundingly lose the expropriation without compensation case currently underway in the Western Cape High Court. No economy has ever grown, and most have shrunk, where property rights are not adequately protected. Given that this clearly is not well understood, let me explain why.
Every month you pay money into a pension fund so that you can retire safely, with your full contribution intact, plus the growth over the investment period. Now imagine you are given two investment options. The first is a normal fund and the second says there is a 1% chance, each year, that your investment will be taken from you and given to someone else. Which fund would you put your money into? As Mark Twain never said, “you don’t invest in stuff you think will be expropriated without compensation”. In a less sophisticated time, we used to call this theft.
A few days ago, I attended a Presidential breakfast brunch, where he spoke to companies already deeply invested in South Africa (and open to investing more) about the importance of industrialisation. Investment, according to the President, would be unlocked because government was not going to privatise broken parastatals, but rather would bring the private sector in as investment partners. He explained that government procurement would be used (presumably with this new flood of private capital) to buy stuff from local producers. This sounds good in presidential speeches, but in reality, dealing with government is a nightmare. Tenders are rigged, compliance with designation rules is patchy at best and getting paid (unless you won the rigged tender) is a very serious challenge. Now you also have to worry that your investment could be expropriated.
Not a single word was mentioned about the importance of property rights.
The assumption that the best economic outcomes can be achieved by taking things from a legitimate owner and giving it to someone else or even worse, the State, who will then use it better, is clearly insane. We know this because while you may think that private property comes straight from the devil, do you feel the same when it’s your house that the State requires because there are comrades in need. And there are always comrades in need. No matter how noble the reasons, once you legalise theft, you will struggle to contain the unintended consequences. The Nats and Mugabe found this out the hard way and so will this government.
Banks sit on the other side of many property transactions. Start expropriating without compensation at scale and watch SA’s largest bank run happen overnight. The Banking Association of South Africa explains that “[p]roperty 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.”
The Institute of Race Relations is a little clearer: “Despite the fact that the Act places the burden on the expropriated property owner to go to court to protect their property rights − meaning someone can lose their source of income at the same time as facing enormous legal costs in court − major law firms, including Fasken Martineau DuMoulin and Cliffe Dekker Hofmeyr, have asserted that because courts are tenuously included in the ultimate settling of compensation disputes, property rights remain protected. Nedbank has expressed similar confidence, citing the Act’s ‘checks and balances’.”
The irony should not be lost on you that the confidence expressed in the Act’s ‘checks and balances’ requires trust in a process that has not worked terribly well even when compensation was paid. Take a moment to read the riveting series in Daily Maverick about the 15-year dispute between Fred Daniel and the Mpumalanga Provincial Government to understand how rigged the system already is before we even consider adding the madness of no compensation. Despite the State losing case after case in court, it never actually abides by the court’s decisions.
Most recently Daniel was granted a cost order of R306 million plus interest and costs and yes, they never paid. Daniel is a wealthy man, able to shoulder the financial burden a lesser mortal could not, but when the State refuses to abide by court orders, then what will someone with less money do? Very few property owners can afford to litigate and so will simply be deprived of their property. When nil compensation is supported by the President, it will quickly be the first, not the last, option. The consequences will be devastating. Now try to collect the mortgage from someone whose property has just been taken. This is how bank runs begin.