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:
Figure 1
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.