Introduction

On 15 March 2013, the Department of Public Works (the Department) published the draft Expropriation Bill (the Bill) for public comment, together with an explanatory memorandum. The Bill purports to give effect to section 25 of the Constitution of the Republic of South Africa (the Constitution), which deals with the protection of property.

While the arbitrary deprivation of property is prohibited in terms of s 25, property can be expropriated if this is in the public interest or for a public purpose as well as subject to the payment of just and equitable compensation. The Bill falls short, however, in its detail; failing to provide adequate guidance and to regulate the discretion of the Minister of Public Works (the Minister) not least of which in relation to the possible expropriation of prospecting and mining rights.

The Bill seeks to replace the Expropriation Act, 1975 (the Act), as well as its predecessor, the draft Expropriation Bill, 2008 (the 2008 Bill). The 2008 Bill was tabled in the National Assembly by the Minister on 16 April 2008 and was subsequently referred to the Portfolio Committee on Public Works. During the public consultation process numerous objections were made to the 2008 Bill, including warnings of a threat to the property market; that the Bill would severely discourage foreign investment; and that it would infringe the protection of property in s 25 of the Constitution. As a consequence, the 2008 Bill was withdrawn towards the end of 2008.

In line with the Constitution, the new Bill displays a fundamental departure from the expropriation model of the Act. It broadens the grounds for expropriation to include expropriation in the "public interest", and no longer bases the determination of compensation on market value. While the Bill goes some way in bringing South Africa's laws on expropriation in line with the Constitution, and while it corrects some of the defects evident in the 2008 Bill, it unfortunately retains, and appears to introduce, certain problematic and possibly unconstitutional provisions. It is important that these provisions are rectified before the Bill is enacted into law. Comments on the Bill are due by 30 April 2013.

Important and potentially problematic provisions of the Bill

Compensation

In line with s 25 of the Constitution, compensation provided in the event of an expropriation must be "just and equitable" and reflect "an equitable balance between the public interest and the interests of the expropriated owner and the expropriated [right] holder".

Under the Bill, the market value of the property to be expropriated is only one of a non-exhaustive list of five relevant considerations which must be taken into account when determining the amount of compensation. The other listed factors are:

• the current use of the property;
• the history of the acquisition and use of the property;
• the extent of direct state investment and subsidy in the acquisition and beneficial capital improvement of the property; and
• the purpose of the expropriation.

Accordingly, the compensation awarded in the event of an expropriation might well be less than market value. While this is a departure from the Act, it is in fact in line with the Constitution. That said, the Bill's formula for the determination of compensation could well violate a number of bilateral investment treaties (BITs) entered into by South Africa with foreign states.

To date South Africa has signed 45 BITs, 22 of which have entered into force. Although the government gave notice last July that it intended terminating all “first generation” BITs with the European Union, it has to date only terminated the BIT with Belgium and Luxembourg.¹

BITs are binding international treaties between two states under which each country undertakes certain reciprocal obligations in respect of any investments made within its territory by nationals of the other state. These treaties generally oblige each state party to provide "prompt, adequate and effective compensation", usually at market value, if a state expropriates the property, in its territory, of a national of the other state. Thus the amount of compensation for expropriation required under BITs to which South Africa is a party could differ markedly from the amount of compensation envisaged by the Bill and the Constitution (under which market value is but one of a non-exhaustive list of relevant factors in the determination of compensation).

The Bill also provides that the amount of compensation must either be agreed by the parties or, failing that, determined by a court; correcting an unconstitutional provision in the 2008 Bill which granted the expropriating authority the final say in determining compensation in the absence of the parties’ agreement.

Public interest

In addition to empowering the Minister to expropriate property for a "public purpose", as provided for in the Act, the Bill allows for the expropriation of property in the "public interest". This is in line with the Constitution.

Despite the importance of the term "public interest", the Bill defines it broadly and provides no additional criteria to assist in the assessment of what would be in the "public interest". "Public interest" is defined in the Bill as "[including] the nation's commitment to land reform, as well as reforms to bring about equitable access to all South Africa's natural resources and related reforms in order to redress the results of past racial discriminatory laws or practices". This definition is problematic as it merely includes some examples of what might be in the "public interest"; leaving the door open for a plethora of unspecified cases in which, in the view of the Minister, an expropriation of property would be in the public interest.

While the Constitution does not provide criteria for the determination of what constitutes the "public interest", the Bill is intended, as enabling legislation, to give effect to the Constitution (in this case, s 25). While such legislation may vest discretionary power in an official, it is required to provide guidance as to how this power should be exercised. This is consistent with the requirement of the rule of law (enshrined in section 1 of the Constitution) that laws should be clear and precise. Under the rule of law, as repeatedly emphasised by the Constitutional Court, the legislature is obliged, when enacting legislation, to limit the risk of an unconstitutional exercise of the discretionary powers it confers. This includes ensuring that legislation adequately limits administrative discretion. Thus, in failing to adequately define "public interest", the Bill may well fall foul of the Constitution.

The definition of "property"

"Property" is broadly defined in the Bill, as it is in the Constitution, in a way that includes movable property and "a right in or to property". This means that shares in a company, as well as various rights in property (including intellectual property rights and incorporeal rights such as prospecting and mining rights) would constitute property under the Bill, and could thus be expropriated under the Bill.

The Mineral and Petroleum Resources Development Act, 2002 (MPRDA) already permits the expropriation of prospecting and mining rights, providing that expropriation may be undertaken by the Minister of Mineral Resources if it is necessary to achieve certain of the objects of the MPRDA.

Such objects include the broad object to "substantially and meaningfully expand opportunities for historically disadvantaged persons, including women, to enter the mineral and petroleum industries and to benefit from the exploitation of the nation's mineral and petroleum resources". Expropriation under the MPRDA must take place in accordance with the procedural provisions of the Act, which will now be replaced by the procedural provisions of the Bill.

In short, if the Bill is enacted, expropriation of prospecting and mining rights may be achieved either by:

• the Minister of Public Works under the Bill, in the public interest or for a public purpose, or
• by the Minister of Mineral Resources on the rather broad grounds specified in the MPRDA.

If enacted in its current form, the Bill could potentially undermine the security of tenure of the holders of prospecting and mining rights. This seems to run contrary to the National Planning Commission’s National Development Plan 2030, adopted by government on 7 September 2012, which cites security of tenure in land and prospecting and mining rights, among other things, as a priority for government.

It is imperative that the definition of "public interest" is amended, and that the broad discretions afforded to expropriating authorities are appropriately narrowed, before the Bill is enacted, to ensure that those concerned are given sufficient certainty as to the circumstances in which their rights may be expropriated.

Expropriation for the benefit of a juristic person

The Bill permits the Minister to expropriate property on the grounds of public interest or public purpose for the benefit of a "juristic person" which is "established by law" (i.e. a statutory body), and which is required to account for the management of its finances under the Public Finance Management Act, 1999 (PFMA) or the Local Government: Municipal Finance Management Act, 2003.

A number of public bodies satisfy the Bill's definition of "juristic person", notably: the Land and Agricultural Development Bank of South Africa (the Land Bank), Alexkor Limited (Alexkor), the state-owned diamond producer, as well as the Central Energy Fund (CEF).

It should also be noted that the PFMA provides that all subsidiaries of the entities required to account under the PFMA are likewise required to do so. This means that these bodies will also be deemed to be "juristic persons" under the Bill if they are "established by law". In this regard, it is significant that African Exploration Mining and Finance Corporation (African Exploration), the state-owned mining company, is a subsidiary of the CEF, although it is not as yet a body which is "established by law".

The Bill's provisions regarding expropriation for juristic persons would thus enable a number of statutory bodies to benefit from the expropriation of land, as well as prospecting and mining rights, from third parties at potentially less than market value.

Agri South Africa v Minister for Minerals and Energy

On 18 April 2013, the Constitutional Court delivered its judgment in Agri South Africa v Minister for Minerals and Energy [2013] ZACC 9 (Agri SA). The case involved a dispute as to whether the holders of unused old order rights under the erstwhile Minerals Act, 1991, had had their rights expropriated when the MPRDA came into effect on 1 May 2004.

Section 3 of the MPRDA provides that the state holds mineral resources in a form of public trust for the benefit of all South Africans, thus repealing all rights previously held under the Minerals Act.²

Crucially, Mogoeng CJ, for the majority of the Court, held that "(t)o prove expropriation, a claimant must establish that the state has acquired the substance or core content of what it was deprived of", and that "there can be no expropriation in circumstances where the deprivation does not result in property being acquired by the state".

The Court found that the constitutional imperative to transform the economy and open up access to land and natural resources to previously disadvantaged people, must inform the notion of "acquisition". The Court went on to conclude that the vesting of mineral resources under the custodianship of the state for the benefit of all South African citizens does not amount to an expropriation of mineral rights, as the state itself does not acquire the ability to use such rights. Custodianship of mineral resources, the Court explained, means only that the state is vested with the authority to grant mineral rights to third parties, and that it acts as a conduit in the process of the transferral of the rights to third parties.

The Court was at pains to emphasise that the determination of whether or not an expropriation of a mineral right has taken place under the MPRDA should be undertaken on a case-by-case basis. It is, however, difficult to see how any expropriation of mineral rights could ever take place on the Court’s approach. The Court came to the general conclusion that the deprivation of mineral rights by the state in order for it, as custodian of mineral resources, to grant prospecting and mining rights to third parties under the MPRDA, is not a state acquisition of such rights. The Court accordingly concluded that there is no expropriation in such cases. While the judgment is rather unclear in this respect, the only apparent case in which the state will not hold prospecting and mining rights in some form of public trust is when it acquires such rights either under the Bill or the MPRDA for the purpose of exploiting them itself, possibly through African Exploration. In other words, this appears to be the only case in which the state might be found to have expropriated prospecting and mining rights, and thus where the Bill and the Constitution's procedural protections, including compensation, would apply.

The Bill, if enacted in its current form, would not provide clarity on this issue. The Bill's definition of expropriation merely states that expropriation "includes the taking of a right to use a property temporarily". The drafters of the Bill appear to assume that "expropriation" is generally understood to mean any taking of property by the state from the owner of such property for a public purpose or in the public interest, regardless of whether the state intends to use the property or not. The Bill's definition of "expropriation" merely clarifies that a deprivation of property need not be permanent to classify as an "expropriation".

The Constitutional Court, on the other hand, appears to limit expropriation to instances in which the state takes property for a public purpose or in the public interest, and uses such property itself. In short, the drafters of the Bill and the Constitutional Court seem at odds as to what "expropriation" entails. The definition of "expropriation" in the Bill needs to be amended so as to resolve this confusion.

While the Bill does address some of the flaws in the 2008 Bill, it nevertheless contains certain problematic provisions. In view of the unfettered discretion vested in the Minister regarding what constitutes the "public interest", the new model for the determination of compensation and the wide definition of "property", the effect of the Bill, if it passes into law, may well be felt by business as much as by the mining sector.

This effect will be compounded by the Constitutional Court's decision in Agri SA. The Court in this case appears to significantly limit the circumstances in which a deprivation of mineral rights in the hands of the state will be found to be an expropriation. The result of this is that the Constitution's procedural protection of property rights, including the right to compensation, will only apply in a limited number of cases.

In the wake of AgriSA, it is necessary for the Bill's definition of "expropriation" to be amended so as to clarify in what cases a deprivation of property by the state will constitute an expropriation.

The Department's invitation for written submissions on the Bill by 30 April 2013 thus provides an important opportunity for potentially affected parties to highlight shortcomings in the Bill before it is introduced to Parliament.

Notes:

¹The notice of termination was contained in a letter entitled, "Termination of the Bilateral Investment Treaty with the Belgo-Luxembourg Economic Union", from Maite Nkoana-Mashabane, Minister of International Relations and Co-operation, to the Ambassador of the Kingdom of Belgium to South Africa, Johan Maricou, on 7 September 2012.
²While the MPRDA contains transitional provisions which provided holders of "old order rights" an opportunity to convert such rights into rights held under the MPRDA, such rights were forfeited to the state in the absence of conversion. Even if old order rights were successfully converted under the MPRDA, their contents after conversion were substantially limited. For example, "the free or unregulated right to sterilise mineral rights was terminated with effect from 1 May 2004", as was the previously unfettered entitlement to sell, lease or cede the mineral right at any time (AgriSA, paras 51 and 66).