Rethinking Profit Sharing During Expropriation

There are media reports to the effect that the existing expropriation proclamation would be amended in a manner that satisfies existing complaints, among others, about inadequacy of compensation.

Expropriation is compulsory for land and property when the state confiscates it for public purpose activities. It is constitutional recognized as a development tool in many countries.

Although government is entitled to expropriate private property, such power is limited on two basic conditions: that expropriation must be made only for public purpose activities, and that fair compensation must be paid for the lost properties.

The principle and application of these two principles is the main sources of contention for critics of the law.

Public purpose is an activity which brings about direct and indirect benefit to society. While public infrastructure activities such as schools, hospitals, roads, dams, stadiums, and airports are considered as bringing direct benefit to society, private investment activities like horticulture, factories and the service sector may be taken as activities that have indirect benefit for society.

It has been argued by researchers in Ethiopia that this definition gives the state unlimited power in taking someone’s property by way of expropriation. In many other countries, the power of the state expropriation power is limited to taking land for such activities that provide direct benefit to the people.

Private investors are obliged to acquire land through government grant or purchase/lease methods. This argument is based on the need to balance private ownership/interest on the one hand and public development/interest on the other.

The second limitation on the state expropriation power is payment of fair compensation to displaced people. As private property is a regime recognized by constitution, it is only just to balance the harm caused to the owner by the taking of property through payment of fair compensation.

Fair compensation is understood as an amount which is equivalent to the value of the lost property. The question is whether the state pays this value. While in many countries the value of the property taken is calculated on the basis of market value of the asset, in Ethiopia, especially in urban areas, compensation is determined based on the cost of constructing the comparable asset or building.

In rural areas, farmers are compensated for both loss of land as well as properties established on the land such as crops, trees and buildings. They receive market value of the trees, crops and other plants. The value of five years’ average produce multiplied by ten is paid as “displacement compensation” in lieu of the complete loss of land.

In urban areas the main asset for property owners is the land and buildings on it. The modality of calculating the compensation amount for loss of land and house through expropriation is based on “cost replacement method” which considers only the construction cost of a building of similar worth.

If the demolition property was an old one; depreciation allowance would be reduced. The big problem with this approach is it does not consider the value of the land. In other words, no location value is added during calculation which contributes a big amount to the compensation payment.

I remember a few years ago this newspaper used to have ads for sale of houses on 500sqm in the Bole District, with houses there now to be demolished. Most prices quoted at that time were in the range of three to five million Birr.

Would the amount the owner gets be less had the land rather been expropriated?

Definitely yes, the government would not pay four million Birr for a house to be demolished; probably it would pay a maximum of 400,000 Br, about 10pc of the market value of the asset.

“Smart” farmers on the outskirt of Addis Abeba and regional cities sell their land before the city incorporates it by expropriation, since they know the compensation they would receive is much lower than the sale price.

This shows there is a fundamental flow in the law that does not recognize the land market.

The usual justification by government is that as land belongs to the “state and public”, the state is not obliged to pay compensation for it. If the state starts to pay market value for land in the inner city, other public development activities would be affected.

Another argument is that the increase in land value of any location within a city comes as a result of state investment in the form of infrastructure building and urban beatification, and the state is justified in capturing the enhanced land value.

This enhanced land value which usually is collected through lease rents would end up back in infrastructure building of the city.

Critics have challenged the idea of land belonging to the state only. As it also belongs to the people, the people need to benefit from it to reflect their joint ownership of the land. As landholders are allowed to reap the profit that comes through sale of houses together with land, a reasonable compensation in the event of expropriation is also appropriate.

The compensation awarded to farmers who live on the outskirts of urban areas is a good illustration. Land taken from farmers is transferred to leaseholders in the range of five to 15 thousand Br per square meter in large cities including Bahir Dar, Meqelle, Hawassa and Addis Abeba, while the compensation given to farmers is not more than 50 Br.

The notion that the government is solely responsible for enhancement of land value is also not valid as it completely disregards the work and investments of homeowners. Some moderate officials said that the state is responsible for 70pc of urban land value enhancement while the rest of the 30pc comes through individual efforts. But in any city, it is rare for the state to provide roads and infrastructures for newly allocated land; it usually comes from repeated request of home owners several years after they built the houses. Individuals are usually responsible for a large share of the enhancement of land value in their neighborhoods.

The above two scenarios show that the state is in monopolistic position in capturing the enhanced value of land in urban areas without considering land owners who committed their money and efforts in hopes of getting benefits.

This, in the long run creates tenure insecurity on land holders. It causes instability in the event of expropriation measures, and triggers moral ambiguity in society. It is not just to prosper at the cost of others. The state is responsible for much of the development activities which warrants it not to pay the whole market value to the landholder. And yet is it neither warranted to capture the whole value in the guise of a developer.

Therefore, there is a need for policy makers to rethink the significance of the “state and public ownership” of land enshrined in the constitution and start to be faithful to such principle, among others, through introducing a modality of sharing the enhanced land value with the landholders.

By Daniel W. Ambaye (PhD)
He is a researcher and consultant in land and property.

Published on Mar 25,2017 [ Vol 17 ,No 881]



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