News in the state media this week suggested that the government and the Bankers Association of Zimbabwe (BAZ) have finally agreed on provisions that will make the 99 Year Leases bankable. If that is true, then that would be a giant step in the positive direction. If 99 Year Leases become bankable i.e. acceptable as security against bank loans, that would mean that resettled farmers can use their land to access funding from private institutions to support their operations. All good.
But what are 99 Year Leases?
In the aftermath of the Fast Track Land Reform Programme, as it has been called, the government sought to regularise the ownership question (considering that the dispossessed farmers held title to the land) by introducing 99 Year Leases. On the face of it the leases identified the state as the owner of the occupied land (the Lessor) and the new farmer as the Lessee whose rights were to a very large extent constrained. Some have described the lease agreements as giving with one hand and taking away with the other. Owing to the agreement's inherent deficiencies mainly to do with (non)transferability and unilateral cancellation by the lessor, banking institutions and indeed all lenders could not accept the agreements as security when borrowing. This effectively rendered large tracts of rich land valueless and constrained the farmers' ability to raise funding to make the land productive.
Basics of Lending...
The basics of banking dictate that for an asset to be acceptable as security it should satisfy at least two key requirements. These are: 1. The borrower must have ownership of the asset, i.e. you cannot mortgage assets to which you have no title, and 2. The lender must be able to realise the security by taking ownership (control) of the asset in the case of default by the borrower, i.e. the claim to the asset must be transferrable. These two requirements make it possible for the bank to recover their capital from the borrower in case of default by assuming control of the security and liquidating it in the market. Unfortunately, the new farmers cannot use the 99 Year Leases because they do not satisfy the requirements explained above. To begin with, they are leases. True, farmers are leasing the land from government and cannot mortgage the land. However, due to financial ingenuity, long leases can be traded on the market with the landlord`s consent provided they satisfy requirement number two.
What then needs to be done?
The BAZ has stated in the past that they want government to set up a special purpose vehicle (SPV) which assumes the responsibility to pay off the loans upon default. This would be a good starting point. In my view, the government needs to do the following to make the 99 Year Leases bankable. First, they should set up a SPV as suggested. Upon default, debt can be transferred to the SPV and the defaulting farmer's lease should then be cancelled with the SPV taking control of the land. Through the SPV, government can then pay off the outstanding debt and offset the outflow by releasing the property i.e. selling it off by re-leasing it to a new investor. The new lease should then be structured in a way that assures that the new buyer (lesee) recoups the capital outlay before the lease is cancelled. Such an arrangement would allow farmers to access credit while securing the bank loan. The pressure on the government to finance farmers would fall away and the land can become productive.
Simple enough.
So why hasn't this been done? Politics?
Government can even go a step further and allow banks to purchase the lease by setting it off the amount the farmer would have defaulted on. That will allow banks to beef up and diversify their balance sheets. The bank can also earn a return by sub-leasing the property, if it so wishes. Ultimately, the lease should be tradable on a secondary market, which brings us to the point we feel has hampered the restoration of value to OUR land; a decade after the land reform programme started.
When Politics defies Economics...
Whilst government may understand all that has been explained above, it possibly fears that making 99 Year Leases transferrable will result in the concentration of land in the hands of a few or worse the return of the former white farmers. Or maybe, they still want to maintain control over the resetlled farmers by holding the rights to the land. The political aspect of ensuring that the land is not sold back to former owners can be addressed via the SPV. Caveats can be placed specifying the terms underwhich the land can be leased and to whom (though this would be a step backwards). Whatever the reason, truth is the Zimbabwean economy and the people are losing out due to political expediency.
In the aftermath of the Fast Track Land Reform Programme, as it has been called, the government sought to regularise the ownership question (considering that the dispossessed farmers held title to the land) by introducing 99 Year Leases. On the face of it the leases identified the state as the owner of the occupied land (the Lessor) and the new farmer as the Lessee whose rights were to a very large extent constrained. Some have described the lease agreements as giving with one hand and taking away with the other. Owing to the agreement's inherent deficiencies mainly to do with (non)transferability and unilateral cancellation by the lessor, banking institutions and indeed all lenders could not accept the agreements as security when borrowing. This effectively rendered large tracts of rich land valueless and constrained the farmers' ability to raise funding to make the land productive.
Basics of Lending...
The basics of banking dictate that for an asset to be acceptable as security it should satisfy at least two key requirements. These are: 1. The borrower must have ownership of the asset, i.e. you cannot mortgage assets to which you have no title, and 2. The lender must be able to realise the security by taking ownership (control) of the asset in the case of default by the borrower, i.e. the claim to the asset must be transferrable. These two requirements make it possible for the bank to recover their capital from the borrower in case of default by assuming control of the security and liquidating it in the market. Unfortunately, the new farmers cannot use the 99 Year Leases because they do not satisfy the requirements explained above. To begin with, they are leases. True, farmers are leasing the land from government and cannot mortgage the land. However, due to financial ingenuity, long leases can be traded on the market with the landlord`s consent provided they satisfy requirement number two.
What then needs to be done?
The BAZ has stated in the past that they want government to set up a special purpose vehicle (SPV) which assumes the responsibility to pay off the loans upon default. This would be a good starting point. In my view, the government needs to do the following to make the 99 Year Leases bankable. First, they should set up a SPV as suggested. Upon default, debt can be transferred to the SPV and the defaulting farmer's lease should then be cancelled with the SPV taking control of the land. Through the SPV, government can then pay off the outstanding debt and offset the outflow by releasing the property i.e. selling it off by re-leasing it to a new investor. The new lease should then be structured in a way that assures that the new buyer (lesee) recoups the capital outlay before the lease is cancelled. Such an arrangement would allow farmers to access credit while securing the bank loan. The pressure on the government to finance farmers would fall away and the land can become productive.
Simple enough.
So why hasn't this been done? Politics?
Government can even go a step further and allow banks to purchase the lease by setting it off the amount the farmer would have defaulted on. That will allow banks to beef up and diversify their balance sheets. The bank can also earn a return by sub-leasing the property, if it so wishes. Ultimately, the lease should be tradable on a secondary market, which brings us to the point we feel has hampered the restoration of value to OUR land; a decade after the land reform programme started.
When Politics defies Economics...
Whilst government may understand all that has been explained above, it possibly fears that making 99 Year Leases transferrable will result in the concentration of land in the hands of a few or worse the return of the former white farmers. Or maybe, they still want to maintain control over the resetlled farmers by holding the rights to the land. The political aspect of ensuring that the land is not sold back to former owners can be addressed via the SPV. Caveats can be placed specifying the terms underwhich the land can be leased and to whom (though this would be a step backwards). Whatever the reason, truth is the Zimbabwean economy and the people are losing out due to political expediency.
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