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Treaty Tribes - The NZIER Report


BACKGROUND

THE NZIER REPORT

In its independent study, the New Zealand Institute of Economic Research (NZIER) considered three costs associated with delay in allocating fisheries assets to iwi. These arise from uncertainty, a constrained potential to strategically manage assets to yield greatest economic and social value and the transaction costs caused by the legal rigmarole surrounding annual lease allocations and ongoing disputes over the Optimum Allocation Model.

From these three costs alone, the NZIER concluded “[t]he current ill-defined rights of Mäori to the pre-settlement assets result in poor utilisation of these assets and the direct destruction of Mäori wealth. Further delays in allocating these assets have been estimated, perhaps conservatively, to cost Mäori $5.5-14 million per annum. … If there is a further delay of five years in allocating the quota assets, as much as $84 million could be lost in the intervening period.”

The three costs identified by NZIER all relate to the lower quality of property rights involved in leasing quota as opposed to owning quota and are outlined in Section 4 of the Report. Essentially, the leases made available to Mäori are a lower-quality property right because they are more uncertain, less flexible and are of a shorter duration than individual transferable quota.

The first of the three costs relates to sub-leasing quota by iwi to third parties. Because quota is currently leased to iwi by the Treaty of Waitangi Fisheries Commission on an annual basis, iwi are unable to form long-term contracts with third parties to catch the fish, reducing the value of the lease.

Another factor is the delay that may be experienced due to belated allocations of annual quota leases. This may mean that iwi have sometimes entered the lease market late, after some third parties may have leased sufficient quota for their needs. Uncertainties over lease allocations also prevent iwi from forming alliances with one another to lease larger parcels of quota that may have a higher combined value. Quota parcels of various species are also allocated to iwi on a “take it or leave it” basis. Should a particular iwi not be able to use the quota for one or more of the species, it may try to sub-lease this to a third party, but the small size of the quota for the particular species may mean it ends up written off. These factors, and others, contribute to Mäori receiving discounted lease prices.

It has been suggested that this effect is more prevalent with deepwater fisheries, which require greater planning, time and capital, than inshore fisheries, which are much easier for small operations to enter.

Under the NZIER’s most conservative assumptions (zero discounting of the value of lease entitlements to in-shore fish-stocks and 5 percent discounting of quota leases for deep-sea fish-stocks), lease discounting would generate a cost to Mäori of $471,000 per year. Under its less conservative assumptions (10 percent discounting across the board), the cost to Mäori would be $1,865,000 per year.

The second of the costs considered by NZIER relates to lost opportunity for iwi to fish in their own right. Because the annual lease allocation process traps iwi in the “spot-market” referred to above, they cannot invest in assets to harvest the quota without bearing the risk that they will not receive any quota the following year. This reduces the potential returns on the quota to the 9 to 10 percent iwi are currently achieving. In contrast, Ngai Tahu Fisheries Ltd generated income 15 percent higher than the leased quota when it fished half of Ngati Kahungunu’s lease allocation in 1998/99.

This suggests that investment in fishing equipment and plant, which can only occur on a wide scale once quota is owned by iwi, could generate higher returns. NZIER has compared the performance of iwi with Sanford, which usually generates returns on assets of over 20 percent, compared with the 9 to 10 percent achieved by iwi.

NZIER acknowledges that it could take some time before iwi developed the infrastructure and skills to achieve the same returns as Sanford. However, if iwi owned the quota they would have greater incentive to invest in infrastructure and the skills of their people. Alternatively, they would also have the option of long-term leasing their quota to operations such as Sanford or Sealord. The price for such a lease would reflect the returns those companies believed they could achieve. Iwi may choose to follow this path for a variety of reasons. For example, in the short term, when their fisheries businesses are still in their infancy, they may wish to sublease some of their quota to more established operators.

In quantifying the cost of this lost opportunity for iwi to fish in their own right, NZIER has provided a range of values based on alternative scenarios of iwi profitability. At the most conservative end, NZIER has assumed that iwi would make an profit no higher than that achieved by Ngai Tahu Fisheries Ltd in 1998/99 should they harvest quota themselves – that is, 15 percent higher than that achieved from leasing. This would mean the current arrangements are costing iwi $3,000,000 each year. At the other end of the scale, NZIER estimates that if iwi could make returns in line with those achieved by Sanford, earnings would approximately double. This would mean the current arrangements are costing iwi $8,000,000 each year.

The third cost considered by NZIER relates to the transaction costs caused by the legal rigmarole of annual leasing and ongoing disputes over the Optimum Allocation Model. In 1998, the Treaty of Waitangi Fisheries Commission spent approximately $2,100,000 on litigation. NZIER has identified this as the minimum saving on transaction costs that would occur should quota be allocated to iwi. Even assuming legal costs by iwi of just 1:1 with the Commission, NZIER has identified an annual cost of $4,200,000 to Mäori associated with the current arrangements.

It is these three costs that suggest that delay in allocating assets to iwi is costing Mäori at least $5.5 to $14 million annually.

NZIER also analysed how the ongoing $5.5 to $14 million cost per annum will impact on Mäori into the future.

It found that, even under the most conservative assumptions (2.8 percent improvement in returns from ownership over leasing and reinvestment of earnings in riskless assets), the cumulative cost of delay would be $33 million by 2006. Even if quota allocation to iwi occurred in 2006, the loss to Mäori would be $80 million by 2021, which is the compounded cost of delaying allocation for five years.

Under less conservative assumptions (6.5 percent improvement in returns from ownership over leasing and reinvestment of earnings in riskless assets), the cumulative cost by 2006 would be $84 million. As before, if it is assumed that quota is allocated in 2006, the loss to Mäori would be $200 million by 2021.

This is not the worst of it. These cost estimates are almost certainly on the low side because the NZIER has not attempted to quantify the economic and social costs borne by Mäori from lost opportunities to diversify and invest in other enterprises or social programmes. Were quota to be allocated, it would be an asset iwi could borrow against. This would allow them to invest in enterprises or projects that would generate higher returns than fisheries in either a direct commercial sense or in a social development sense. Accountability mechanisms for iwi required by the Optimum Allocation Model would ensure that any alternative economic or social investments had the support of their people. NZIER reports that these costs undoubtedly exist, from continuing to tie up $350 million of pre-settlement assets in the Treaty of Waitangi Fisheries Commission rather than allowing iwi to invest in the priorities of their people, but they cannot yet be quantified.

END

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