Will an increase in agricultural land value benefit Namibia?
Introduction – What are we dealing with?
RECENTLY the Ministry of Land and Resettlement announced a new valuation of agricultural land for the whole of Namibia.
This valuation is still based on the so-called Unimproved Site Value or USV and so means the land without infrastructure such as boreholes, pumping equipment, pipelines, dams, troughs or any fences and buildings.
Land tax is calculated as 0.75% of this per-hectare value for the farm, multiplied by the number of hectares on the farm. Should the owner have more than one title deeded unit, the additional units are calculated at 1.75% of their USV. Unlike other property and businesses, the land tax cannot be deducted from income tax.
Our government uses the land tax revenue to buy farms as part of its resettlement programme. The purpose is to make available agricultural land for previously disadvantaged citizens so that the historic imbalances when it comes to land ownership can be rectified. An additional aim is to increase agricultural production, food security, to alleviate rural poverty and to safeguard social peace.
The new valuation on which the land tax calculations will be based for a period of 5 years presents a dramatic increase of up to 630%. This brings up the question what benefits Namibia as a whole can expect from such a drastic step.
In particular, how will it affect the agricultural sector, all the people living off that land, the ecology and last, but not least how it will affect the land reform process with its above mentioned objectives.
Understanding the new valuation of land
Four trained valuers and their assistants from the Ministry of Lands visited approximately 400 freehold (commercial) farms which have been sold in the past 4 years.
They assessed the value of the present infrastructure and then deducted this value from the actual price for which the property was sold. The remaining per-hectare amount was taken as the new unimproved soil value and not the agricultural production potential of the land.
Generally the government has the first option on all farmland that is being offered for sale. Only when the government has declined this first option or when farms are being sold out of a deceased or a bankrupt’s estate can it be traded on the free market.
One of the consequences of the rarity of these free market sales is that farmland is bought for „collectors“ prices paid by persons who do not have to live off the land they are buying and who have access to capital from non-farming income.
In Namibia this means the market value exceeds the production value of the farm by up to 10 times.
The result of the above dynamics are unrealistically high land prices and discouraging circumstances for increasing agricultural production and productivity.
Consequences and repercussions
In the following the consequences for all affected parties, as well as the ecological health of the land will be sketched out:
1. Farming economics:
Commercial farmers will experience financial stress beyond their liquidity.
To illustrate this, data from a real life farm and enterprise is used:
A cattle farm of 4,651 ha, situated 130 km south-east of Windhoek.
An average of the production figures of the past 5 years (2008 to 2012) are used for the calculations. Here it is important to take into account that rainfall in these particular years averaged 454 mm in comparison to the long-term average of 300 mm.
The farmer-cum-land owner has no non-farming income. His wife who works full-time for the farm enterprise receives a modest salary of N$2,100 per month. Up to now the land value (USV) was assessed at N$317 per hectare.
With the first announcement of the new land value the farm fell into the category of N$2,000/ha. There may well have been an administrative mistake and the Ministry of Lands may adjust it to N$1,330/ha. This represents a 420% increase on the previous valuation.
Through the new land valuation the total taxation of the enterprise thus increases from 30.5% to 46% of net income or 15.5%. The main reason for this being that farms were sold at „collector’s“ prices to persons who do not have to live off and from the land like this and all other commercial farmers.
Already the current monthly medical aid contribution of this farmer for his family of four costs N$3,512.00.
The source of the above example is available and verifiable on request. In this example the enterprise is debt-free, meaning that there are no financing costs. This is an exception if one considers a study by the Namibia Agricultural Union (NAU) which shows that the average debt load of the commercial livestock farming sector currently stands at N$2,852 per large stock unit (LSU) GVE.
If one calculates at an average stocking rate of 1 LSU/ha this means farms in the central region of Namibia are indebted by $238 per hectare. Farmer will simply not be able to pay the suggested increased land tax on top of this.
The example also shows that it will not be possible for farmers to save any money, a fundamental necessity for farming enterprises who have to deal with fluctuating rainfall and meat prices. The severe effects and costs of a drought, veld fires and livestock diseases and other natural catastrophes cannot be buffered if there is no financial safety cushion. Financing of ecological and infrastructure improvements and special initiatives such as de-bushing would be impossible, besides not being able to save for retirement.
Currently the land tax policy put the full risk on the land owner / farmer – for example if the farm burns down, the land tax will not be waived, although the farm will have produced only at a much reduced rate or not at all in that given year.
If the new land valuation is implemented as is, it may well lead to all the above effects and a great number of commercial farmers may have to declare bankruptcy and the land will be sold. While these farms would become available for resettlement the land would be sold on the free market (sold from an insolvent’s estate) and the government would not have first option to buy. It can be expected that these farms again go to persons who do not have to produce and live off the land.
2. Concerns about ecological health and productivity
It is expected that farmers who can no longer afford to pay for all basic farming expenses will put the native grass land on which livestock production depends under undue pressure.
Neglecting management and labour demanding sustainable rangeland management practices or stocking beyond carrying capacity may be one way of saving costs and increasing short term income. Soil degradation and erosion and over-grazing would not only reduce forage for livestock, but would also negatively impact on forage and habitat for wildlife.
Farmers may resort to harvesting game beyond the levels of sustainability in order to boost their cash income. In this way not only agricultural, but also tourist enterprises would suffer.
In an effort to safeguard economic survival, large scale retrenchment of farm labourers can be expected. The workers, like their previous employers, will move to towns in the quest of a livelihood and a place to stay. The political aims of reducing poverty and promoting social stability and peace may be severely jeopardized.
For reasons mentioned above it can be expected that the new land-owners will produce less food, reducing food security and especially foreign currency earnings from agriculture, because the new landowners lack training and experience in this regard and many of them do not rely on farming for their livelihoods.
The effect will be a growing divide between haves and have nots, between rich and poor besides a drop in government revenue.
4. The Land Reform Process
The state will enjoy a short-term dramatic increase in revenue from the increased land tax. At the same time it has to pay a much higher price for farms it buys for resettlement purposes, following the change in valuation.
This will most likely slow down the whole process of land reform and can create dissatisfaction and frustration among those targeted to benefit from the resettlement.
In this way not only agricultural, but also tourist enterprises would suffer, besides the fact that the country would lose valuable biodiversity for which it is internationally known.
Currently Namibia boasts a productive and stable agricultural sector but the high land prices will have a severely negative impact on the national economy.
Livestock production, which depends on access to extensive tracts of land, will go down. With that the purchasing power of the agricultural sector is weakened which in turn will affect many other enterprises and whole economic sectors and foreign currency earnings.
Unemployment, urbanization and crime will follow and this will endanger social and political stability. The achievement of Vision 2030 goals will be threatened. Simultaneous over and under-utilization of rangeland due to lack of labour and capital will lead to environmental degradation. A probable long-term result of this will be that the mass of freehold agricultural land will no longer produce a surplus and will instead be used for subsistence farming.
Answer to the initial question
High land prices are not benefiting any of the involved parties, except perhaps those land owners who plan to retire from farming and would want to sell their land in the very near future.
In order to avoid the above outcomes, undesirable to both the farming community and to the government - three options or a combination of the three can be considered:
1. The new valuation be suspended temporarily and the old values remain the basis for calculating land tax. In this case all stakeholders would have to come together to discuss and work on a mutually beneficial and satisfactory way forward. The advantage of this option would be that the overall level of prices paid for agricultural land would probably remain relatively low.
The Ministry of Lands and Resettlement has distributed questionnaires to all farmers in order to obtain an inventory for each farm about the nature and the value of all infrastructure. The questionnaire must be answered and returned to the ministry by 31 January 2013. Until this inventory is fully captured and analysed, the previous USV values should remain valid. A provisional estimation assumes that the total value of infrastructure would come to three or four times the USV value.
2.While the new valuation would apply, the Receiver of Revenue, i.e. the State, allows for deduction of land tax payments from income tax, as part of general production expenses. The main disadvantage would be that the land purchasing price would remain high and the Government would have to pay large sums of money for farms destined for resettlement.
3.While the new land valuation would apply, the tax percentage of 0.75% could be reduced. This would however result in a reduced land tax revenue for government with the remaining burden of high land purchasing prices. With the reduced government revenue fewer farms can be purchased for resettlement with the undesirable slowing down effect on land reform.
We hope that the current crisis may function as a catalyst for all affected stakeholders to collaborate in finding a solution which is simultaneously politically, ecologically, socially, and economically sound in the context of our national economy and of individual enterprises.
Especially emerging farmers and new land owners should be involved to motivate them to farm productively and profitably. Like the so called affirmative action farmers, they could apply and be exempted for a limited time of 5 years from paying land tax.
A joint strengthening of the agricultural production sector is essential for the realization of government’s Vision 2030 objectives.