Reforming the leasing and the use of agricultural land in Fiji

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 of ALTA

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 soil?

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 therefrom; and
  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:

 

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 below.

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