A Case of Using Property Rights to Manage Natural Resources

Crown Land Sales and Purchase during Land Reform

Although the freehold rights the Crown sold appear more valuable than the leasehold rights it bought, the Crown paid leaseholders $52 million more than it received on net. This is illustrated in Table 1. After the freeholding, all the previously prohibited land uses become possible (subject to New Zealand's Resource Management Act 1991 and the relevant district plan).

When tenure review began, the New Zealand Treasury compared the value of what the Crown was selling to what it was buying. Treasury estimated the pastoral rights were worth about 72% of the freehold private property rights sold by the Crown. Thus the ratio of per hectare prices (price paid by the Crown for pastoral rights/price paid by leaseholder for freehold) should vary around a median of 0.72 [4, citing Treasury documents]. Rural land prices in New Zealand suggest the ratio should be lower [5]. Yet thus far, the median ratio is 3.4. The ratio at Alphaburn was 2.1, and it ranges as high as 940, at Shirlmar. Of 110 deals, only 19 have a ratio of less than 1.0.

Freehold Land after Land Reform

As of mid-2015, what was once 110 pastoral leases had become over 3,000 freehold parcels. Almost a third of the new freeholders had subdivided and sold some land. In all, 74,000 ha (about 20% of what the Crown sold for $65 million) has on-sold for $275 million. On average, on-selling prices are 693 times the Crown's selling price. This is illustrated in Table 2. In other words, at 65,700% of the purchase price, the capital gains realised at Alphaburn are below the median of 69,200%.

Using Economic and Political Theories to Understand Land Reform Outcomes

It seems baffling that the Crown would privatise Crown pastoral land and lose money in the process. One explanation could be corruption. But Transparency International surveys describe New Zealand as consistently having the lowest levels of perceived corruption, rendering this explanation unlikely. Economics and political science offer several more credible explanations, which might suggest recommendations for improving outcomes.

Olson's [6] logic of collective action predicts that those with a vested, or financial, interest in resource conflicts will mobilise more readily than public interest groups. This tilts the tenure review playing field in the leaseholders' favour from the start. Further the devolution of the process means that tenure review outcomes are decided case by case, which narrows the scope of debate, and makes national media coverage unlikely [7, p.29]. This favours the status quo of Olson's [8] victory of the few with the vested interest over the many with the public interest. The devolved implementation also privileges local needs over national goals [7, pp.207–209]. Though seemingly personal and amicable, case-by-case decision-making renders scrutiny and challenge prohibitively expensive for dispersed national conservation interest groups. Hence, most sail through unnoticed.

Further still, the Crown employs contractors to negotiate the deals, then instructs them to be neutral, to avoid taking sides, and not to advocate for the Crown's interest [4]. The Crown appears to embrace the concept of neutrality for two reasons.

First, in New Zealand's 1980s neoliberal reforms, public sector reformers adhered to the policy-operations split in which public service operatives should be entirely separate from, and untainted by, political and policy decisions [9, pp.258–259]. Proponents of the split assumed that a politically neutral and autonomous administrative bureaucracy would deliver unbiased outcomes [2, pp.50–58].

Second, the contractors are instructed to consult with interested parties, not negotiate, and not advocate for the Crown. The Crown agency in charge interprets consultation as prohibiting the statement of a desired outcome for the Crown and the public [2, pp.52, 56].

However, the Crown holds the residual ownership interest in the land it is selling, and thus is itself an interested party. Hence, the Crown's avoidance of advocacy cedes both its property interest in the land and its power from the outset. It also devalues its own financial interest and sells the public short. The financial outcomes of tenure review suggest apolitical administration facilitated farmer dominance instead of avoiding agency capture as neoliberal reformers hoped.

Finally, any time a government contracts out a job, a principal-agent problem can arise [10]. This occurs when the contractor agent ignores or subverts the Crown principal's goals, because their motivations are different. Three features of tenure review's contractual arrangements suggest a principal-agent problem:

1. The Crown hires contractors hired/employed by property management, development, and valuation firms (including, but not limited to, DTZ, Opus, and Quotable Value).

2. Contractors are not paid on commission, but by prearranged contractual sums for administrative progress towards the ultimate goal (a signed deal). The Crown neither rewards cheap deals nor penalises expensive ones. More tellingly, the Crown does not set a reserve price from which the contractors negotiate.

3. Until August 2006, tenure review outcomes were confidential, meaning only bureaucrats and individual contractors knew how much money changed hands.

Agency theory predicts that when principals instruct agents to do A, but pay them when they do B, they often do B [10]. This is especially true when the principals don't know whether agents are doing A or B. In tenure review, the minister (principal) directs the contractors (agents) to

1. get a ‘fair financial return for the Crown’ [11, 12]; and

2. complete tenure review deals.

Until August 2006, not even the minister knew if they were doing both A and B, or just B. In short, land reform had serious structural problems.

2007 Reforms and Thereafter

In 2007, an optimistic centre-left government changed the rules [13, paras 22, 23]. No land within 5 km of a lake could be freeholded, unless ‘demonstrably’ in the Crown's interest. Financial transactions became obtainable under the Official Information Act. And all deals had to be signed by the minister, instead of just the contractors. In July 2009, the newly elected centre-right government rescinded outright the lakeside rule, but left the others intact [14, paras 15–20].

If tenure review were only a principal-agent problem, we would expect a right-leaning government in a recession to produce cheaper outcomes than a left-leaning government running a budget surplus. But the Crown has lost more money, not less. Since 2007, the Crown purchase price to retire leasehold rights has trebled, while the leaseholders' purchase price for freehold has only doubled. These prices suggest there is more to tenure review than a principal-agent problem.

Looking Deeper: John Locke's Ideas about Land Ownership

The image of the ‘Southern Man’, making something out of nothing in the unforgiving but hauntingly beautiful Southern Alps, is a popular cultural image in New Zealand. The image and its political implications bear marked resemblance to the American cowboy and the Australian ‘Man from Snowy River’ [15]. In all three countries, this iconography has become associated with the idea of establishing land ownership on the frontiers by way of hard work and gritty determination.

This work-to-own idea of ownership originates in John Locke's [16] labour theory of property. It is a colonial and nation-building idea of property, which served the interests of young nations and colonies by motivating development of land and natural resources [17, p.20]. The American Homestead and General Mining Acts (1862 and 1872, respectively) exhibited Lockean ideas by promising freehold title as a reward for making economic use of a piece of the West. By contrast, New Zealand's successive Land Acts (1948, section 66) expressly forbid freeholding the fragile and erosive high country [18, pp.409–411].

In politics, interest groups often promote a worldview that serves their goals. In tenure review, the leaseholders promoted an idea of ownership that conforms more to Locke's work-to-own idea than to today's laws. Leaseholders have often implied that the land they farm is theirs, that leasehold is as valuable as freehold. New Zealand newspapers describe pastoral leases as ‘their land’, ‘their properties’, ‘their pastoral lands’, ‘our properties’, and ‘their high country land in perpetuity, signed by the Crown in 1948’ [2, p.72].

Although the leaseholders do have an ownership interest in the land under lease, it is much narrower than freehold. Like the American Homestead and General Mining Acts, the Land Act 1948 encouraged leaseholders to make economic use out of the harsh high country landscapes. It also granted leaseholders ownership rights to those uses and improvements they created. In 1948, the something the leaseholders created was more valuable than the nothing of the land itself. In 2017, freehold land itself is worth on average 693 times the value of pastoral use rights. Yet prices suggest that, regardless of the structure of the contracts and incentives operating on Crown negotiators, Lockean ideas of property prevail.

Herein lies the irony of the tenure review case study. Adhering to the Southern Man image is transforming the landscapes that created the image. The dominance of the antiquated model of granting freehold title to reward hard work is destroying the geographical substrate of the Southern Man. Clinging to the romance attached to the landscape is subsidising the destruction of the landscape itself [2, p.164].