Reforming The Use Of Agricultural Land In Fiji
REFORMING THE LEASING AND THE USE OF AGRICULTURAL LAND IN
An Economic Incentive Approach
John Davies and Courtney L. Gallimore
John Davies is Professor and Head, Department of Economics, Acadia University, Wolfville, Nova Scotia, Canada.
Courtney L. Gallimore is Lecturer, Department of Economics, University of the South Pacific, Suva, Fiji.
The authors would like to express their deep gratitude to the numerous individuals consulted throughout Fiji who provided invaluable insights into land issues, the problems they confront and the hopes they nurture. Thanks must also go to those who commented on earlier drafts of this study and cleared up many misconceptions in the process. Of course the authors alone are responsible for any errors or fact or omission. This study, it must be emphasised, reflects the views of the authors alone. It in no way relates to the official position of any institution to which the authors belong or have belonged.
The first draft of this report was written and circulated for discussion in September of 1999. This version includes some minor amendments introduced in the light of feedback and also to update certain factual information.
June 8, 2000.
This report argues that current problems surrounding the tenure and the use of native land have at their heart a single primary problem – the failure of leasing contracts under ALTA to be mutually beneficial to both landowner and tenant. Tenants have benefited, but landowners have not. Consequently, as ALTA leases expire, many mataqalis are refusing to renew them, either at all, preferring instead to cultivate their own land, or else not renewing them under the auspices of ALTA.
The primary, but not the only, problem for landowners with ALTA is that the rents it prescribes are extremely low. In 1995, ALTA rents averaged $36 per hectare, a figure far below any other country for which the author was able to find details. Thus, for example, the daily rental proceeds from an average 4.2-hectare farm – just over 40 cents per day – are insufficient for its landowner to purchase a newspaper! For sugar land, which carries higher rentals, the average rents per hectare as of March 2000 were $65. Had the rental formulas used in the most tenant-friendly of other countries been applied in Fiji, average rental rates on sugar land would be in the order of $275- over $300 per hectare, not $65 per hectare. ALTA, then, has exploited landowners by denying them rents based on the true economic contribution of their land to agricultural production.
Tenants, by contrast, have done exceptionally well under ALTA. Not only have they benefited from low rents, many (non-cane farmers in particular) have managed to avoid paying any rent at all. Indeed, in a good year, only 60% of the total rents contractually payable to the NLTB are actually paid by tenants. The economic position of tenants on sugar leases has also been advanced by:
Subsidies from the
One of the most advantageous divisions of sugar revenues between miller and grower to be found anywhere in the world.
From a rental formula in ALTA that ensures that none of the EU subsidies, or any windfall gains from devaluation, are shared with landowners.
The reason why existing land tenure legislation has so exploited landowners is to be found in the history of the country. While the colonial government recognised Fijian ownership of native land, that recognition was evidently enough of a concession. More pressing, were the needs to maintain sugar profits and colonial finances. These were sustained through the exploitation of labour, and the instrument of exploitation was indenture. But once labour became emancipated and demanded both land security and greater shares of sugar revenues, there was no choice but to follow the path of least resistance and shift the burden of indenture on to land. And currently, the primary instrument of land’s indenture is the ALTA legislation, which effectively emasculates the ability of the NLTB to act as trustee to the landowners.
Under the combined influences of ALTA and the indenture of native land, the last 30 years has witnessed a huge transfer of real income from landowner to tenant. Agricultural productivity has also suffered in that there are few positive incentives in the ALTA legislation that encourage tenants to improve farm productivity. Similarly, there are no effective measures in the legislation to discipline tenants who do not farm efficiently or even pay their rent.
The most immediate consequence of ALTA is that it provides no incentive to the landowner to lease his land. Given the low rents it permits, even the most inefficient landowner/farmer would lose nothing by cultivating his own land as opposed to leasing it out. And by minimising the potential pool of available leases, a continuation of ALTA constitutes the gravest possible threat to the tenants’ future.
For tenants, then, as well as for landowners, ALTA is the problem, not the solution.
The study sees the solution to the ALTA problem as lying in the creation of an institutional mechanism that will enable leasing transactions to be based on the informed consent of both landowner and tenant. In the process, leasing arrangements will be mutually beneficial to both parties. The market is proposed as the mechanism that can most expeditiously promote this result. A market orientated land policy has the further advantage of removing the dangerous ingredient of politics from leasing transactions.
To achieve market solutions, the study advocates the creation of a land exchange within which all agricultural leasing would be transacted. Within this land exchange, the NLTB would function not simply as trustee to the landowners but also as a broker or agent, providing the specialised knowledge that is necessary for leasing contracts to be based on informed consent. Tenants too would have their own expert counsel to promote intelligent contracts on their part. Within certain limits, market negotiations would be used to determine conditions of tenancy and rent levels.
With respect to the structure of rents (as opposed to the level of rents), the study contends that the national interest requires the identification of a rental structure that simultaneously provides the maximal incentive to the landowner to lease out his land, the maximal incentive to the tenant towards sustainable productivity, and rewards the tenant with a demonstrably fair share of gross agricultural proceeds. A structure that achieves these precise objectives, which reconciles the seemingly opposing interests of landlord and tenant is identified within the study. This proposed rental structure combines a fixed rental with a ‘diminishing marginal sharecropping supplement’.
The study also recognises that future land policy in Fiji will not just be about leasing. It must also be about facilitating the desire of some mataqalis to resume cultivation of their ancestral lands. It is contended that an extension of the practice of contract farming offers a tried and tested method for successfully integrating subsistence farmers into modern commercial agriculture, something imperative for both the nation and for Fijian landowners when finally they have the opportunity to profit from their land assets.
Alongside the need to facilitate the entry of mataqalis into commercial agriculture, is the related need for a policy to mitigate the hardship suffered by tenants whose leases expire; to prevent the homelessness and financial losses currently associated with lease non-renewals. It is suggested that a most effective policy would be to require all future leases be split into a commercial agricultural lease and a separate residential lease. The benefits of this are numerous, including the prevention of homelessness currently associated with lease non-renewals, and the ability to make a tenant’s residential investment realisable in cash through the sale of residential leases. This, in turn, would promote the mobility of labour and the general efficiency of the country’s labour market.
With respect to the critically important sugar industry, instead of the end of ALTA being the crisis that many fear, in point of fact it offers a wonderful opportunity to modernise and reorganise the industry for the new millennium. It offers a clean break from many of the counter-productive incentives, practices, and attitudes that have been dulling innovation and crippling farm productivity. The move to a market-based leasing system not only maximises leasing opportunities to tenants, it further offers the chance for the best farmers to acquire the best leases and to increase their land holdings. It also permits landowners to engage in sugar production in a larger scale so as to permit realisation of the numerous efficiencies possible under a comprehensive system of contract farming. Given that EU subsidies are declining, and will inevitably be phased out, and that the current division of sugar proceeds between grower and miller has become unsustainable, these developments offer sugar a realistic opportunity of accommodating itself to the market realities of the new millennium.
1. INTRODUCTION – THE STUDY IN PERSPECTIVE 1
2. ARE ALTA RENTS FAIR? 4
3. INDENTURED LAND – THE CAUSE OF THE LANDOWNERS’ EXPLOITATION 12
4. THE EFFECTS OF THE CURRENT ALTA RENT FORMULA 16
4.1 The Economic Consequences of ALTA 16
The Equity Effects of ALTA 16
The Efficiency Effects of ALTA 20
4.2 The Sociological Effects of ALTA 22
4.3 The Political Effects of ALTA 22
5. TOWARDS A SOLUTION TO THE LAND PROBLEMS 24
5.1 Land and Property Rights 24
5.2 Facilitating the Consummation of Mutually Beneficial Leasing Contracts 26
5.3 Housing Former Tenants Whose Leases Have Expired 28
5.4 Efficient Rental Formulas, Share-Cropping and the Problem of Sub-leasing 29
Efficient rents – an example 31
6. LANDOWNERS TAKING BACK THEIR LAND 34
6.1 Contract Farming 35
7. CONCLUSION – THE WAY FORWARD 43
APPENDIX 1 46
APPENDIX 2 49
Mumias Sugar, Kenya Booker McConnell 49
1. INTRODUCTION – THE STUDY IN PERSPECTIVE
It would be difficult to underestimate the magnitude of the problems relating to the use of agricultural land in Fiji. Likewise, it would be difficult to understate the intractability of these problems – of exactly how difficult it has proven to be to discern an enduring solution. And it is not through lack of effort. Each government since independence, as well as the colonial regime before, has had no choice but to grapple with the land issue. Their failure to reach an acceptable solution has resulted in the human tragedy currently unfolding with the expiry of the Agricultural Landlord and Tenant Act (ALTA) leases. The displaced tenants, wondering where to go, what to do; the landowners, incredulous that until now no one had planned for the expiry of leases, and offended over the consternation that seems to accompany any actual exercise of their constitutional rights as land owners; and others, in between not knowing quite what to say.
But in contemplating previous policy failures one must be tolerant. For in the land we have the conjunction of economics, politics, history, sociology, ethnicity, law, tradition, and even spirituality. Land effectively distils and volatilises all that is actually and potentially flammable in the nation state of Fiji. It must be treated with caution. The very combustible character of land doubtlessly induces a desire to stay well away from it. This is equally dangerous. The pressures that have been building over the last generation, if ignored, or if bottled up for yet another, could well prove too much to contain. The creation of an enduring policy safety valve, therefore, is absolutely vital.
Despite the heated sentiments that appear almost daily in the press, the conditions at the present time are particularly appropriate for the creation of this much needed policy safety valve. The goodwill evinced in the creation of the 1997 Constitution still remains, as does the memory and the general desire never to repeat the 1987 military coups. Fiji has been, and remains, peaceful. Its society and body politic is thankfully free of radical elements. The timing, then, is right and the opportunity must be seized.
This study is motivated by a belief that many stakeholders whose livelihood directly, or indirectly, depends on land, and many individuals who are in a position to influence policy, have not fully appreciated the economic realities that cumulatively and qualitatively have been changing landowner behaviour – in particular, the increasing desire of individual mataqalis to be free to determine the disposition of their lands. Not only has this left the nation, by and large, unprepared for the expiry of ALTA, but it has also induced a widespread, but quite probably erroneous belief, that solutions to the land problem may lie in an extension, or a mere modification, of the legal and policy status quo. However, in this study it is suggested that the interests of the principal stakeholders – landowners and tenants – along with the health of the economy as a whole, can only be properly served by a land policy that takes to its very heart the economic incentives that shape and influence the behaviour of individuals. Accordingly, the objective of this study is to develop a land tenure policy explicitly oriented around economic imperatives.
While this approach was selected with the particular view of remedying the specific problems generated by Fiji’s unique land tenure system, it is important nonetheless to recognise that,
“A massive transformation of land management is occurring worldwide from being located in institutions for “public” decision making to a substantially greater degree of “privatisation” of land management. The moving force behind the privatisation of land management is the politico-economic decision to establish dynamic market economies”.
Thus, in experiencing pressure for greater and more sustainable agricultural productivity, and the need to solve the unexpected social and economic side effects relating to its land tenure legislation, it is important to recognise that Fiji is not alone. Conditions in Fiji are unique, but the category of its land tenure problem is not. Accordingly, the study looks at what lessons Fiji may learn form the rest of the world.
The intended contribution of this study is in the form of a policy framework, a strategy, as opposed to the tactical and legal details needed to implement a strategy. It is recognised that this is a weakness. But it is also a strength. For it is contended that a vision – that an over-arching strategy – is what is most urgently needed at this stage. That said, the study does not shy away from details.
Specifically, the study identifies the national interest regarding agricultural land as being served by the creation of an institutional mechanism that will enable leasing transactions to be based on the informed consent of both landowner and tenant. In the process, leasing arrangements will be mutually beneficial to both parties. And with intelligent, mutually beneficial contracts, the potential for discord will be considerably, if not totally, discharged.
The market is proposed as the mechanism that can most expeditiously promote this result. A market orientated land policy has the further advantage of removing the dangerous ingredient of politics from leasing transactions. With respect to rents the lynch-pin of any leasing transaction the study contends that within the context of mutually beneficial contracts, and given the magnitude of the tenant community, the national interest requires the identification of a rental structure that simultaneously provides the maximal incentive to the landowner to lease out his land, the maximal incentive to the tenant towards sustainable productivity, and rewards the tenant with a demonstrably fair share of gross agricultural proceeds. A structure that achieves these precise objectives, which reconciles the seemingly opposing interests of landlord and tenant, is identified within the study.
The study also recognises that land policy in Fiji is not just about leasing. It is also about the desire of some mataqalis to resume cultivation of their ancestral lands. The study analyses the opportunities and the pitfalls present in this desire, so that again, informed consent can drive the decision. The other side of this coin is the need for a policy to mitigate the hardship suffered by tenants whose leases expire; to prevent the homelessness and financial losses currently associated with lease non-renewals. This too is addressed.
In the background to all the above are the twin economic concerns of efficiency and equity. It is contended that the market solutions proposed in this study offer the best guarantee of the kind of land use that will safeguard the interests of the economy in general, and sugar, in particular. Likewise, the market solutions offered, when combined with the suggested modest regulatory constraints, serve the interests of equity; and, in the process, promote friendly relations between landowner and tenant.
Of course, one can only hope to arrive at an acceptable policy if the real problems and fears of each party are clearly recognised. Each must know that their concerns have been explicitly taken into account. Equally, it would be foolish to advocate a major change in policy without demonstrating the weakness of the status quo. Consequently, before addressing its policy recommendations, the study explores existing land policy and the effects that it has had on both landowner and tenant.
The study does not try to describe in detail the background to agricultural land tenure in Fiji, the ALTA legislation, traditional landowner protocol, etc. This is fully and effectively covered elsewhere. Rather than reinventing the wheel, then, the emphasis here is concentrated on identifying problems associated with adverse economic incentives that permeate the present system and to identify solutions to these problems.
By endeavouring to both illuminate, as starkly
as possible, the source of the nation’s land problems, and
to advance a policy vision that has the potential to address
these problems, it is hoped that the present study will
constructively contribute to the current debate on the
proper use of native land in Fiji – both for today and into
the next millennium.
2. ARE ALTA RENTS FAIR?
A critical part of the debate about ALTA relates to the appropriateness of the rental payments it prescribes. Representatives from the tenant community have expressed the view that the basis for fixing current rentals is reasonable and that concerns of landowners for greater rental incomes could be met through minor quantitative adjustments to the existing formula . Landowners, however, argue that they are wholly inadequate and that a complete re-writing of the very principles used to fix rents is required. Also, from landowners, we hear questions about the efficacy of the Native Land Trust Board (NLTB) in collecting rents. The following section seeks to analyse the level and structure of agricultural rents with the objective of laying bare those facts and principles that can be used to reach tenable conclusions on the appropriateness of the current ALTA formula.
Consider actual rental rates first. ALTA rents are fixed at a maximum level of 6% of the “unimproved capital value” of the land. Now whereas “market values” can be established by an auction and are objectively clear to see in the case of freehold title (which, with some important qualifications can serve as a benchmark for market values for native land, as will be shown below), “unimproved capital values” are determined by professional valuers employed to make such determination under the Act. Actually, there should be very little difference, if any, between the market-based “imputed price for land” (ie. the shadow price of land) and the “unimproved capital value of land” and the shadow price of native land, as estimated in Appendix 1 of this study provides figures which are of the same order of magnitude as the UIC values currently used in ALTA. The difficulty, however, is that ALTA makes provision for tenants to appeal their rental assessment which virtually all have done. The end result is that actual rentals instead of being determined by a clear formula – 6% of unimproved capital values – are actually determined by a political process, by the legal and political power tenants are able to utilise in appealing their rental rates.
What is objective, by contrast, is the actual level of rents payable according to the historical ALTA formula. In October 1995, a total of 201,013 hectares of land were leased under ALTA which were assessed to carry a collective rental of $7,344,455. Accordingly, rental payments averaged $36 per hectare per year. This is equivalent to a dozen bottles of beer, per acre, per year!
It is not simply the level of rents that is important, but whether the assessed rents are actually paid. In the above noted year (1995), of the $7.3 million contractually payable on ALTA leases only $4.4 million was actually paid . In other words, during 1995, which was a rather good year for rent collections, only 60% of the rent payable was actually paid by tenants. With respect to the non-payment of rents, a significant pattern exists between cane and non-cane leases. Concerning cane farming, the rent normally does get paid as it is taken off the top as a deduction from the earnings of the cane farmer before the farmer actually receives them. Landowners who lease land to non-cane farmers are not so lucky, and in a good year less than 50% of the total rentals that should be paid, actually are paid. It is difficult to conceive that the situation would be any different had cane farmers the responsibility for directly paying rents. In any event, looking at the total picture, clearly, as a rent collector, the evidence suggests the NLTB is less than adequate! It also indicates that many tenant farmers just do not take seriously their contractual obligation to pay rent.
While it clearly tempting to admonish the NLTB for its track record in collecting rents, the real problem lies not with them but with the ALTA legislation and its administration. While the NLTB can seek legal redress against negligent tenants, the process is time consuming. And a favourable adjudication would only allow either the recovery of rental arrears or the eviction of derelict tenants, neither of which would compensate for the expensive legal costs involved. Hence the poor track record of the NLTB in terms of collecting rents is attributable not to any lack of interest or desire, but to a cost benefit analysis of the legal remedies available to them under ALTA.
For sugar lands, which comprise about 40% of all agricultural land rentals – but which carry the highest agricultural rents and which generate by far the largest source of agricultural income for the NLTB – as of March 2000, the average rent per hectare was $65 . This figure is approximately 1.15% of the assessed unimproved capital value of average cane land . This demonstrates clearly the practical importance of the political process in determining rents. Equally it attests to just how misleading to the uninformed is the 6% UIC value formula that appears in the ALTA legislation.
But what about the level of rents? Is $65 per ha per year appropriate for sugar land? This can be analysed in a couple of ways.
First, consider land as an asset like any other asset. Indeed, it is the only asset possessed by many Fijians (their own labour aside). Now, the owner of any asset employed in the market to create wealth is entitled to earn a rate of return on that asset. The Fiji Sugar Corporation (FSC), for example, for many years paid dividends equivalent to a 15% rate of return on the market value of its shareholders’ investment. Few businesses would make investments in productive assets that carried less than a 10% real rate of return. Even the European Community in evaluating the desirability of funding capital works in Fiji judges that they should be able to sustain a 12% rate of return.
Of course, most commercial ventures carry with them a degree of risk that the entire investment might be lost. Normally, the greater the anticipated risk, the greater the rate of return expected by investors. Now, when a mataqali invests its land in a venture there is no possibility that the land can be totally lost, so in some respects landowners, when using their land for leasing purposes, invest it in a risk free venture. At the same time there is a risk that tenants might, through poor farming practices, exhaust the land, rendering it next to worthless to the landowner when ultimately he takes possession. But if, for arguments’ sake, we take the extreme case and assume that land investments are totally risk free, then they would approximate, in nature, perpetuities or guaranteed investment certificates backed by the public treasury. These sort of risk free financial instruments normally carry a modest rate of return, usually a real rate in the order of 3%, which, given Fiji’s current inflation rate of 3%, would translate into a nominal rate of 6% per annum.
What about the actual economic returns to the asset land? Well, the current market value of an acre of agricultural land is about $4,500 (Fiji Times, May 8, 1998, p.5) which equals $11,120 per hectare. A 10% nominal rate of return on this asset would be over $1,000 per hectare per year. Of course $1,000+ per year may be too much to expect. After all, freehold title is a ‘thin’ market. Accordingly, the demand for freehold, and the price of freehold, may be higher than the value of Native Land. In principle, one could overcome the absence of an explicit market for native land by computing a “shadow price” based on the capitalised value of the income it can generate. Appendix 1 performs just such a calculation using deliberately conservative assumptions so as, if anything, to err on a price that is too low rather than too high. The estimated shadow price for native land is $7,619 per ha. But even according to this conservative shadow price, market based rents would still average over $700 per ha per year. And even the 6% “risk-free” return, when applied to land valued at the shadow price, would still yield over $450 per ha per year.
To say that current ALTA rents of $65 per hectare are somewhat modest would be a huge understatement. They amount to an annual nominal rate of return of 0.58%, when land is valued at current freehold prices ($11,120 per ha), or 0.85% at the estimated “shadow price”. Moreover, given the 3% current inflation rate, the real rate of return currently enjoyed by landowners is essentially zero . Now, who in their right minds would invest their assets in projects yielding a zero real rate of return? And which business leader or politician, anxious about the economy, can honestly look landowners in the eye and advocate that in the “national interest” they, the landowners, should continue to lease out their land for essentially nothing?
A second approach to judging the appropriateness of current rentals would be to compare rents with the incomes which land can produce. Given current poor farming practices, the yield of cane in Fiji averages out at the rather low figure of 55 tonnes per ha . Now, the price of cane varies considerably depending on market conditions, from less than $50 per tonne to over $80 in the drought year of 1997/98. If we assume a $50 average value, then one hectare can produce 505x50 or $2,750 of income for the farmer. Rent payments, then, would amount to 2.36% of earnings, an utterly insignificant figure.
It is instructive to compare the landowners’ effective 2.36% share under ALTA with the practice in other countries. In India, sharecropping based on a 50/50 division of the crop between tenant and landlord has been widely applied, both in the past and at present . Interestingly, a legacy of this practice survives amongst Fiji’s Indian community in the so-called adhiya pe system. This involves a freehold landowner, or, more commonly, a lease holder (who may have retained the lease over his farm and then migrated or gone into another line of business) informally and illegally sub-leasing his farm to another tenant in return for a 50% share of that tenant’s crop. Similar 50/50 splits have been commonly applied in other Asian countries and in Latin America . In Sri Lanka, legislation is in effect that restricts the landlord's share to 25% (though this restriction has encouraged concealed 50/50 arrangements) . In Africa, where leasing is often done within family units, where land scarcity has not been so pronounced, and where the distribution of income and status has tended to be more equal, rent levels tend not to have been so exploitative. Particularly revealing is the case of Kwazulu in South Africa where, like Fiji, land is leased primarily for sugar cane production and where, as is also true in Fiji, the renter assumes all production costs. Here, the renter pays the landowner between 10-15% of gross income .
As economies mature and agricultural productivity increases, and as the “reservation wages” of tenants’ increase (as a result of a greater availability of alternative employment opportunities) the shares going to the landowner also typically decline, but often not by much. Thus, in the state of Louisiana in the USA, tenants on sugar cane lands pay the landowner either one fifth (20%) or one sixth (16.67%) of gross income . Here the tenant, as in Fiji, assumes all production costs. In Queensland, the share going to the landowner is lower still, at only 10% of the value of the cane crop though it is sometimes significantly more if any costs are borne by the landlord.
The international comparisons listed above are summarised in Figure 1 below:
Rent Payments as a % of Gross Agricultural Production by Country
While the figure above shows the rent paid on sugar lands to be completely out of line with international comparisons, the same will also be true for many other crops which both produce a greater dollar value of output per hectare than does sugar, and which also benefit from lower rents than sugar land carries . Indeed, so completely out of line are Fijian agricultural rentals that it is tempting to ask whether this is by accident or design.
In this regard, it is sometimes the case that rentals are deliberately suppressed by governments as an instrument of social policy. In Western Europe, social activists have perennially expressed concern over its class structure and the huge imbalance in the distribution of wealth and income with landowners being at the very top of the wealth/income scale. Responding to this, governments over the last two centuries have rigorously controlled agricultural rentals so as to produce for the landowner a real rate of return varying from only 1.3% in Belgium to 2.5% in France and 3% in the UK. The objectives here were deliberately to make leasing an uneconomic option so as to engineer a progressive transfer of real income from landowner to tenant, and to preserve the concept of the family farm by making it unattractive for investors to profit from the acquisition and letting of land. It should be noted, however, that after the UK joined the common market in 1975, and availed itself of the prevailing agricultural subsidies, land values substantially increased allowing landowners to command a rate of return on let farms of 10%. And when rent controls were relaxed in 1995, rents jumped by a further 50%.
But even before the UK relaxed its rent controls, and even in the extreme cases of Belgium and France, the landowners rates of return were still more than double those in Fiji. This leads one to question whether social engineering, the calculated desire to deliberately suppress rents so as to effect an income transfer from landowner to tenant, was not a major component of ALTA.
Perhaps the easiest and clearest way to relate ALTA rents to international levels is to go back to the sharecropping principle and compare rent as a proportion of gross income. In this regard it is instructive to note that were rents in Fiji to be set according to 10% of average cane crops – the absolutely lowest level found amongst international comparisons they would amount to over $275 per hectare, or over 4 times current ALTA rents ! By the same token, it is noteworthy that were the ALTA rent formula actually enforced, in other words were actual rents to be set at 6% of UIC values, the actual rent that would be paid by tenants on sugar land would be $340 per hectare , a figure that is certainly compatible with international standards.
Given the above context, the effect of the recent proposals of the Chaudhry government to increase maximum rentals from 6% to 10% of unimproved capital values can be seen clearly. Theoretical maximum rentals on paper would rise from one level that was not enforced - 6% - to another higher level - 10% - that would not be enforced.
Thus, it is abundantly clear that – both absolutely and relatively – tenants in Fiji have been remarkably lucky, especially when it is recognised that the incredibly low ALTA rents coincided with a 30-year lease period.
And it is not just
with regards to rents that tenants – cane farmers in
particular have been lucky. They benefited
initially from Commonwealth Preferential prices and then,
after 1975, from the EU’s Lome Agreement which, over recent
years, has subsidised growers and the FSC to the tune of
$2-3 million per week. The Lome Agreement effectively
doubles cane farmers’ incomes and, of course, is of major
benefit to the shopkeepers in whose stores the cane farmers’
subsidised incomes are spent. But how much of these windfall
subsidies go to the landowners? The short answer is none!
For the landowners to share in such subsidies – subsidies
which really amount to a substantial injection of foreign
aid – some mechanism would have to be in place to redirect
some of this subsidy money to the landowners. If rents were
given a quantum upward adjustment after 1975 to reflect the
new higher, subsidised price of sugar, this would have
enabled the landowners to share in the EU’s aid package.
Appropriately increasing the unimproved capital values of
land and ensuring that rents were actually based on such
declared values would accomplish such a sharing. This was
not done. It was not until after the coups of 1987 that any
serious attempt was made to address rent levels and all that
accomplished was to bring them up to today’s wholly
inadequate levels. The problem, as noted earlier, is that
ALTA rents are based not on the prevailing economic
realities but on a political process that supersedes a
declared but unenforced 6% unimproved capital value formula.
This process ensures that essentially none of the hundreds
of millions of dollars of EU subsidies since 1975 ever gets
passed on to landowners. Similarly, every time the Fiji
dollar gets devalued, the Fiji dollar value of sugar sold
overseas increases, thereby again increasing the price of
cane paid to farmers. And again, the ALTA rent formula,
combined with its five year time lag between rent
reassessments, ensures that not one cent of these windfall
gains gets shared with the landowners.
On top of these manifold gains to tenants, it should further be noted that cane farmers in Fiji have achieved for themselves one of the most advantageous divisions of sugar proceeds between grower and miller found anywhere in the world. To quote from a recent World Bank study,
“The mill share of proceeds from the sale of sugar and molasses is among the lowest in the world, having dropped to a level insufficient to maintain the mills. The mills currently receive about 28 percent of proceeds, the farmers about 72 percent. FSC has had little leverage to resist this trend, since the issue is largely settled in the political arena, and as a government-owned corporation it has bowed to pressures to increase the share of the growers under the general Master Award System (MAS)”.
From the foregoing, it is clear that the ALTA rent formula has been remarkably successful in advancing the financial interests of tenant farmers cane farmers in particular. They have benefited from rents that are many orders of magnitude lower than in any other country for which the authors were able to find details. They also benefited from a rental formula that allowed tenants to capture the entire benefits of any windfall gains like subsidies or devaluation. They also benefited from one of the most advantageous (to the farmer) divisions of sugar proceeds experienced anywhere in the world. And notwithstanding the economic advantages conferred by these conditions, many tenants (primarily non-cane tenants) have further benefited by consistently avoiding paying any rent at all! Collectively, this set of circumstances testifies to just how incredibly successful the tenant community in Fiji has been in mobilising the political decision making apparatus of the country into passing legislation and regulations that advance its particular interests. Moreover, two recent events further testify to this remarkable political influence. First, is the recent proposal to offer to tenants whose leases are not renewed a government grant of $28,000. This amount is virtually sufficient to purchase a freehold farm! It also typically exceeds the totality of rent that has been paid out by the tenant to landowners since Fiji became a colony in 1874! Second, the general manager of the NLTB was advised not to comment on the very topic – native land leases – under whose purview the NLTB itself is mandated, as trustee to the subsistence landowners. In most democracies, such restriction on free speech, and the violation of the basic human right to express the collective views of organised individuals in a negotiating process, would not only bring down local condemnation, but international opprobrium.
The $28,000 payout to evicted tenants caused a predictable uproar amongst the landowning community in that no such relief was initially extended the ‘cash short’ and ‘collateral short’ subsistence landowners, who by dint of repossessing their land, would be embarking on a new and hitherto untried livelihood – commercial agriculture. Responding to this the Chaudhry government did promise new farmers a $10,000 start up grant though no budgetary provisions were made for this and nothing was ever paid out.
The essence of the problem,
then, is that the manifold financial gains that tenants have
enjoyed under ALTA, as detailed above, have come at the
expense of landowners. Indeed, it would be no exaggeration
to conclude that the ALTA formula has resulted in the
wholesale exploitation of landowners. What other possible
conclusion is there? But how could landowners end up being
the victims of such systematic exploitation when
institutions are in place – the NLTB in particular –
expressly designed to advance their interests? The
remarkable story of the causes of this exploitation is the
focus of the following section.
3. INDENTURED LAND – THE CAUSE OF THE
In the previous section (Section 2), it was noted that agricultural land rents in Fiji are very low both absolutely and relatively. Indeed, on both counts they are many orders of magnitude below that in any other country for which the author was able to find data. While these low rents have proved an absolute windfall to tenants, for landowners, however, they have amounted to wholesale exploitation.
But what are the causes of this exploitation? How is it that landowners have been so victimised when the NLTB is supposed to act in their interests, and, until this year, post independence Fiji has always had Fijian governance?
A major part of the problem relates to the fact that the provisions of ALTA, and before that, the Agricultural Landlord and Tenant Ordinance (ALTO), often prevented the NLTB from properly acting in a trustee capacity for the landowners – which is why the NLTB quite naturally wants ALTA abolished . But apart from this legislative straightjacket, it has to be said that those charged with advancing the interests of landowners have not been doing their homework. And this applies not just to the NLTB. Fijian politicians and the BLV have not been nearly as assertive or successful in promoting general Fijian interests as the Indian politicians and labour leaders have been in promoting tenant interests, as noted in the previous section.
But over-riding these issues, is a hidden and surprising cause of the land problems that has served decisively to shape current tenure legislation. In order to understand this underlying cause of the land problems we have to revisit the country’s colonial past.
Both before and after Cession, European settlers were after Fijian land in order to pursue a variety of agricultural enterprises including cotton and later sugar. And sugar, of course, proved ultimately to be the only successful plantation crop. The Colonial Sugar Refining Company (CSR) emerged as the dominant sugar producer by the end of the nineteenth century and the sole producer after 1926. It leased huge tracts of the best Fijian land and purchased much freehold title . Of course, to produce sugar it needed not just land, but labour. Fijian labour proved unavailable, the Fijian population still collapsing from introduced disease, the chiefs unwilling to release young men for the colonial government’s enterprises, and commoners seeing no sense in toiling in the fields for a monetary pittance that could buy them nothing the village could not produce for much less effort. And so in order to obtain plantation labour the colonial government brought in indentured workers from India, starting in 1879.
The circumstances surrounding indenture have exercised a continuing domination over local Indian thought, historical research, political activism, and indeed mythology. The core of the indenture system, which was, and remains, so resented by the Indian community, consisted of a contract between worker and employer (the colonial government underwriting the CSR) which essentially gave the employer exclusive rights over the worker’s labour (and, to a degree, his non-working hours) for a period of five years. The resentment aroused by this bargain developed naturally from the three primary characteristics of the indenture contract.
First, during the contract (indenture) period, workers were not free to use their labour as, when, and how they wanted – they were always at the CSR’s beck and call. Second, workers were exploited by being paid a wage that did not reflect their economic contribution to sugar production – they remained poor while the company and colonial coffers prospered. Third, the workers, being uneducated and ill informed, were not aware of the full implications of the indenture contract. Often, they were pressured into agreeing to the indenture contract when they would not have done so had they known the full measure of what it entailed. Of course, workers were also physically abused, though this was not specific to the indenture system, but was a general component of the workers’ lot in the nineteenth and early twentieth centuries.
Of the three ingredients of the indenture system, exploitation was undoubtedly the major grievance. Had the indentured labourers been paid European wage levels, or more, and been treated accordingly, in all likelihood the Indian community today would fondly celebrate its indentured past.
The recruitment of indentured labour was terminated
by the British colonial government in India in 1916, and
current contracts of indenture were cancelled by the
colonial government in Fiji in 1920. This development served
to create a potential labour shortage for the CSR. Also, the
end of indenture gave Indians in Fiji the confidence to
demand greater freedom and higher wages, as indeed they
showed in 1920 with a willingness to use industrial action
to achieve these goals . Faced with this, the CSR needed a
strategy both to increase the effective supply of labour
effort and to discharge the incentive to strike. The
solution chosen by the CSR was to abolish the plantation
system, subdivided its lands into 4 ha plots, invite the
Indian labourers to sub-lease these plots, and run them as
independent, small-scale family farms . The theory was that
the extra effort and motivation that predictably would be
forthcoming from free, independent farmers would more than
make up for the inability to further recruit indentured
workers. Equally, it would obviate the need for the CSR to
pay the higher wage rates it was being forced to pay the now
free labourers employed on its estates. This fundamental
change in business practice marked the birth of the current
small leasehold cane farming system.
Under the small leasehold system, the demand for Fijian land now had new voices. Alongside the CSR, which had been arguing that its long-term profitability could best be served by the permanent alienation of leased native land, the Indian smallholders, their union and political representatives, and indeed the government in India, were also demanding land security . The economy too depended on sugar revenues and colonies must turn a profit . And so the pressure mounted for Fijians to accommodate these demands, for it was now in the national interest of the country to ensure the full and proper utilisation of land. Ratu Sukuna echoed the national interest argument in his selling of the NLTB concept in 1936. Equally, he emphasised the prevailing reality that unless Fijians accepted the idea of the NLTB, over which they were to have control, the colonial government would introduce direct and much stronger controls over native and leased land. And so Fijians, always ready to make sacrifice for their country, eventually agreed with the suggestions of how they may serve the national interest as it was presented to them: they assented to the concept even though few knew the full import of what was happening. Henceforth, discretion over the right to lease was removed from the individual mataqalis and invested with the NLTB . And leasing, in turn, was further and decisively influenced by colonial policy and the legislation governing leasing obligations between the NLTB and the thousands of smallholder tenants – ALTA being but the latest version.
It is this precise set of historical circumstances that served to create the conditions by which native Fijian landowners were exploited.
The end of the indenture of labour, which marked the beginning of smallholder farming, did not mark the end of the indenture system. The principle and the practice of indenture were simply shifted on to land.
Sugar profits and colonial finances required exploitation and the instrument of exploitation was indenture. But once labour became emancipated and demanded both land security and greater shares of sugar revenues, there was no choice but to shift the burden of indenture on to land. And the primary instrument of land’s indenture has been the circumscription of the NLTB by ALTA legislation.
INDENTURED LAND, THAT, AND THAT ALONE, IS THE ROOT CAUSE OF THE LANDOWNERS’ EXPLOITATION
Lest anyone doubt the reality of this,
consider the three principles of indenture and see how they
relate to land:
Principle 1. Landowners are not free to use their land, as, when, and how they want. Since 1940, not only has exclusive control over native land been removed from the owning mataqalis and been invested with the NLTB, but the discretion of the NLTB in acting in a trustee capacity for the landowners has been decisively constrained, initially by colonial policy and then by the overtly pro-tenant legislation, ALTO and ALTA.
Principle 2. Landowners are exploited by being paid rentals that do not reflect the economic contribution of land to sugar or other agricultural production. As mentioned earlier, landowners are receiving a rate of return on their land that bears no resemblance to market value. They remain poor while the users of their land have prospered comparatively.
Principle 3. Landowners were, and many still are, ill informed on the full implications of leasing contracts. Many have no idea of what they could be getting, or their rights and responsibilities. Overt threats, the national interest argument, and patriotism for noqu vanua were used to pressure the BLV and landowners into agreeing to a complex legislative framework governing leasing contracts when they would not have done so had they known what ultimately it entailed .
In short, the systematic exploitation of landowners that has been witnessed over the last two generations and more can be traced to an inability of Fijian leadership to wield the kind of political power that capital and labour were able to muster to serve their interests. For the colonial government, investing Fijians with nominal land ownership was enough of a concession. Confronted by the demands from capital and labour for land security, and for maintained or greater economic returns, officialdom followed the path of least resistance. They effectively indentured Fijian land for the benefit of the other groups. And thus it remains today.
The cumulative effects of land’s indenture have been to precipitate the widespread desire of mataqalis to be free individually to decide the disposition of their lands. On top of this, the nation has witnessed manifold pernicious economic and social effects that have flowed directly from ALTO and ALTA. And these effects, ultimately, are as damaging to the tenant as to the landowner. These effects will be discussed in Section 4 below.
4. THE EFFECTS OF THE CURRENT
ALTA RENT FORMULA
It was noted earlier that current ALTA rents are far below those of any other country for which the authors were able to find details. Further, before rent payments actually reach the ordinary landowner, certain deductions are made from gross rental incomes, as specified under Native Land Trust Act Cap 134 section 11.1. These relate to the NLTB's management fee of 25% (which has been reduced to 20% as of January 1, 1999) and a ‘chiefly take’ of 30% (comprising 5% to the Turaga ni Taukei, 10% to the Turaga ni Yavusa, and 15% to the Turaga ni Mataqali). Once these leakages have been subtracted, the amount of rental income actually arriving in the hands of ordinary landowners, if anything arrives at all, is rarely more than a pittance.
Much has been made of these ‘leakages’ from the rental income stream and there is little doubt that efficiency and accountability of both the NLTB and the turagas –especially if they hold more than one office can and must be improved. At the same time, much of this criticism is used no doubt to deflect attention from the ridiculously low level of rents that tenants actually have been paying.
But what are the effects of this current ALTA rental system? The consequences of ALTA are both numerous and diverse in scope, embracing economic, sociological, and political dimensions.
4.1 The Economic Consequences of ALTA
The economic consequences can be broken down into two types. First, there are equity effects, relating to the distribution of income. Second, there are efficiency effects relating to the extent to which the country uses its scarce land resources in ways that allow the greatest value of goods to be produced, something which thereby permits the greatest total incomes to be earned.
The Equity Effects
Whereas exchanges at the market level are necessarily mutually beneficial – a seller would not sell unless he saw his interests being served by the sale and likewise for the buyer – landowners in Fiji have had virtually no discretion in determining the use of their principal asset, land. Indeed, the combined effect of colonial policy, ALTO, and ALTA have effectively indentured land by tying the hands of the NLTB in properly acting as trustee to the landowners, as described above. Consequently, while tenants under this system have been free to decide whether to accept, to refuse, or to terminate a lease, landowners have not. Control over their land has been removed from them. They have been placed, by law, in the position of silent witnesses to the leasing of their land.
Under this system where landowners have been essentially coerced into accepting exchanges, the nature of which has been determined by others, the exchanges have not been mutually beneficial. Tenants have gained at the landowners’ expense. In the process real income – consumption and investment opportunities has been transferred from the landowners to the tenants throughout the 30-year operation of ALTO and ALTA. The amount of this transfer of income is quite staggering. Thus, if one accepts that proper market rentals would, very conservatively, be in the order of $300 per ha per year, as opposed to the $65 that is presently paid by tenants on sugar land, this income transfer would amount to nearly $19 million in the current year alone; and applies only to the 40% of all agricultural land devoted to sugar . And over the 30-year life of ALTA the cumulative income transfer to cane tenants from landowners would be well over half a billion (1999 dollars), and much more with the application of compound interest! And this is for sugar land alone!
The effect of this income transfer has been manifold. Certainly the material standard of living of rural Fijians has suffered in consequence. Opportunities for investing in rural schools, in university scholarships, in agricultural or commercial ventures, in training facilities for village sports teams, in investing to improve their own land, in buying various financial assets etc. have all been compromised . And by diminishing the range of activities possible in village communities, it has undoubtedly accelerated the migration of the young to urban areas with all its attendant economic and social problems. More generally, the income transfer has served effectively to rob the rural Fijian community of the resources needed to cushion the hugely difficult task of transforming its traditional subsistence based economy into a more productive and self-sustaining market based economy able to meet the growing aspirations of its increasing population.
While the picture sketched above describes the long term effects of the income transfer, perhaps the most immediate effect is to induce landowners not to agree to any extension of leases under ALTA. It creates the perfect incentive for mataqalis to farm their land themselves as opposed to continuing to lease it at uneconomic rent levels. Even the most inefficient landowner/farmer would lose nothing in the process. Thus, by creating such incentives, ALTA effectively minimises the pool of potential leases available to tenants. Accordingly, instead of tenants’ interests being advanced by a continuation of ALTA, as many mistakenly believe, they are actually threatened by it. For tenants, then, as well as for landowners, ALTA is not the solution, it is the problem!
Of course, equity issues arise not just from the level of
rents but also from the decision of mataqalis not to renew
expiring leases. Is it fair for tenants to be evicted when
their families may have worked the same soil for close on a
century and when they may have made certain improvements to
The former point directly touches on one of the most sensitive aspects of land policy. Do the mataqalis have ownership rights over their land in practice or only in principle? After all, if existing tenants have some implied usage rights by virtue of extended occupancy, then the discretion of the actual owners is subverted. Additionally, any implied extended occupancy rights that benefit existing tenants discriminate against new potential farmers who may be frozen out of land leasing options . The equity aspects of lease non-renewals, then, are not a clear-cut issue.
Notwithstanding the multifaceted nature of equity, it must be emphasised that the termination of a lease marks the termination of a tenant’s livelihood, and the beginning of a new source of income for the landowner. Now, whether it is reasonable to expect tenants to plan for the termination of their leases is a matter of debate. What is undeniable, however, is that tenants have enjoyed certain conditions that will not be available to those landowners who eventually take over and farm their own land. Since 1975, tenant farmers have enjoyed sugar incomes inflated by the preferential prices possible under the Lome agreement. As the European and world economies gradually phase out trade preferences, farmers’ incomes will become predicated upon world market prices for sugar which are only one third of the preferential prices Fiji currently receives on that part of its total sugar sales (50%) earmarked for Europe. Thus, landowners contemplating entering the cane farming business upon the termination of leases will never experience the real cane prices enjoyed by their former tenants. Similarly it is doubtful whether the current division of sugar revenues between miller and farmer, which has been so advantageous to the latter, is sustainable in the long run.
During the course of ALTA, then, existing tenants have benefited from low rents, high sugar prices and a very favourable division of sugar revenues. Together, these provide a cushion facilitating the adaptation of tenants to a post agricultural life , something that contrasts markedly with the afore-noted absence of a cushion for rural Fijians trying to adapt to the imperatives of a modern market economy.
Consider now the compensation provisions stipulated under ALTA. They require tenants to be compensated by landowners for any ‘improvements’ made to the land they lease, like buildings, drainage, irrigation, fencing etc. Is this fair and equitable?
If such improvements were of a permanent or long-term nature, and would serve to increase the rental incomes earned by landowners upon the replacement of the investing tenant by a new tenant, or would increase the income of the landowner were he to farm his own land, then clearly former tenants have an arguable case for compensation. At the same time, tenants would only undertake such investments if they were judged profitable. So, unless tenants are patently irrational, they would already have captured the benefits of their investments, in higher profit streams, prior to the end of their leases. (This is especially true with investments that have limited scope and duration.) In such instances, there would be no blanket case for compensation. Landowners, it is true, may benefit from their tenants investments. At the same time it must also be pointed out that all acts of investment will necessarily benefit parties other than the direct investor. The “multiplier” effects that radiate from any investment expenditure create flows of downstream income that are transmitted throughout the economy. It is ludicrous to conceive that the original investor has any right at all to these downstream incomes let alone a moral right to receive compensation from the indirect beneficiaries of his investment sufficient again to recover the initial investment costs.
Consequently a convincing case for compensation would require a demonstration of at least the following two conditions:
1. The tenant’s investment
demonstrably resulted in a permanent improvement that
directly allowed the landowner to earn a higher income
2. The tenant was not able to recover the costs of this investment during the currency of his tenure.
And even in the presence of these two conditions there is still no guarantee that compensation would be warranted. One would have to ask why the tenant was not able to recover his investment costs. Was it bad planning, poor implementation, or an ill-conceived idea from the outset? Certainly, there is no way that a landowner could be held accountable for failings such as these.
It should also be pointed out that the practice of compensation for improvements has a rather unsavoury history. It was first introduced in 1916 (the year that marked the end of labour’s indenture) in Ordnance No.23. The colonial government fully realised that landowners were never in a position to pay the assessed compensation and thus, “[t]his procedure affords an effective check to any general movement to refuse renewal of leases” . Compensation, then, was used as an instrument to lever lease renewals.
At the present time, when leases are expiring, some of the current claims for compensation exceed the totality of rent that has ever been paid by tenants on their lease since the Deed of Cession in 1874 – the very beginnings of colonial rule and land leasing in Fiji. Given the previously noted absurdly low level of rents, this is not difficult – even a modest building would often suffice. What ALTA and its predecessor legislation has done then, is to provide simultaneously for the payment of compensation and also for rents – rents which are set at such levels to make it impossible for compensation to be paid. The instrumental role of compensation provisions are therefore still alive and well in ALTA. Moreover, the same instrumentality is there to serve other ends too. Thus, the compensation of tenants by landlords for ‘improvements’ can be used in the legislation to offset any possible liability from negative investments by tenants – like soil degradation caused by repeated cane burning, failure to apply proper crop rotation, poor ploughing practices leading to erosion and loss of topsoil etc. These practices, which are all endemic today, were also matters of concern before ALTA . Thus the provisions in ALTA for the compensation of tenants offers a mechanism by which tenants can try to insulate themselves from the consequences of bad husbandry.
In short, the idea that tenants have a right to compensation for improvements is invariably complex and necessarily conditional. And what further complicates the issue is that not only does it occur in a body of legislation, ALTA, that is overtly pro-tenant in orientation, but it has also been used historically as a device for dis-empowering landowners.
The Efficiency Effects of ALTA
In a free market, resources are allocated to their most productive use via the price mechanism. Consider how this would work with land. First, land use would be organised in the most productive fashion, with those crops capable of yielding the highest net returns per ha attracting the best land, as they can outbid other competitive uses. As for poorest quality and least productive land, its demand and price would fall until some use can be identified capable of yielding revenues in excess of its low rental cost. In between these extremes, one would have a hierarchy of uses each incorporating a direct relationship between land productivity and return per ha per crop.
For this result to materialise, there must be a market either in land itself, or else in leases. Since the former is impossible, consider how the latter, a free market for leases, would work. Leases, when newly created or when vacated, would be auctioned off to the highest bidder. Those tenants who are highly industrious and productive, who can galvanise their farming with knowledge, imagination and capital, and who can discern the most profitable land uses, will be able to outbid their weaker brethren for the prime leases. The best, most productive farmers, then, would secure the best land while the worst would be relegated to lower quality, cheaper leases. In the process national agricultural output would be maximised. Should a tenant fail to abide by the terms of the leasing contract he has secured, the lease again would be auctioned off to the highest bidder. Of course, sometimes weather conditions may prevent tenants from living up to the conditions of their contract. To prevent this, tenants would have the incentive to invest in crop insurance schemes; something that would serve to deepen and render more sophisticated the financial markets of the nation.
A properly functioning market for leases would have the following characteristics. The rental rate per lease would be determined by supply and demand, the most productive and therefore the most highly demanded leases commanding the highest rental rates. Lease duration would also be similarly determined. Short-term leases are not normally as valuable as long-term leases and therefore their demand would be lower. Rental rates, accordingly, would be expected to vary directly with the length of lease. Eventually, a duration is reached where tenants judge the extra security of an additional year of tenancy is not worth bidding more to obtain.
The virtues of a properly functioning market for leases are numerous. Each parcel of land would be allocated to its most productive use. Tenants would be allocated to leases on the basis of productivity. Competition for land by tenants and landowners would quickly drive rents up to market levels. A range of leasing contracts of varying durations would emerge to ensure flexibility and promote innovation in terms of land use. A market would also ensure that the benefits flowing from fortuitous exogenous changes – such as a devaluation or a rise in the price of particular crops – are not appropriated solely by tenants, as has been the case under ALTA, but are shared with landowners. The price paid for prime leases would also induce tenants to properly care for their leaseholds, while the value of such leases to the landowner would induce effective procedures to monitor land husbandry. But perhaps most importantly, a market in leases would ensure that leasing transactions are mutually beneficial to both landlord and tenant. In the process, the prospect of market rentals would give a powerful incentive for landowners to lease out their lands rather than take them back willy-nilly. And equally, a market allocation of leases removes the politics and the race factor from land, something desperately overdue in Fiji.
The picture painted above describes how a market allocation of leases would work and the beneficial results that would flow therefrom. It does not yet occur; currently, we have ALTA. In effect, what ALTA does is to create a major impediment to market exchanges, and accordingly, serves to prevent the attainment of the efficient use of land that market exchanges would otherwise promote . More specifically, the prime negative consequences of ALTA’s usurping of market forces have been:
Rents are so
low that landowners have become chronically frustrated and
are often refusing to extend leases on
By providing no incentive to landowners to lease, ALTA serves to minimise the pool of future leases available to tenants.
The legislation and politics surrounding current leasing arrangements politicises an economic issue and, in the process, damages inter-ethnic relations.
The low level of rents provides no incentive for tenants to strive for maximal productivity: even if farm income is minimal or zero, rents can be paid or avoided. So why bother?
The absence of any credible threat of eviction during the course of a tenancy removes any incentive for tenants to increase productivity.
The mechanistic formula for rent determination means that the nation’s land resources will not be allocated to their most productive uses.
The mechanistic formula for rent determination means there is no guarantee that the best farmers will be able to secure the best leases.
By not promoting either efficient land use or the efficient allocation of land to farmers, the agricultural productivity of the nation is compromised.
4.2 The Sociological Effects of ALTA
While the economic effects of ALTA create undoubtedly the most cause for concern, the legislation also serves to generate other pernicious problems of a sociological nature. Tenants, as well as landowners, know that rental incomes are a pittance. Consequently, when tenant and landlord meet socially, say in a bar, there is a presumption on the part of the landowner, and a feeling of obligation on the part of the tenant, that the tenant should buy the drinks. The unequal bargain of ALTA, then, has created a pattern of social interaction based on expectation, obligation, favours, and advantage. You see this in landowners sometimes helping themselves to tenants’ crops or property, or not respecting their privacy or exclusivity rights over the leased land: “why should they have exclusive rights on our land when we get next to nothing for surrendering it?” And you see it in tenants putting up with it. You see it in the goodwill cash offerings tenants feel are now necessary to secure a lease extension. You see it in landowners, almost desperately, but at the same time with embarrassment, trying to seize any opportunity for financial gain such as charging hikers a toll for walking through their property .
In short, what ALTA has done is to exploit the landowner, and the victims of exploitation often respond with behaviour the beneficiaries of exploitation, or indeed passive bystanders, do not like. While this result is to be expected, especially since an entire generation has grown up under the exploitative rent formula, what is particularly troublesome is its ethnic dimension that serves to fuel the worst stereotypes.
4.3 The Political Effects of ALTA
The economic and sociological effects of ALTA, as described above, combined with the institutional setting within which these effects, and indeed the entire ALTA legislation operates, together threaten to produce what is widely and popularly perceived as a political and macro-economic crisis. We have long heard that investor confidence is irreparably damaged by the insecurity created by the threats of landowners to take back their land, that the sugar industry – for generations the backbone of the economy – will collapse if leases are not renewed, and that together these forces will throw the entire economy into deep and permanent recession. The effect of this, we hear, will be political turmoil: Fiji will become an economic basket case. But absolutely essential to such reasoning is the unspoken presumption that the viability of investment flows, of sugar, and of the entire economy, are all fundamentally dependent on mataqalis not being allowed to exercise their constitutional rights as owners of land. Those who advocate the maintenance of an ALTA type rent formula, combined with similar or even greater lease security, as a solution to the nation’s problems are really saying the following. The economy can only flourish if we continue to suppress the rights of landowners both to be free to use their land as, when, and how they choose, and their rights to receive a fair rate of return on their land assets.
It is precisely this thinking that threatens to precipitate a crisis. The problem is not roadblocks or the eviction of tenants whose leases have expired; it is the incredible belief that economic viability, that the national interest of the country, requires a land sweatshop.
The solution to all
these problems is not easy but clearly it lies in the
creation of a land regime orientated around the workings of
a free market. How this may be effected will be discussed
5. TOWARDS A SOLUTION TO THE LAND PROBLEMS
It is abundantly clear that the problems surrounding the use of land in Fiji, as described earlier, are numerous and diverse. The principal specific problems include:
the need to allow mataqalis to exercise their constitutional
rights as owners of land;
the need to allow desirous and productive tenant farmers the opportunity to use land;
the need to re-settle former tenants whose leases have expired;
the need to safeguard the continuing viability of the sugar industry;
the need to ensure that Fiji’s land resources are used in such a way as to promote the maximal welfare of current and future generations;
the need to reverse decades of soil and land degradation;
the need to ensure that the laws and regulations governing leasing and the use of land are generally accepted, widely understood and religiously followed.
The resolution of the problems, moreover, must necessarily be in the order of a final solution. The economic, political, and social problems experienced today would be incalculably worse if bottled-up for another generation through evasion or the application of some half-baked political balm. A final solution must nonetheless admit of flexibility for the future is always unpredictable circumstances always change.
The most promising approach lies in combining properly and explicitly stated property rights with a land regime allowing for the free operation of market forces.
5.1 Land and Property Rights
There are three classifications of land in Fiji – freehold, crown, and native land. The property rights relating to freehold land are clear and generally uncontroversial. The only real exception relates to some limited situations where freehold title was obtained through the sale by government of crown land that may inappropriately have been removed from the native register. More controversial is the position of crown land, as significant holdings relate to transfers from native land effected to enable the implementation of certain specific government or national projects. If these projects or uses were never put into effect, or if they are no longer in effect, does the land legitimately still belong to the crown? Similarly, if certain mataqalis have died out, does their land automatically go to the crown, should it go to the yavusa, or may not descendants of that line now registered in other mataqalis through, eg. marriage of female ancestors, have some legitimate claim over it?
While the problems relating to freehold and crown land can in certain limited situations be serious, they tend to relate more to the specific application of correct procedure and law, as opposed to turning on matters of fundamental land policy. The real land problems, then, revolve around native land, which comprises some 83% of the total landmass of the country. Moreover, any final leasing solution to native land will provide a model that can have application on leases of crown land. Thus, the primary emphasis must be on finding a solution to the disposition of native land.
With regard to property rights relating to native land, the fundamental question is quite simple. It is this: Do the mataqalis have property rights to their native land or not? At first blush this seems a facile question since the property rights of native landowners are entrenched in the constitution. At the same time, there is a widespread fear amongst landowners, and hope amongst tenants, that alongside the former’s right of ownership is at least a moral right of use by the latter. This possible moral right of use by non-landowners flows from two primary sources:
from extended occupancy the
fact that tenant families may have occupied the same parcel
of native land continuously for up to a century. The news
media and others have accorded tenants whose leases have not
been renewed, the special status of putative victims.
Indeed, the more accurate phrase “former tenant” has
completely disappeared from the lexicon and has been
replaced by the more emotive “evicted tenant” or “displaced
from the national interest argument – that the viability of sugar and investment, upon which the economy and the jobs of thousands are critically dependent, requires the general access to native land. Remember the “national interest” argument has been used repeatedly to justify the compulsory acquisition of native land by:
the state (crown) for highway and airport construction, hydro-power schemes etc. etc under the auspices of eminent domain;
the state in order to “buy a generation of time” for Indian tenant farmers under the auspices of ALTO .
The intrusion into the land problem of possible moral rights to others’ property, however appealing it may be to non-property owners, is absolutely fraught with danger. No mataqali would renew a lease if it feared losing ultimate control of its land to tenants. And the economy would quickly crumble if the state deemed that, by symmetry to its rights over land, it also had rights to use or acquire the capital or the labour of others.
The property rights of mataqalis to native land must be no different to any other property right the state enforces through law and this must be acknowledged in order to allay fears or raise false hopes. Mataqalis, then, are the sole owners of native land and by virtue of being the owners are alone free to decide on its use. Neither tenants nor the state have any rights, direct or implied, to mataqali land. Of course, non-owners of land may wish to use native land. And to acquire the right of use they must be allowed freely to negotiate with the landowners, or their representatives, so as to purchase a lease. The consummation of such a transaction will be mutually beneficial if both parties are free and willing participants, in other words, if there is no coercion, and if they have full knowledge of the rights and obligations of each party.
Flowing from the above discussion is the following recommendation:
That government and the leaders of all political parties, and official representatives of tenants’ interest (like the Sugar Cane Growers Council), explicitly and publicly acknowledge that Native Land is the exclusive property of land-owning mataqalis and that accordingly the mataqalis alone have the right to determine when, how, or if their land is to be used.
At the same time the mataqalis must acknowledge that once a leasing contract has been consummated, landowners have surrendered to the tenants all usage rights stipulated in the leasing contract and that over the duration of the lease, the right to use the land is, in consequence, exclusively the tenant’s.
5.2 Facilitating the Consummation of Mutually Beneficial Leasing Contracts
Attitudes to leasing transactions have unfortunately been complicated by history and by a fundamental change in circumstances since the current policies toward native land were first put into effect. Principal amongst these important historical events and situational changes are:
The end of labour’s
indenture and the beginnings of land’s indenture coincided
with a period of relative labour scarcity and land
abundance. The Fijian population had been in continuous
decline since Cession and some observers did not expect it
to recover. Today, given the absolute and relative growth of
the Fijian population, land is scarce, with even many
Fijians having little or no access to land. Consequently the
sacrifice entailed in surrendering the use of native land is
far higher for mataqalis today than it was when the NLTB and
ALTA first came into effect.
The living standards of both tenants and all those engaged in the formal economy (mostly non-Fijians) were built on access to native land at rentals far below economic levels – in other words they were predicated upon landowner exploitation.
Whereas the contribution of tenants to the national economy, their toil and their sacrifice, has been widely and correctly recognised (if not trumpeted), the sacrifice of landowners in agreeing to serve the national interest (which at the time was really the interests of the immigrant communities) by having to accept the exploitative rent formula has never been properly acknowledged. It has been taken for granted.
At the time of the creation of the NLTB and more recently ALTA few Fijians were literate or aware of their rights as citizens – they were persuaded to accept, often with deep reservation, paternal decisions made on their behalf.
The changes that have taken place since current land use policy was first put into effect mean that the post-ALTA native land regime will necessarily be very different from the present. In particular, the growth in the Fijian population means that non-landowners will never again have the ease of access to native land to which they have grown accustomed. Similarly, population pressures, coupled with decades of sub-marginal rental incomes, displeasure over the realisation that the political representatives of the tenant communities have never publicly acknowledged the exploitation of landowners, and greater general levels of education, mean that never again will rents be at their exploitative ALTA levels. All would-be leaseholders will have to adjust to very major increases in rental rates.
Such adjustment, doubtlessly, will not be welcomed by tenants. It is, however, an unfortunate fact of economic life. But with time, and with economic growth, it will become progressively less of a problem, as the absolute and proportionate numbers employed in agriculture experience secular decline, as has happened throughout the world as countries develop. But in the meantime, mechanisms must be established to promote leasing contracts.
The best way to encourage the negotiation of leasing contracts would be through the formation of a land exchange, similar in nature to a stock exchange. In essence, such an exchange would comprise a formal market within which individuals looking for land to lease (or any proper representative thereof) may be brought into contact with landowners (or any proper representative thereof) seeking to lease lands. This exchange would serve as the forum within which bids for land would be expressed, the availability of land for leasing purposes would be advertised, and the conditions of any lease – the duration, rental rates, specific contractual conditions etc. determined through negotiations between buyer and seller.
The establishment of such a land exchange is normally a complex and very extensive undertaking, requiring the creation of new institutions, land surveying, land use monitoring, and creating an institutional and personal familiarity with land markets and contracts. Fiji, fortunately, already has in place the NLTB which evolved to deal with many of these functions. Consequently, it would not be a major undertaking to redirect its focus to one facilitating the consummation of leasing contracts between individual mataqalis and tenants. It would be able to offer standardised, model leasing contracts to streamline negotiations, function as a broker or agent; offer legal advice or suggest where independent advice might be obtained, and act as the repository within which the contracts would be registered.
The brokerage function of the NLTB under this market scheme of things would function as follows. A mataqali has land it wishes to lease. It notifies the NLTB of this. The NLTB communicates the availability of this land to prospective tenants along with model leasing contracts and a copy of an efficient rental structure (as developed below). The same documents are also sent to the mataqali. Limited room will be provided to allow for adjustments to lease durations as well as to actual rent levels. If both parties accept, the leasing transaction is consummated. Rental payment would be made directly to the NLTB, as under the present system, to prevent bribery coercion etc.
In fulfilling the crucial
role of broker, the NLTB is admirably positioned to provide
the expert counsel needed for the leasing decisions of
mataqalis to be based on informed consent. Of course, the
NLTB was set up to act as the guardian of the landowners’
interests, not the tenants’. This duty must still remain.
Consequently, a body should be established to promote the
interests of tenants, to act as their specialist broker and
While government would clearly have an important role in facilitating the establishment of such an exchange, the control and running of this exchange nevertheless should be at arm’s length from government, to remove the politics that perennially has served to inflame discussions on land issues.
To promote both the willingness of landowners to extend fresh leases, and the emergence of market based solutions to leasing arrangements, the following recommendations are suggested:
That government and the leaders of all political parties, and official representatives of tenants’ interest (like the Sugar Cane Growers Council), explicitly and publicly acknowledge the debt owed by both the nation and the tenant communities to the landowners for their sacrifice in having surrendered use of their lands under ALTO and ALTA at less than commercial rates of return. These same parties should further publicly acknowledge the right of landowners to receive a fair, commercially determined, rate of return on lands they chose to lease.
That government expeditiously institute and oversee the establishment of a “land exchange” responsible for facilitating leasing transactions between landowners and tenants. This exchange will be responsible for effecting market solutions to rentals and leasing conditions which will replace those provided by ALTA upon the expiry of that legislation. This exchange will essentially embody an evolution and re-emphasis of the current NLTB.
That whereas government is responsible for ensuring the creation of the land exchange, and for the creation of the regulatory environment governing the conduct of the bodies providing advice to tenants and landowners, the actual operation of the exchange be demonstrably independent of government control.
5.3 Housing Former Tenants Whose Leases Have Expired
It is important to emphasise that the above analyses of the mechanisms by which a market for leases may be established, and the virtues of that market, relate to commercial agricultural leases only. But alongside the commercial use of land for agricultural purposes there is also a need for residential land to accommodate farmers and their families. While these two distinctive types of land use have been conflated in ALTA, there is a pressing need explicitly to separate them. We see this, today, in former tenants having to dismantle and quit their residence upon the termination of their leases. The expiry of a lease consequently imposes upon former tenants a major financial burden because it means that their residential investments have no realisable capital value. The physical loss of a residence also serves to create downstream housing shortages.
These problems can be overcome by formally separating land leased for agricultural use from land leased for residential use. The benefits of such a policy are numerous. First, if residential leases are long-term, say 50 year rolling leases, then residential construction does not simply provide current housing services to the tenant, it also serves as an important capital asset that can be converted into cash through a sale of the lease. Second, the ability to sell one’s residential lease promotes the mobility of labour and with it, general efficiency of the country’s labour market. Third, it means that the termination of an agricultural lease does not render former tenants homeless. Fourth, the existence of a residential lease separate from a commercial agricultural lease renders it easier to terminate the agricultural lease of an incompetent farmer, say one who does not pay his rent or does not farm according to contractually stipulated practices of good husbandry. Such leases can then expeditiously re-enter the market, via the land exchange, while the ex-farmer seeks a new and more productive occupation without losing his residential abode. Both forces, then, will serve to advance the interests of economic efficiency. Finally, the separate existence of a long term residential lease is symbolically very important in that it testifies to a recognition by, and agreement on the part of, landowners that tenants must never again be put in a position of being rendered homeless.
The following recommendation follows from the above:
That each new agricultural lease be bifurcated into a commercial agricultural lease and a separate residential lease. While the commercial agricultural leases may be of any duration, as determined by the market, the residential leases should be long term in nature, eg. 50 year rolling leases.
5.4 Efficient Rental Formulas, Share-Cropping and the Problem of Sub-leasing
An absolutely critical component in promoting the willingness of landowners to lease land is the establishment of a clear and demonstrably fair formula for rental payments. In this respect, bidding transactions for land would be expected to feature either dollar figures, sharecropping based on negotiated percentages of crop values, or some combination of both. In identifying what is most appropriate, history again intrudes its complications.
Landowners have expressed reservations about the potential operation of market transactions because of problems with sub-leasing. Historically, tenants have been able to obtain leases from the NLTB at the afore-noted ALTA rentals. Subsequently, some tenants have then illegally sub-leased their acreages to other tenants either at rental rates many times that of ALTA, or else under adhiya pe share-cropping arrangements. It is particularly grating to landowners to contrast the pittance they receive from the ALTA rents with rental income accruing to the official leaseholder from his sub-lease. In turn, this situation provides little incentive to the landowner either to lease out his land or to respect existing land legislation.
The solution to these problems lies not simply in a legal prohibition of sub-leasing, since the present prohibition has simply driven the practice underground. It is a problem of incentives. Were a proper rental formula in place in the beginning, backed by an appropriate leasing contract, the incentive for tenants to illegally sub-lease would disappear: there would be no surplus for the legal tenant to capture through arbitrage. Also disappearing would be the landowner’ incentive not to lease. The black market would be superseded by the legitimate market.
Concerning tenants’ fears, they tend to be afraid of sharecropping arrangements. No doubt his is because they are familiar with exploitation and suffering that has befallen members of their number under adhiya pe. It should be noted, however, that there is nothing intrinsically exploitative in the principle of sharecropping. It simply describes an arrangement where “the agent’s (i.e. tenant’s) compensation is a function of output”. What is a problem is the exorbitant share that is often demanded. Sharecropping, indeed, is advantageous to the tenant, when a fixed rental would be difficult to meet. This may be the case when the fixed rental is excessively high, when the tenant has little access to other inputs that may enhance his productivity and income, or when he does not have access to crop insurance. While the sharing arrangements between tenant and landowner can easily be adjusted, what is intrinsically problematic with sharecropping is that it dulls the tenant’s incentive to produce, something which jeopardises economic efficiency. Another problem with share-cropping is that it requires the landowner to monitor closely production, prices, and shares in order to ensure that he actually receives the full measure of the rent contractually due .
In contrast to sharecropping, fixed rentals, if they are set high enough, can provide a powerful inducement for the tenant to produce. The need for sufficient income to be earned to pay the fixed rental encourages the tenant to strive for maximum productivity. But if the fixed rental is too high it becomes debilitating, especially if, as noted above, there is no crop insurance or if there is difficulty in obtaining capital or other inputs needed to maximise productivity. Under ALTA, fixed rentals are levied but these are not just absurdly low, tenants often simply do not pay them, as discussed in Section 2. Consequently, for the tenant, there is no need for crop insurance, no impetus to productive effort, and no incentive for the acquisition of other inputs that would spur productivity. ALTA, then, is a major obstacle to agricultural productivity.
When devising a basis for setting rents, then, it is imperative, and explicitly so, to both address the concerns of landowner and tenant and also to establish a structure that provides a powerful productivity incentive. In practical terms, this means that a desirable rental structure should provide the maximal incentive to the landowner to lease out his land, the maximal incentive to the tenant towards sustainable productivity, and a reward to the tenant with a demonstrably fair share of gross agricultural proceeds. It is in this precise conjunction that efficiency and equity are promoted and the national interest served.
A payment structure combining both a fixed reservation rent and a diminishing marginal sharecropping supplement can fulfil these objectives as defined above. The following hypothetical example illustrates the basic nature of this rental system and how it may operate:
Efficient rents – an example
It was noted earlier, that the average annual yield of cane per ha is a rather paltry 50 tonnes. Efficient, full-time farmers can and do easily produce more, often much more. Now a landowner, cognisant of these possibilities, may agree in principle to lease his land at a ‘fixed reservation rental’ calculated at a demonstrably fair share, say, 10% of a crop easily attainable by an average full-time farmer working with due diligence, e.g. 60 tonnes per ha. Assuming the price of cane to be $50 per tonne, this would yield a ‘fixed reservation rental fee’ of $300 per ha. This ‘reservation rental’ means that the tenant would have to pay at least a flat rate of $300 per ha to secure the lease: in other words $300 would be the minimum rental the landowner would consider before allowing his land to be leased. Now once productivity exceeds 60 tonnes per ha, the diminishing marginal sharecropping formula comes into effect. Thus for a crop in the 60-80 tonne range, the tenant would pay, in addition to the reservation rental, a rate of, say, 8% of the incremental crop. For crops in the 80-100 tonne range, the incremental rental supplement would be, say, 5%. And for crops in excess of 100 tonnes the excess may carry no incremental rental supplement.
Thus, using this hypothetical formula consider the rental paid by an efficient tenant, farming on good soil and producing a good crop of, say, 120 tonnes per ha.
Total income from the sale of cane = 120x$50 = $6,000 per ha
1. reservation rental fee of $300; plus
2. marginal share-cropping supplement of 8% of the first 20 tonnes in excess of 60 = (20x$50) x 0.08 = $80; plus
3. marginal share-cropping supplement of 5% of the next 20 tonnes in excess of 80 = (20x$50) x 0.05 = $50.
4. marginal share-cropping supplement on tonnage (20) in excess of 100 tonnes = 0
Total annual rent paid to landowner
……………………………..….$430 per ha
Total annual income earned by tenant after rent deductions …..….$5,570 per ha
Rent as a percentage of gross farm income ………………………..……….7.2%
rental arrangement means that efficient tenant farmers will
not only earn absolutely larger incomes than would
inefficient farmers producing smaller crops, but they will
also pay out a smaller proportion of income in rent. This,
alongside the realistic basic fixed rental payment, provides
a direct incentive towards productivity. The share of gross
agricultural proceeds going to the tenant is also
demonstrably fair, the landowner only receiving, in the
example, 7.2%. The basic fixed rental is also calculated in
a manner that is demonstrably fair, relating to those
international comparisons that are the most favourable to
the tenant .
The same rental arrangement means the rental incomes of landowners are greater when their tenants are productive. Landowners, then, have not just a powerful incentive to ensure that they continue to lease out their lands, but they also have an incentive to compete for the best tenants. They also face an incentive to take direct interest in the activities of the tenant, in order to monitor the application of the incremental sharecropping supplement. Indeed landowners also have an incentive directly to work with their tenants to stimulate land productivity since they would be able to capture some of the benefits. In sum, the proposed rental structure combines the best characteristics of both fixed rentals and share-cropping, avoids the potentially deleterious effects associated with high fixed rental, brings about a congruence of the interests of tenant and landowner, promotes co-operation, and provides the incentives required to unlock the productivity improvements so desperately needed in cane production in Fiji.
But how would this blueprint relate to the auction for leases that is necessary for a market solution to work? Essentially the blueprint would serve as a framework for discussions. Through negotiations and bidding both the reservation rental and the magnitude of the progressive rental structure can be modified up or down according to market conditions and experience.
In light of the foregoing, the following recommendations are suggested:
That all sub-leasing of agricultural land be prohibited.
That the composition of rental rates be based on a combination of a reservation rental and a diminishing incremental sharecropping supplement. The rental component of all negotiations held under the auspices of the land exchange, and leading towards the negotiation of a leasing transaction, shall relate to a rental structure of this type.
The proposed rental structure will have the effect of rewarding increased effort and, therefore, encouraging productivity. However, land productivity can be temporarily increased by suspending fallow periods and by the excessive use of fertilisers and pesticides. Such practices, however, are damaging both to long term soil productivity and to the environment in generally. Consequently, to promote sustainable productivity, it is necessary that the rental agreement embody requirements for good, sustainable, and environmentally appropriate husbandry.
That all leasing contracts embody explicit contractual requirements to ensure good, sustainable land use.
It must also be remembered that the end of ALTA is not just about the creation of new leasing arrangements, it is also about landowners farming their own land. The opportunities and pitfalls of this option is the subject of Section 6 following.
6. LANDOWNERS TAKING BACK THEIR LAND
The explicit recognition of the property rights of landowners, combined with the creation of a land exchange and the application of an efficient rent structure, will create a powerful incentive for landowners to lease out their lands to tenant farmers. This will serve to allay some of the fears relating to lease insecurity, agricultural productivity, and the ongoing viability of the sugar industry. At the same time, it must be recognised that even with such incentives many landowners will still need or wish to farm their own lands. It is, of course, their absolute right to do so. The country, then, will have no choice but to come to terms with the picture of Fijians farming their ancestral lands. What is, by contrast, a matter for analysis and debate are the mechanisms which Fijians can most appropriately utilise in entering the unforgiving world of commercial agriculture.
In Fiji today, commercial agriculture is dominated by the small leasehold system, the origins of which were described in Section 3. This system was developed with cane production in mind, the crop that still dominated the country’s agricultural economy. The tenant community learned its cane farming under the rigorous extension and supervision services maintained by the CSR prior to its departure in 1973. The FSC has endeavoured to maintain its extension capacity but as a publicly owned company operating in a post independence environment it has not been able to function as assertively as the CSR. At the same time, skills and tricks of the trade learned through observation and imitation, have been passed down, father to son, between farming generations.
The smallholder pattern, however, is experiencing problems in Fiji. As the economy develops and alternative employment opportunities present themselves, the family unit is not compelled to exhaust its labour on the farm, which tends to diminish gross output per hectare. Additionally, when farms are passed down from father to son, it is often the case that the son does not inherit his father’s capacity for toil and sacrifice. So, even amongst the Indian tenant community, declining farm productivity is becoming a concern. More public concern, however, tends to accompany the replacement of an Indian farmer by a Fijian.
When a mataqali decides
to cultivate sugar land that formerly was leased, typically
it does not have the above-described history of experience
possessed by the former tenant. Thus, it is only natural to
question whether the productivity of new Fijian cane farmers
will match that of their former Indian tenants, when finally
they get the opportunity to cultivate their own land. And
while evidence from Seaqaqa suggests that the best Fijian
farmers are as good as the best Indian farmers, it also
shows the average Indian farmer to be more productive than
the average Fijian.
These productivity fears tend particularly to be emphasised given the importance to the economy of the sugar industry. But what is the correct policy response? Most suggestions tend to revolve around punishing Fijian farmers who fail, by e.g. requiring the recycling of their farm to a more productive tenant, an idea redolent of the colonial land policy. It is suggested, however, that a far better strategy would be to introduce effective procedures, appropriate to the mataqali structure, that would minimise failure in the first place. Contract farming is particularly promising in this regard.
6.1 Contract Farming
In view of their productivity, as noted above, it is commonly recognised that small family farms are potentially an important source of growth in agricultural production, in addition, small-scale agriculture has socio-economic advantages of improving income distribution, mitigating urban-rural migration, and enhancing and revitalising village life and culture. But there are serious constraints to the transformation of subsistence and semi-subsistence agriculture to commercial agriculture, especially small-scale commercial agriculture. These constraints arise from problems of access to production inputs, services, information, and credit. Most small farmers are independent producers, who sell their produce individually and have little bargaining power with input suppliers and produce markets. Agricultural marketing is similarly underdeveloped, with overlapping marketing channels, inadequate infrastructure and price information, lack of post-harvest management expertise, inadequate storage and transportation facilities, poor packaging of produce, to mention but a few. Small-farmers often lack the necessary production and marketing information particularly about new crops and varieties. Even with sufficient information, they do not have enough financial resources and credit facilities are limited – mainly due to a lack of collateral.
Government intervention and subsidies are often used to redress these problems. But in developing counties, public interventions and support policies are usually ineffective. In addition, government intervention and subsidies do not help to remove the obstacles men-tioned above – they merely ameliorate symptoms without addressing causal factors.
In the last three decades, contract farming has been promoted in less developed countries (LDCs) as a replacement to government intervention and subsidies; as an institutional innovation for improving agricultural performance; as a vehicle for the transfer of technology; as a means of creating a stable and politically conservative class of family farmers; and, as a means of facilitating the transformation from subsistence, semi-subsistence, and traditional agriculture to modern, commercial, industrial agriculture.
Contract farming is an institutional framework that redresses the many constraints encountered by farmers, especially small, traditional farmers, in LDCs. It provides, in an integrated manner, the mechanism for the delivery of price incentives, technology, and other agricultural inputs. It has been used as a key element of rural development and/or settlement projects. Local governments, local private firms, multinational companies, and international aid and lending agencies – U.S. Agency for International Development, the World Bank, Asian Development Bank, and Commonwealth Development Corporation – have also been involved in promoting and facilitating contract farming schemes in LDCs.
Of course, the basic notion of contract farming is not new to Fiji. Sugar, Fiji’s single most important export commodity, is cultivated by small leasehold farmers under “contract” to the Fiji Sugar Corporation (FSC). Since the advent of the small leaseholder system in the 1930s, the success of the sugar industry in Fiji has been directly related to the system of contract farming. Indeed, as discussed below, the future survival of sugar in Fiji will depend on strengthening the system of contract farming and extending it to Fijian villagers. The sad fact is that contract farming, as currently practised by the sugar industry in Fiji, is woefully inadequate in the services provided to farmers, especially new sugarcane farmers, and particularly new Fijian sugarcane farmers. Indeed, “contract farming” as currently practised in Fiji’s sugar industry can, at best, be called quasi-contract farming, since most of the beneficial elements of contract farming (see below) are singularly missing.
Contract farming represents an expanding and much suggested method of agro-industrial integration within develop-ing economies. With contract farming, farmers and agribusinesses are linked by mutually beneficial arrangements that offer producers (farmers) lower market risks and greater access to inputs and financing, and at the same time, ensuring processors (agribusinesses) a guaranteed supply of farm produce.
From the perspective of agribusiness the benefits of contract farming are:
Reduced capital investment in agricultural
land and farm buildings. This is particularly applicable to
Fiji. The issues of agricultural leasehold – rental rates,
secure tenure, land improvement, and the construction of
“permanent” farm buildings – need not pose any problem. With
the increased desire of rural landowners to obtain
“middle-class” levels of living through commercial
agriculture, contract farming with landowners becomes the
ideal mechanism to realise their income aspirations; and, at
the same time, avoid the issues associated with agricultural
The ability to guarantee a required supply of raw material in a timely manner. Establishment of processing plants requires large outlays for machinery and equipment (fixed investment). Hence, agribusiness has a vested interest in reliable sources of raw materials – open market purchases are unlikely to achieve the necessary degree of reliable raw material flows.
The desire to secure raw materials of specific quality.
The introduction (expansion) of new technologies to producers, thus altering or improving producer management skills.
Reduction of overall firm risks with contracts rather than with ownership integration.
Control of costs.
Gaining and improving of market position. This is facilitated through the timely delivery of known quantities of high quality agricultural commodities. Also, since inputs are supplied under contracts, agribusinesses can focus more attention on the marketing end of their operations.
With contract farming, it is important to note that the scope of services provided to farmers by agribusinesses depends, to a large degree, upon the particular crop in question. In some instances, it is possible to accord institutional support for nearly all aspects of an agricultural commodity’s life cycle, while in other instances, institutional support is accorded only some of the aspects of a commodity's life cycle. Obviously, contractual relationships that offer more services are preferred to those that offer less. The full scope of contractual services and their attendant benefits, from the farmer’s perspective, can include:
the seed commodity to the farmer so that the farmer
cultivates appropriate varieties. Varieties are provided to
the farmer that suits prevailing processing and market
preferences. The arduous task of establishing consumer
preferences is eliminated from the many decisions taken by
the farmer. Also the risk of uncertain input supplies and
uncertain input price is attenuated.
Reduced capital investment. This is especially relevant to contract farming of livestock since the farmer does not have to buy animals, feed, or medication.
Land preparation. Ploughing, harrowing, furrowing, and drainage facilities.
Specifications for specialised facilities such as housing for broilers and pigs, tobacco curing sheds, fish and prawn ponds, dairy parlours, etc.
Provision of fertilisers, feedstocks, pesticides, and medicines to the farmer so that the farmer cultivates appropriate varieties using appropriate inputs.
Extension and husbandry services for all stages of the commodity’s life cycle from sowing to maturity. This ensures that not only are the appropriate varieties cultivated by the farmer using appropriate inputs, but also the appropriate cultivation and harvesting practices are executed by the farmer to achieve a mature commodity of high-quality. It affords the farmer access to sophisticated practices such as environmentally sound, sustainable, and economically viable agriculture. It facilitates the introduction (expansion) of new technologies to farmers, thus altering or improving producer management skill. Also, the private provision of extension and husbandry services negates the need for the public provision of these services, which unfortunately, are usually ineffective or non-existent in many LDCs.
The introduction (expansion) of new technologies to producers, thus altering or improving producer management skills.
Contract farming allows the farmer to diversify his farm on a limited number of acres.
Harvesting and transportation of the mature commodity from the farm to a processing plant. This allows the farmer to specialise in one aspect of the production process, high-quality cultivation. The farmer no longer needs to grow, harvest, then transport, and, finally, market his product.
Processing of the agricultural commodity.
Marketing and transportation of the processed commodity to intermediate and end users on a timely basis.
Lower market risk. The farmer no longer has to seek out buyers for his commodity, nor does he have to instigate and establish commercial relationships with reliable input suppliers.
Lower risks of price fluctuations.
Systematic and timely payment to the farmer for his mature commodity.
Income stability. Because most contract arrangements reduce risks in comparison with traditional production or marketing channels, a contracting farmer’s resulting income tends to be more stable over time.
Access to credit and collateral. This is especially apropos to Fiji were most land, especially agricultural land, cannot be used as collateral, however, agricultural contracts can themselves be used as collateral.
The nature of the crop and its associated production technology are the most cru-cial determinants of the success or failure of contract farming. For instance, basic grains do not generally require contract arrangements – they are not perishable, and neither do they require strict quality standards nor prompt harvesting and processing. On the other hand, perishable and bulky products that require concentrated production and careful scheduling are usually amenable to successful contractual relationships. Also, commodities that require uniform standards through the use of specific farming practice and specific inputs, such as broiler production, tend to lend themselves to successful contract farming.
Examples of contract farming include the following commodities – the list is by no means exhaustive.
Vegetables and spices
Inland fisheries including prawns and shrimp
It is important to note that the category “vegetable and spices” is an extensive one. PepsiCo India Holdings, the Indian subsidiary of PepsiCo Inc. headquartered at New York, is extending its contract farming operations of vegetable and spices to include chilli, garlic, ginger, spinach, mustard, and carrots. While the category fruits consists of, inter alia, bananas, pineapples, mangoes, papaya, citrus, etc. – all of which have been subject to various contract farming agreement in different parts of the world.
The potential of contract farming is far-reaching and should not be underestimated. In 1993, about US $47 billion (32 percent) of the total value of agricultural production in the United States was produced under contract arrangements. And the United States Department of Agriculture’s 1993 “Farm Costs and Returns Survey” found that more than 83 percent of the total value of production under contract was for vegetable, fruit, nursery, cattle, hog, dairy, and poultry products.
Contract farming holds great potential for rural development, especially when it is integrated into the national economy. An important function for the state in facilitating contract farming is in the area of legislative arrangements. In agriculture, there are a wide variety of production enterprises; hence, it is impractical to promote a single comprehensive contract model with universal rules. Instead, government can assist in determining the overall framework for contracts and establish mechanisms for dispute resolution amongst contracting parties. Preferably, the government should not be directly involved in dispute resolution. Its role should be relegated to legislative arrangements and an independent institution should be organised to resolve disputes between firms and farmers. This latter point should not be underestimated; the lack of dispute resolution mechanisms is the major cause for failures in contract farming. The court system, with its long delays, is inappropriate for solving the disagreements and disputes between producers and processors over quality standards, delays in delivery and payments, and default on loans and the like. Thus, an arbitration and/or a conciliation system would be useful by involving government and representatives from non-governmental organisations.
In addition to legislative arrangements, there needs to be wide-ranging improvements in government services to agriculture, market infrastructure, information, farming technology, and farmers’ skills.
As for the farmers, they need to be organised into groups or co-operatives that can use economies of scale in bargaining, co-ordinating supply, and accessing credit and other support services. Resource-poor farmers, particularly, need support in organising producer groups in order to increase their negotiating power and benefit from increasing commercialisation of agriculture.
Of course, contract farming is not a panacea to solve all the related problems of agricultural production and marketing systems associated with the impending transition from subsistence to commercial agriculture in Fijian villages. But contract farming is probably the most effective way for the small-scale village farmer to obtain easier access to credit, inputs, information, technology, and product markets. Contract farming, therefore, should be seen as an integral part of rural development and promoted to improve agricultural performance in Fiji.
The immediate questions at hand are these. Fijian landowners are generally inexperienced sugar cane growers, now that their land will finally be available to them, will they live up to the expectation to produce sugar cane as well as their Indian counterparts? If the inexperienced new sugar cane farmers do not produce the required sugar cane, what will be the future of the sugar industry? Proximate answers to these questions lie with the example, starting over twenty-five years ago, with the Mumias Sugar Company (MSC) located in Kenya.
Following an approach by the Government of Kenya in the late 1960s, Booker Agriculture International, drew up a project proposal to build, operate, and transfer a sugar mill with a smallholder component. The smallholders were traditional farmers who grew mostly subsistence crops. The full details of the successful introduction of the sugar mill are provided in Appendix 2. The highlights of the project are presented below:
The factory began operations on July 1
1973, reaching its designed capacity by September the same
Between 1977 and 1979, factory capacity was more than doubled, from 125 to 300 tons of cane per hour.
By 1979, Kenya achieved self-sufficiency in sugar with Mumias providing 45 per cent of its supply.
The Company was profitable from the first six months of operation. This was due to higher cane yields, higher factory capacity utilisation, and lower costs than had been forecast.
By the end of 1974, a mere 18 months after production began, the project, based on the opportunity value of sugar at world price levels, had completely) paid for itself.
Mumias had the lowest production costs of any sugar project in East or West Africa.
Almost 5,000 permanent and more than 9,000 seasonal jobs have been created, and almost 17,500 farmers are now receiving cash incomes who were not before.
Company employees have benefited from organised training at the apprentice, technician, and management levels. By 1978, out of 102 management employees, only 17 were expatriates.
The Company grouped together indi-viduals’ cane plots to make stands of cane no smaller than 6 hectares. This enabled machines to be used economically for deep ploughing and other heavy land preparation work. Cane transport costs could also be kept down in this way.
Disease-free planting material and fertiliser were supplied to each grower on credit and each farmer was then responsible for his own planting, weeding, and fertilising. However, Company representa-tives visited the plots regularly to advise farmers and harvesting was carried out by the Company. This control was essential to maintain the necessary regular volume of cane flow to the factory.
All cane, both on the nucleus estate and on outgrowers’ farms was cut by hand which provided more employment than mechanised methods.
The relationship between the Sugar Company and the growers was covered by a contract and at the end of 1981 17,474 farmers had signed contracts with the Sugar Company.
The cogent example set by the Mumias Sugar Company, a quarter century ago, is instructive for Fiji, especially with a large number of sugar cane leases expiring over the next few years, and especially as a template for introducing subsistence farmers to modern commercial and industrial agriculture. A brief outline for a new strategic thrust in the sugar industry is discussed below. The new strategy is based on two pivotal notions: a cane payment system based upon sugar content, and a market-based lease system with changing numbers of participants.
Sell the government’s shares in
the FSC to those mataqalis with sugar cane lands at a
Have each sugar mill operate under a separate management agreement with companies such as Booker McConnell, Colonial Sugar Refinery, Tate and Lyle, etc.
When current ALTA sugar cane leases expire, consolidate indi-vidual cane plots to accommodate a comprehensive system of drainage, irrigation schemes (canals), and cane access roads that will enable machines to be used economically for deep ploughing and other heavy land preparation work; and eventually, depending upon labour supply conditions, mechanical harvesting.
Subdivide the consolidated area into production units of say, 6 hectares or more, so that the newly managed sugar mills can provide land preparation, irrigation, and harvesting services to each cane farmer. Each sugar mill can now schedule, co-ordinate, and provide cane-harvesting services that are fully integrated with the rail transport system, thus facilitating efficient throughput of sugar cane. The goal is to crush the canes within 24 hours of harvesting.
Implicit in the proposed lease exchange is the need for extension services for the ever-changing number of participants, including landowners who wish to cultivate their own land.
Under this new dispensation, the sugar mill will provide cane farmers with land preparation services (millmud, ploughing, and harrowing), water for irrigation, disease-free planting material, fertiliser, and weedicide. The cost of these services will be credited to the farmer’s account. In turn, each farmer will be responsible for his own planting, weeding, and fertilising. Sugar mill representa-tives will visit the plots regularly to advise farmers on appropriate sequencing of these events and appropriate cultivation practices. The sugar mill will be responsible for harvesting the canes to suit their specifications, and transporting it to the mills to maintain the necessary regular volume of cane flow to the factory. The goal is to cultivate quality canes of high sugar content that will be crushed within 24 hours of harvesting.
In addition, under
this new dispensation, the landowner will now be responsible
for all long-term investment in sugar lands – clearing and
developing including drainage systems, irrigation systems,
and on-farm access roads. The tenant, on the other hand,
will be responsible for “very short-term” investment
associated with a three-year planting cycle consisting of
seedcane, 1st ratoon, and 2nd ratoon. The tenant,
therefore, will pay the costs associated with the
establishment of seedcane for each new three-year cycle.
That is to say, every third year, the tenant will pay for
seedcane, ploughing, harrowing, millmud, and planting.
In theory, then, sugar cane leases could be as short as three years. In practice, however, nine-year rolling leases say, offer greater security to both tenant and landowner alike, and greater retention of “sugar-related knowledge” within the sugar industry.
In conclusion, it must again be stressed that the end of ALTA does not of itself threaten the viability of sugar or the general health of the country’s commercial agricultural sector. By contrast, it creates a wealth of unique opportunities. It permits the creation of a new land leasing system that is mutually beneficial to landowner and tenant, that provides incentives to galvanise farm productivity, and that is free of the politics that cripples the effectiveness of current leasing practice. It also permits the introduction of bold new approaches to agricultural development. An extension of the practice of contract farming is a case in point. It is suggested that this offers a tried and tested method for successfully integrating subsistence farmers into modern commercial agriculture, something imperative for both the nation and Fijian landowners when finally they have the opportunity to profit from their land assets.
7. CONCLUSION – THE WAY FORWARD
The history of land tenure in Fiji, since Cession, is complex and of major practical significance. The complexity is self-evident to anyone who has endeavoured to study the extensive literature on the subject. Its practical significance is manifested in the thousands whose livelihood depends on the use of land, in the critical role land plays as an economic factor of production, and because land serves as the anchor in which the Fijian identity is grounded.
The Deed of Cession itself, and the interpretation of that Deed by the early colonial governors, invested ownership of native land with the mataqalis that had ceded the country to Britain in the first place. However, the interests of foreign capital (the CSR in particular) and immigrant labour required access to this land. Together, then, capital and labour sought to pressure the colonial government into creating a land tenure regime that rendered Fijian land ownership nominal rather than effective. These efforts have been manifested in the initial desire of the CSR to require that all leases be held by the government in perpetuity, in proposals to tax Fijians on all land they did not use for purposes acceptable to the colonial government, in compensation provisions to force lease renewals, in legislative threats, and in pressure that was brought to bear to coerce Fijians into parting with their lands to advance the national interest. Faced with these challenges, the efforts of Fijians were targeted on retaining control of their ancestral lands. And just when they thought the had secured control, in the creation of the NLTB, along came legislation in the form of ALTO and then ALTA that effectively crippled the ability of the NLTB to act as guardian of Fijian interests.
In surveying this conflict between immigrant labour and capital on the one hand, and the Fijian landowners on the other, a critically important pattern emerges. The former did not see any need to create an environment supportive of incentives to the landowners willingness to surrender use of their lands through leasing. There was no carrot, only the stick. The entire land issue was seen as a zero sum game in which the settler interest could be advanced only though more and stronger controls. And up to now, labour and capital have been remarkably successful in winning their zero sum game. Perhaps, nowhere is this more clearly manifested than in the extremely low historical incidence of lease non-renewals, in the fact that many tenants’ families have been able to remain on the same land for up to a century, and that, coincidental to this, the rents paid to landowners have been absurdly low.
But in consistently ignoring the need for leasing to be mutually beneficial, the tenant communities have become victims of their own success. Their chickens are coming home to roost. For now, as ALTA leases expire, we see the overwhelming desire of mataqalis to actually exercise their rights of land ownership. After more than two generations during which their land has been effectively indentured, and during which they were victims of a rent system calculated to advance the interests of only tenants and capital, we see a position emerging that can be summarised in two words: never again.
Never again will they surrender control of their land.
Never again will they accept rental at non-commercial levels.
That the emergence of such a position has caught both labour and capital by surprise, despite over a century of co-habitation with the indigenous land-owning community, is most telling. Equally, nobody seemed to take note of the experience in the rest of the world that has demonstrated time and again that legal regulations to advance the interests of tenants are doomed to failure when they are carried on the backs of the landowners.
The thesis that this report has endeavoured to argue is that, ultimately, the land problems in Fiji are attributable to a single fundamental cause – the demonstrable failure of extant leasing contracts to be mutually beneficial. For two generations they have been one-sided bargains predicated on landowner exploitation. The evolution of the agricultural economy and the consumption levels and lifestyles of the settler communities, moreover, have all been predicated on this exploitation. And while the end of this exploitation is long overdue, it is also clear that it will require considerable adjustment all round. Patience and a desire to accommodate will be essential prerequisites for a smooth transition.
Just as the land problems have at their heart a single fundamental cause, their solution in principle is also deceptively simple. All that is required is the creation of institutions that will promote intelligent leasing contracts between individual mataqalis and tenants based on informed consent. In the process, the consummation of such transactions, by being voluntary and intelligent, will necessarily be mutually beneficial. While the creation of the institutional, legal and policy environment necessary to support market-based transactions has proven difficult in some countries, Fiji is particularly blessed in having in place the NLTB which has already been fulfilling some of the required functions. The presence of a re-focused NLTB, coupled, it is suggested, with the economic incentives recommended in this document, offer a blueprint for an equitable and efficient land tenure system suited to the realities of the new millennium.
It has been the belief over the last century that the potential vulnerability of the tenant community warrants legislation or regulation designed to afford them explicit protection. It is argued, however, and demonstrated in the history of Fiji and numerous other countries, that the interests of the tenant community are not served by heavy-handed legislation that infringes on the fundamental rights of the landowner. In this regard, the worst possible policy for promoting tenants’ welfare would be an extension of ALTA or the imposition of some similar legislation. All this would accomplish is the removal of any opportunity to lease. The most effective method of advancing the interests of tenants is to increase their bargaining power. The creation of alternative employment opportunities, education, the creation of incentives that promote and reward productivity and demonstrate accomplishment in agriculture, access to capital, crop failure insurance, and the creation of conditions that will render tenants’ residential investments realisable in cash, will all ultimately prove far more effective. And when leasing conditions are negotiated under a market-based system, tenants will have the opportunity, through their bids, to acquire whatever security of tenure they would be willing to pay for.
With respect to the critically important sugar industry, instead of the end of ALTA being the crisis that many fear, in point of fact it is a wonderful opportunity. It offers a clean break from many of the counter-productive incentives and practices that have been dulling innovation and crippling farm productivity. The move to a market-based leasing system not only maximises leasing opportunities to tenants, it further offers the chance for the best farmers to acquire the best leases and to increase their land holdings. It encourages landowners to see that their interests are congruent with those of their tenants, to see themselves as partners rather than antagonists.
The end of ALTA also permits the introduction of long overdue, bold, new approaches to the development of commercial agriculture in Fiji, designed not just to enhance productivity but also to integrate Fijian landowners into the nation’s commercial economy. The application of a comprehensive system of contract farming is suggested as being particularly appropriate in these regards.
the end of ALTA is not a crisis and must not be made into a
crisis. It is a unique opportunity that must be fully and
imaginatively seized. It can be a win-win situation for all
stakeholders, and for the economy as a whole. The timing is
right, the opportunity is at hand, and we have at our
disposal the experience of the past, and the experience of
other countries. It would be unforgivable if those charged
with effecting a solution did not fully and appropriately
avail themselves of this uniquely favourable
Estimating the Shadow Price of Native Land in the Sugar Belt
A “shadow price” is an estimate of the price that would exist were native land actually to be traded in a market. It can be computed by estimating how much the land is actually worth on the basis of the income it can generate when worked by an average farmer. To do this, the net revenue contribution that land can generate each year must be estimated by subtracting from gross revenues the total costs of production, including labour. The resulting figure for land’s annual net revenue contribution can then be converted into a net present discounted capitalised value. The procedure is outlined below.
First, however, it is important to emphasise that the calculations below are for an average parcel of native land, so that they can be compared with average rentals. In practice, both market based rentals, the actual price of freehold title, and the shadow price of native land will all vary according to:
The crop grown
The expected reasonable diligence of an average farmer in maintaining high yields
The prevailing market price of the crop in question
The inherent fertility of the soil
The location of the farm
Consequently, before our calculations proceed, we must establish the characteristics of an average farm on native land.
In a recent document (World Bank Report No. 13862 – Fiji, “Fiji Restoring Growth in a Changing Global Environment”, June 20, 1995) the World Bank reported that the average cane farm in Fiji had the following characteristics:
area harvested: 3.11 ha;
cane tonnage harvested: 151 tonnes;
gross income: $8,314.
Gross revenues, of course, depend on the average price of cane, as well as the average tonnage harvested, but the World Bank figures are in line with the official Bureau of Statistics figures which show average cane farm income to range, in recent years, from $9,732 in 1995 to $7,456 in 1997 (Current Economic Statistics Jan-Oct. 1998, Bureau of Statistics). Consequently, $8,314 will be taken as reasonable gross revenue of our average or representative farmer.
Concerning production costs, these will vary according to whether ploughing and seedcane are used as the basis for production or whether cane is produced from a ratoon. Taking the former which is the highest cost case, the Asian Development Bank (Fiji Agriculture Sector Review, July 1996) estimate the production costs per ha to be $1,289. This figure includes seedcane, millmud, ploughing, harrowing, fertiliser, weedicide, furrowing, harvesting and loading, and cartage (though were rail to be used, there would be no cartage cost). Consequently, total production costs for the 3.11 ha actually devoted to cane would be $4,009.
Subtracting total production costs from gross income leaves a figure of $4,305. This represents the net annual income the farmer can receive when investing his labour in farming an average farm. To obtain the net contribution of land alone, the labour costs of the farmer would have to be deducted. This, of course, is problematic. The true labour cost depends on its opportunity cost. In this respect, cane is often described as a ‘lazy man’s crop’ since the labour input is not that great and can often be done at odd hours when the opportunity cost of cane farm labour would be leisure, not other productive work. Also, children or other family members often help out too. Consequently, the true economic value of the labour expended is likely to be rather low. But again, for illustrative purposes we can take a labour cost figure that is likely to err on the high side, say $2,305.
Consequently, the net revenue contribution of land alone, in our example, would be $2,000. The land embodied in our representative farm, then, would be able to generate indefinitely a stream of profit of $2,000 annually.
Applying the formula (x/i)+x used for calculating the present value of a perpetuity, where x is the annual revenue generated by land alone (ie. $2,000) and i is the rate of interest), the capitalised value of the indefinite income stream can be computed . Of course, another critical issue is the interest rate, the discount factor, to be used. There are several possibilities here. Perhaps the best measure for illustrating the true opportunity cost of capital would be the real rate of interest payable on long term Reserve Bank of Fiji bonds. Currently, the nominal rate here is 7.48%. Alternatively, and of more direct interest to farmers, is the rate charged by the FDB on loans. These rates are 8% for the first $20,000 and 13.5% for anything in excess of $20,000. Again, these are nominal rates. To properly estimate true asset prices, these rates should be reduced to real values, by deducting the rate of inflation. Since the theoretically desirable RBF level is close to the FDB lower level, we can make computations using simply 5% and 10% real interest rates. Doing this we get the following calculations:
Using a 5% interest rate
Here the shadow price of 4.2 ha of native land would be:
2000/0.05+2000 = $42,000.
This yields a value per ha of $10,000, a figure very close to currently advertised prices for freehold agricultural land.
Using a 10% interest rate
Here the shadow price of 4.2 ha of native land would be:
2000/0.10+2000 = $22, 000.
This yields a value per ha of $5,238.
There is no single best way of judging which of these values is most appropriate. However, faced with this dilemma, it seems reasonable to take the average of the two figures as a rough indication of the effective value of a typical 1 ha parcel of native land. Taking the average, then, we obtain a shadow price of $7,619 per ha.
Interestingly, the above analysis has further important implications. Given that the average farmer on the average farm would be able to earn $2,000 in net profit per year, this figure will also represent the maximum rental the tenant would be willing to pay per year for his lease. This amounts to $476 per ha. Consequently, if rents were set at our conservative estimate of a fair market rate, namely $300 per ha, the tenant would still be enjoying a healthy margin of consumer’s surplus.
Sugar, Kenya Booker McConnell
(In Abbott, John C. Agricultural Marketing Enterprises for the Developing World, Cambridge University Press, Cambridge 1987)
The partnership of Booker McConnell with the Government of Kenya in the Mumias Sugar Company (M.S.C.) has been described as one of the most imaginative and successful examples of transnational private participation in agricultural development. It provided productive employment for an area of the country previously neglected, was highly labour-intensive in its operations, made up a deficit in supplies of a major food that would otherwise have had to be imported, and paid over to the government in taxes a substantial part of its gross income. Even Susan George in her critique of the multinationals how the other half dies (Penguin Books 1976) had only good words for Mumias Sugar.
Origins of Mumias Sugar
Traditionally Kenya has
imported much of its sugar. Consumption was growing by more
than 7 per cent per year when, in 1965, the Ministry of
Agriculture prepared a sugar project for the Nzoia river
valley. The climate was suitable; also the region though
quite densely populated was very underdeveloped.
Booker Agriculture International (B.A.I.) had been set up by the sugar processing and marketing firm Booker McConnell following the nationalisation of its operations in Guyana. It had a subsidiary Fletcher and Stewart that built sugar processing plants and machinery'.
Following an approach by the Government of Kenya, Booker Agriculture International, drew up a project plan for a 3300 ha nucleus estate and an outgrower component. The Mumias Sugar Company was formed in June 1971. The factory began operations on July 1, reaching its designed capacity by September the same year. Between 1977 and 1979, factory capacity was more than doubled, from 125 to 300 tons of cane per hour. By 1979 Kenya achieved self-sufficiency in sugar with Mumias providing 45 per cent of its supply.
Capital structure and operation
Mumias Sugar Company was established as a
commercial corporation with 3500000 authorised shares of 20
Kenyan shillings each. Booker Agriculture International took
5 per cent at the insistence of the Kenya Government to
ensure that it had a financial interest at stake. Details of
the shareholdings and loan capital in 1974 and 1981 are
provided in Table 4.8.
In addition to carrying out a pilot project and performing a major design role, B.A.I. had a managing agency agreement with the Mumias Sugar Company. This, along with the contract to supply the sugar factory, was Booker's main reason for going into the project. B.A.I.'s remuneration had three elements:
(1) A relatively
small fixed fee to cover the general manager's salary' and
B.A.I.'s relevant overheads. Other B.A.I. staff were
seconded to the project at cost.
(2) A commission on net M.S.C. revenues (i.e. sales of sugar to the Kenya National Trading Corporation less Government excise duty). Contrary to what might be expected in some quarters, this commis-sion rate increased with the volume of output. This was done to give B.A.I. a direct incentive to maximise output. Commission rates were first set as follows:
output Per cent of net revenues
less than 45000 tons 0.0
55000-60 000 tons 3.0
60000-65000 tons 4.0
more than 65000 tons 5.0
(3) 2½ per cent of net profits of the Mumias Sugar Company. This was done to give B.A.I. an incentive to operate the project as efficiently as possible. With the subsequent substantial expansion in production capacity these terms were revised later and made subject to an overall maximum.
Table 4.8. Capital structure: Mumias
End 1974 End 1981
Authorised shares of K.sh. 20/- 3500000 12000000
Shares issued and fully paid 2900000 8500000
Kenya Government 3800000 8421000
Commonwealth Development Corp. 661000 2044000
Kenya Commercial Finance Co. 498000 595000
East African Development Bank 276000 314000
Booker McConnell Ltd 276000 526000
Total share capital 5511 000 11900000
Loans and advances 4560000 21 284000
Profit and loss account 793000 (108000)
Total capital employed 10864000 33076000
Conversion rates 1974K20sh = 1.90: 1981 K20sh = $1.40.
The outgrowers' farms were small. It was considered socially desirable to use no more than 50 per cent of their area for sugar cane so that food supplies could be maintained. The Company grouped together indi-viduals' cane plots to make stands of cane no smaller than 6 hectares. This enabled machines to be used economically for deep ploughing and other heavy land preparation work. Cane transport costs could also be kept down in this way.
Disease-free planting material and fertiliser were supplied to each grower on credit and each farmer was then responsible for his own planting, weeding, and fertilising. However, Company representa-tives visited the plots regularly to advise farmers and harvesting was carried out by the Company. This control was essential to maintain the necessary regular volume of cane flow to the factory. All cane, both on the nucleus estate and on outgrowers' farms was cut by hand which provided more employment than mechanised methods.
This relationship between the Sugar Company and the growers was covered by a contract and at the end of 1981 17,474 farmers had signed contracts with the Sugar Company. The outgrowers' scheme was a clear success. The difficulties came up on the marketing side.
The participants in the project knew
there were risks on the production side, but the market
seemed clear: Kenya was in deficit for sugar; its expanding
population would take up whatever could be produced M.S.C.
was to sell output to the Kenya National Trading Corporation
at a price fixed by Government. The Corporation was obliged
to buy all of M.S.C.'s production. Nevertheless, the
problems came up on the market side. On occasion the
Corporation found itself unable to take delivery of sugar
already manufactured. M.S.C.'s own operations had then to be
shut down temporarily for lack of finished sugar storage
Most serious for the Company was the Government's unwillingness to raise the price paid for sugar in spite of inflation. Between May 1977 and April 1981, despite repeated requests from M.S.C., the Govern-ment kept prices constant. The Company was forced to subsidise cane farmers' operations. The cane and sugar price increases approved in 1981 were 12.8 per cent and 9.8 per cent respectively, while over the same period the general rate of inflation was 48 per cent. The impact of this on M.S.C. can be seen in Table 4.9. Net profits before tax dropped from over $5000000 in 1977 to a loss of $108000 in 1981. Yet production had been raised by 90 per cent to 167400 tons. In his 1980 and 1981 annual reports, the Chairman, Professor George Saitoti, summed up the situation as follows:
(1980) The Company’s cash resources have suffered over the past three years from diminished profits due to the lack of a price increase and the need to subsidise the farmers. In view of the present liquidity position, the directors have recommended no dividends for 1980. It is deeply regretted that, due to circumstances outside management control, shareholders will be denied the reward of their successful investment.
(1981) The Company's cash position continues to be highly unsatisfactory' and survival was possible during the year only by taking excessive credit on the payment of the sugar excise.
Any private Company's operations in any country are exposed to the unfavourable effects of changes in policy or regulations by the Govern-ment. B.A.I. had minimised these risks by entering into a partnership with the Kenyan Government to pursue common economic and developmental goals in such a way that both Company and Govern-ment were rewarded if objectives were achieved. Unfortunately, the pressure of outside events, particularly increases in the cost of imported oil, resulted in the Government seeking every possible means to keep down price inflation, especially in basic food items like sugar. While the Government as a major shareholder had to forego dividends along with the others, and received no tax on Company profits because there were none, it continued to collect the excise duty. So, even after allowing for devaluation of the Kenya shilling, it took out more in dollar terms than in previous years.
Table 4.9. Summary operating results: Mumias Sugar Company 1977, 1979, and
1977 1979 1981
Gross turnover 29780 40848 48847
Excise tax 7936 10490 11831
Net turnover 21844 30358 37016
Payment to growers 6152 10042 14197
Profit (loss) before taxes 5738 276 (108)
Income tax 2527 (467)
Profit (loss) after tax 3211 743 (108)
Equity 17547 17334 14069
Profit after tax as percentage of equity 18% 4%
Dividends 2430 1 620
Dividends as percentage of equity 14% 9%
Tax revenue to government 10463 10490 11831
Nucleus estate cane (hectares) 3300 3300 3300
Outgrowers cane (hectares) 9900 15400 24300
Cane crushed (tons) 697000 975000 1566000
Sugar produced (tons) 81 275 109800 167400
Annual increase in production 28% 19% 2%
Registered farmers 9372 13113 17474
Permanent employees 3521 4108 4936
Seasonal employees 89 5282 9218
Benefits from the Mumias project
The Company was profitable from the first six
months of operation. This was due to higher cane yields,
higher factory capacity utilisation, and lower costs than
had been forecast. The social cost-benefit analysis has also
been very favourable, mainly because of the boom in world
sugar prices during the early years of the project. By the
end of 1974, a mere 18 months after production began, the
project, based on the opportunity value of sugar at world
price levels, had completely)' paid for itself. Sugar prices
have fallen since. However, B.A.I. management estimate that
Mumias has the lowest production costs of any sugar project
in East or West Africa.
Almost 5000 permanent and more than 9000 seasonal jobs have been created, and almost 17500 farmers are now receiving cash incomes who were not before.
Company employees have benefited from organised training at the apprentice, technician and management levels. By 1978, out of 102 management employees, only 17 were expatriates. In accordance with the original agreement, B.A.I. was to withdraw at the end of its fixed term management contract and Kenyans would take over complete managerial responsibility.
It is said that the project furthered inequality in land holding and incomes among the farmers concerned, led to relative neglect of traditional food crops and to social deficiencies deriving from rapid access to wealth. These criticisms cannot, however, be pressed very far. They are based on hindsight on a project that succeeded beyond all expectations.
For Booker McConnell the payment by results contract proved very favourable. Its management fees averaged a $1.7 million over the years 198O~2. This was about 3 per cent of gross turnover - not high, however, considering the initial management risks, the success achieved and the part played by its management in achieving it.
It was also a step to other such contracts in Somalia and Papua New Guinea, and eventual takeover of a majority share in the International Basic Economy Corporation (I.B.E.C.) of New York.