Are ALTA Rents Fair - 05 Towards a Solution

Reforming the leasing and the use of agricultural land in Fiji

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 If these projects or uses were never put into effect, or if they are no longer in effect, does the land legitimately still belong to the crown?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 tenant".

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:

Recommendation 1:

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 advisor.

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:

Recommendation 2:

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.

Recommendation 3:

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.

Recommendation 4:

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:

Recommendation 5:

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

Rental payments:

reservation rental fee of $300; plus

marginal share-cropping supplement of 8% of the first 20 tonnes in excess of 60 = (20x$50) x 0.08 = $80; plus

marginal share-cropping supplement of 5% of the next 20 tonnes in excess of 80 = (20x$50) x 0.05 = $50.

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%

This 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:

Recommendation 6:

That all sub-leasing of agricultural land be prohibited.

Recommendation 7:

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.

Recommendation 8:

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.

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