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natural resources and environment | 14 Jul 2020
BY James Brand
ENSight

natural resources and environment


Water sales held to be unlawful by the Gauteng High Court

Water is an economic enabler and ensuring that water is used where it will have the most benefit is key to the agricultural sector and maintaining food security. South Africa is a water scarce country and climate change is set to make water in even shorter supply in large parts of our country. One critical tool for drought mitigation is the ability to temporarily transfer water between users so as to maximize and ensure the efficient use of this scarce resource.  

A recent South African High Court decision has confirmed that the sale and transfer of water is unlawful, and if recent policy is implemented, we can anticipate express statutory restrictions on the transfer of water use entitlements in the future.

The historic position

Water transfers are a heavily regulated and evolving area of the law in South Africa and are subject to ongoing debate in our courts. Two key aspects are firstly whether a water use entitlement can be transferred to a third party and secondly whether it is permissible to sell a water use entitlement as part of this transfer.

Section 25 of the National Water Act, 1998 (“NWA”) regulates the following with regard to water transfers:

  • Temporary Transfers: Water management institutions have historically allowed a person holding an entitlement for irrigation to allow a third party to temporarily use that water on another property for the same or similar purpose, subject to any conditions they may impose as regulated by section 25(1) of the NWA.
  • Permanent Transfers: The Department of Human Settlements, Water and Sanitation (“Department”) has historically allowed a person holding an entitlement to surrender that entitlement in terms of S25(2) to a person of his/her choice. The recipient would then apply for a new water use entitlement based on the surrendered entitlement that facilitates the new application.

The historic policy position adopted by the department on water transfers was recorded in the White Paper on a National Water Policy for South Africa of 1997, which informed the NWA that was promulgated in 1998. This White Paper as well as the Director General’s Circular 18 of 2001 and the Department’s subsequent Water Resource Strategy of 2004 all supported a historic interpretation of section 25 of the NWA that allowed a transfer of a water use entitlement between third parties as a sale. The recognition of the payment of compensation for the transfer of a water use entitlement is expressly referred to in section 29(2) of the NWA.

A change in policy

A change in policy was evident in the Department’s subsequent Water Resource Strategy of 2013 that was later confirmed in the Department’s Circular of 2018, which sought to reinterpret section 25 so as to make it unlawful to transfer water between third parties. At the heart of this policy shift was the view taken by the Department that the sale of water use entitlements between unrelated parties would frustrate equal access to water and keep emerging farmers out of the agricultural industry, as they would not be able to compete financially to acquire what is becoming an increasingly scarce resource.

Inequitable access to water runs contrary to the stated purpose of the NWA as it would hinder the redress of the results of past racial discrimination and would not facilitate social and economic development. It would also be inconsistent with the spirit and objectives of the Bill of Rights of the Constitution. The Department’s National Water and Sanitation Master Plan of 2019 confirms that only 5% of agricultural water used in South Africa is by emerging farmers. The need for redress is clear as planned government irrigation schemes have not sufficiently materialised to create new water access to emerging farmers and the compulsory licensing provisions of the NWA have not been fully utilised by the Department so as to free up existing allocated but unused water.

The Circular of 2018 provided that transfers may only take place to the same holder of an entitlement for use on different land. But it is questionable whether an outright ban on the transfer of water to third parties could ever contribute towards achieving equity in the allocation of water. The Circular of 2018 didn’t provide sufficient weighting to the existing provision of section 27 of the NWA which requires the Department to take into account all relevant factors when issuing a water use transfer on a permanent basis, including “the need to redress the results of past racial and gender discrimination”. While our Supreme Court of Appeal has held that this factor should not carry greater weight than any of the other factors that are relevant as part of the assessment of a water use entitlement application, it still provides the Department with the ultimate control it requires to ensure that water redress is achieved in a permanent water transfer scenario.

Transfers of water use entitlements

The strained interpretation of section 25 of the NWA offered by Circular of 2018 so as to prevent transfers to third parties was found to be unlawful by the Western Cape High Court of 26 October 2018. This was supported in the recent judgment of the Gauteng High Court of 19 June 2020 as well. We now have clarity from our High Courts that it is permissible to permanently or temporarily seek to transfer water use entitlements to third parties in terms of the procedures provided for in section 25 of the NWA.

Payment of compensation

But the recent judgment in the Gauteng High Court held that a sale of water, involving the payment of compensation for the entitlement, is unlawful. This supports an earlier judgment by the Eastern Cape High Court of 26 March 2019 which also held that the sale of water between private parties is unlawful. So, while parties may transfer entitlements to third parties in accordance with section 25, they may not do so by way of a sale arrangement in terms of which compensation is paid. 

Application for leave to appeal this judgment from the Gauteng High Court has since been applied for and we will need to wait until the Supreme Court of Appeal (“SCA”) decides the matter for absolute clarity. In the interim, the Gauteng High Court judgment is suspended until the SCA decides the matter. If the SCA comes to the same conclusion as the Gauteng High Court, sale agreements entered into after the NWA came into effect will become invalidated with retrospective effect. This has the potential to give rise to claims between parties and is likely to have an impact on the valuations banks may have provided to agribusinesses that do not have a lawful entitlement to water.

Should the SCA uphold the judgment, going forward it is not clear on what commercial basis a holder would ever give up its water for no value in favour of a third party. It remains to be seen whether other commercial arrangements would be permissible that allow an emerging farmer, the seller and the purchaser to ensure that water is used both efficiently where it is needed but in a manner that seeks to redress the much needed participation of emerging farmers within the agribusiness sector.

It also remains untested in our high courts whether it is permissible for unconverted irrigation boards to authorise water transfers as sales in terms of their constitutional documents and the old Water Act, 1956. In certain circumstances reliance may be placed on the transitional provisions of section 98 of the NWA permitting unconverted irrigation boards to do so.

The Master Plan of 2019 suggests that amendments to the NWA are due to be published for comment in 2021. If these amendments to the NWA provide an express prohibition on the transfer of water the above considerations will all become academic. However, we may live to regret having an inflexible statutory system that could prevent us from transferring water to where it is most needed in the water-stressed times that lie ahead.

Reviewed by Lloyd Christie, head of ENSafrica’s Natural Resources and Environment department.

James Brand

Senior Associate | Natural Resources and Environment

jbrand@ENSafrica.com

+27 79 877 7778