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Land reform in South Africa is complex. Land reform solutions are equally complex and within partnership and development models, this is no different – but there is hope. KwaZulu-Natal has several types of partnership models and the wide variation in farming systems, as well as their different needs, set each model up for different strengths and weaknesses.
A single article is not enough to examine partnership models in detail, but if viewed through the lenses of continued and increasing agricultural investment, tangible benefits to participants and maintained or improved livelihoods, two projects stand out. For the purposes of distinction, one will be called the 49:51 lease joint venture (JV), and the other the 50:50 state land partnership.
The 49:51 lease joint venture
The 49:51 lease JV was initiated by farming brothers in the early 2000s. They saw the opportunity to include their 60 permanent workers in the farm ownership model. The workers, through the SLAG/LRAD grants system, each received a portion of money that was put into the pot as down payment for purchasing the land on which the farm operates. The balance of the purchase cost was raised through debt finance from a commercial bank (the commercial farmers still had to sign surety for this debt).
The property was purchased in a vested trust where each worker had a 1/60th share. Because the project was seen as an economic development initiative, it was envisioned that over time participants would be allowed to buy and/or sell their share, with the farm maintained as a business operation and not a settlement farm.
The debt finance was repaid through a guaranteed long-term, transferable lease to the operating company on the farm. The operating company, previously owned by the farmer partners, donated 49% of the entity to the employee trust that had bought the land, thus they retained operational control but shared dividends and profits through this JV company.
There are a few key features that indicate how successful the model is, including that the recipients of the land have now paid off the farm, receive rental income that is distributed to the beneficiaries, and benefit from dividend payments when the farm makes a profit.
There are also obvious successes in that the beneficiaries have an opportunity to retain jobs, there is an increasing plane of income over time, as well as space for personal growth in management. The co-ownership of the business means that expansion, purchasing of an additional farm by the operating JV, planting of higher-value crops (avocado orchards) and lease of additional farms also benefit the beneficiaries.
A few key issues
There are a few key issues that have arisen from the model of a vested trust where, over time, beneficiary employees die, retire, are fired and/or resign of their own accord. The first is that their benefit is not easily transferable due to the high cost of their share – this means that most of the other beneficiaries cannot ‘buy them out’.
Even if one did ‘buy out’ another, it would create a situation where there are fewer and fewer owner beneficiaries over time. The end point would most likely become a reflection of the starting point – one relatively well-off individual among many poorer individuals.
A second challenge with this lack of ability to enter/exit the trust is that, over time, it is possible that most of the beneficiaries will live and work off-farm, with an obvious option to extract their asset value as a sale of the farm. Although technically there isn’t anything ‘wrong’ with these outcomes, they detract from the aim of increased ownership and equality of those who work the land.
The JV has ‘postponed’ the issue of increasing off-farm beneficiaries by signing a long-term lease that would allow the operating company to retain use of the farm even if the farm is sold. The management team of the operating company are exploring ways to create another JV operating company, to allow entry of new employees on the farm who were not present at the time of the initial project establishment. Yet the economic reality is that shares in the land, as a valuable asset, cannot easily be extracted by individuals for their own personal benefit, even on retirement or death.
The 50:50 state land partnership
The 50:50 JV on state land came about through selling the farm to the state with the expressed intention of engaging in a JV on the land. The state bought the farm, the JV operating company was established with 50% held by the previous farmers’ company, 45% held by an employee trust and 5% held by the National Empowerment Fund (NEF) that, as a parastatal, is an ‘accountability’ shareholder and a source of loans for the company, since state land cannot be leveraged in a commercial bank.
The employee trust is a vested trust, which in this case only includes employees who have worked on the farm for more than ten years. This trust has directors who serve on the board of the operating company and, together with the NEF, make up 50% of the decision rights. Within the trust there is no capital distributions from the operating company and no allowance for any future white employees. The benefits are therefore purely profit and cash-flow based, rather than reflecting any realistic growth in asset value.
Successes and drawbacks
The successes of both models are that they retain skills necessary to maintain and grow production. In both cases the operating companies have increased investment and improved profitability since the start of the project – this in turn has increased employment and the gross livelihood impact of these farms. There is also a clear benefit in terms of profit dividends and distributions to beneficiaries.
Both models have theoretically solved the challenge of being able to raise investment through the trust’s ability to leverage its land for debt in the 49:51 lease JV, and through the involvement of a funding stakeholder (NEF) in the second. Although this is the theoretical case, in practice they have had to raise capital through other means – such as the Industrial Development Corporation (IDC) or through other operating company leveraging. What has been demonstrated, however, is that it is possible to raise finance without leveraging the land, although it is a challenge.
There are entry and exit mechanisms to both models – one through simply becoming a beneficiary after a certain number of years, and the other through the sale of benefit shares, although this is impractical due to the high value. One of the key components that both models have succeeded in doing, is restoring a form of dignity to the farm workers involved as they are now ‘co-owners’ of equal value in their immediate society.
The challenges in both models, however, revolve around the entry and exit mechanisms, how efficient they are, and how they practically achieve the key aspect of ‘those working the land benefit from the land’. Both models have also effectively devalued the land by making it a ‘dead’ asset, meaning that it cannot be leveraged for debt or extracted for benefit.
Model to solve entry/exit issues
A third model, established purely as an employee benefit model and not particularly for development purposes, may hold a key opportunity in terms of solving entry/exit issues. This farmer combined his family trust in a JV company with a discretionary employee trust to purchase land, which was then leased back by the farmer’s operating company.
The discretionary trust is established in such a way that the benefits of the trust are not vested in the beneficiaries, but are set according to certain rules administered at the discretion of the trustees. This means the rules of the trust can define the level of benefit, means of entry and exit, and value of each person’s share within the rules stipulated in the trust deed.
This farmer used the gross earnings to date earned by an employee as a proportionate measure of their benefit proportion in the trust. A new employee entering with no value in the trust (R0 earned) will have an opportunity to gain a share simply by contributing his or her labour.
In general, discussions around adopting this model suggest that a measure of years worked rather than gross earnings would be more easily applied, but that is semantics. The key is that a means to enter and exit using a measurable share has been identified.
Another key benefit of this model is that the share value is linked to the repayable debt of the trust (i.e. the debt repayable by the rental income from leasing out the land). Hence, the asset value is not entirely tied up – it can be leveraged for those individuals within the trust at the agreement of the trustees.
The extractable asset, as well as the value of that leveraged for an individual, would have to be limited to the individual’s proportional share of the net asset value (i.e. gross value less outstanding debt multiplied by the proportionate share of the individual) and linked to the repayable debt, or there would be a cashflow issue to pay individuals leaving the trust.
Building blocks for success
Although at present the models operate in separate spaces and in separate businesses, the building blocks for some truly successful models, from both a social impact and economic sustainability view, are available to be put into the puzzle. The lessons learned are invaluable for another farmer wanting to explore new models of farming, but care must be taken in the process (not spoken of here) as well as defining the model envisioned. – By John Flanagan, Kwanalu Land Desk
For more information, contact John Flanagan on 081 377 5148.