7 Discussion
There is a strong interaction among the different aspects of property rights. For example transferability is theoretically relatively unattenuated, but in practice it is limited by the flexibility and divisibility of the consent. Flexibility could be enhanced, but to move away from the attempt at regulation to achieve efficiency and control of land use would require a strongly operating market system which would direct the water to move to its highest value use.
At present regulatory agencies are reluctant to grant high quality title for any duration, because of the potential need to change management of the resource. This highlights the strong link between quality of title and duration. Furthermore one would not wish to increase the quality of title without ensuring that transferability and an operating market was in place, since without this an increase in quality of title may lock in rights without allowing for the water to move to its highest value uses. As Coase's theorem (Coase, 1960) notes in respect of property rights of nuisance, it doesn't matter to whom the initial rights are granted, as long as a mechanism for transfer of those rights through negotiation is available.
All aspects of water property rights are dependent on clearer definition of the quality of title, particularly associated with greater scientific understanding of the resources, and a clearly defined planning regime specifying the flow or resource management regime. This is the key area of action required in respect of property rights. We feel however that there are a number of further issues which may warrant further attention. These are discussed below.
Flexibility
Most consents are specific about issues such as irrigation type, application rates and location, with two of the areas studied appearing to use the irrigation consent to limit land use. The consents also tend to have a "use it or lose" it provision. There was general agreement that this was potentially limiting in terms of the ability to manage the water in the consent, but for those consent holders studied it had not been an actual constraint - primarily because most had not needed to change land use or if they wished to had applied to the council and had the change accepted. That is the consent holders could see potential problems in the future, but had not experienced them. While we see these constraints as a clumsy and rather ad hoc means of managing land use, those issues are outside the scope of this report. We do however see some property rights issues in respect of constraints on flexibility which have the potential to distort the investment landscape. These are a constraint on moving to land uses which use less water, and constraints on transfers of consents.
Ideally the limits on flexibility would only affect the changes in land use to the degree which was needed to limit impact on the environment. However the reality of the allocation system is that while amounts of water which have been consented can go down, they are unlikely to increase if the change in land use is one which requires more water rather than less. The asymmetric nature of this is exacerbated by the thin or non-existent market in water, with landholders understanding that if they give up water they are unlikely to be allocated more nor will they be able to buy it back.
In some cases, such as the Awatere where land is being converted from pasture to grapes, this is managed by the landholder by extending the pastoral irrigation elsewhere on the property. This is achievable because the consent is rarely sufficient to irrigate the whole property. However in other areas, such as Dunsandel/Te Pirita, where the most of the available land is irrigated in a property, extra land to manage the change within a property may not be available. We are concerned that in the long run this may distort moves into alternate higher value land uses where these have lower water use, since this would result in loss of a water right that in current circumstances cannot be regained.
Tying the consent to particular locations and land uses also places a barrier on the transferability of water. Again this was not observed directly, because transfers have been very limited. While it is likely that, subject to it meeting the appropriate requirements, any new land use in conjunction with a transfer will be approved by councils, the requirement places an additional barrier to a market system for water and adds considerably to transaction costs.
The constraints on the amount of water consented for an area of land are designed to impose some lower constraints on the efficiency with which water is used. While this is admirable, it imposes further constraints on the flexibility of use of the resource. If a regulatory approach is needed to manage efficiency, it may be that constraining an application rate rather than the consented amount would be more efficient.
The "use it or lose it" provisions appeared to be working against efficiency in the Tasman area, where in conjunction with an overallocated resource and the desire by the council to claw back a large proportion of allocations, they appeared to be encouraging landholders to irrigate where otherwise they may not in order to retain use rights.
It is worth noting here that there may be considerable opposition from other stakeholders to increasing flexibility of consents, because within the other stakeholders focus group there was a significant body of opinion which saw other means of managing land use and efficiency as ineffective.
Transferability
The interesting feature about transferability was that, apart from the Tasman focus group, almost all groups and interviewees perceived quite severe limitations on transferability, regardless of whether they were in favour of it or not. This is despite the fact that the regulatory agencies all have policies which state that transferability is allowed under particular circumstances. The perception of limitations on transferability is possibly a reflection of the difficulty of completing a transaction with the need to go through the consent process, the transaction costs involved, and the relative scarcity of trades being undertaken.
In Tasman District the claw back provisions have made many deeply suspicious of the council's desire to encourage transferability. There is a feeling that if the council is approached to undertake a transfer, that the water will instead be taken away (under the use it or lose it provisions) and returned to the common pool. Here the focus group also noted the restrictions on transferability with the tight zoning system, which constrains ability to trade quite considerably. It may not be possible to overcome these latter constraints however as they are geographically defined.
It appears from the discussion held that transferability is not a strong aspect of property rights because of both practical and regulatory constraints. It may be that to reinforce this aspect of property rights a more pro-active approach to strengthening transferability is needed.
Duration
Duration did not appear to be a major issue with consent holders. In practice most of them believed that their consents were renewable, since this appeared to be common practice among councils. However this status is not enshrined in statute, and appeared to be noted in only one council's planning regime. It may be that this status will continue, but it may also be that in the future consents will not be renewed.
From a regulatory point of view it does not really matter whether the consent holder's actually have a long term right or whether they believe they have a long-term right. In practice it only matters that they behave as if they have a long term right. In this sense the current situation is perfectly satisfactory, since the consent holders are certainly behaving as if they have a long term, renewable right. It is difficult to judge whether they are correct in this, since in practice their faith in the rights of existing consent holders may indeed be soundly based on an enduring custom in our society.
However in the long term this may not be desirable. It would take only one high profile non-renewal for landholders to change their view of the duration of their consents, which is likely to dramatically alter their management of the resource. It may also lead to a loss of faith in the regulatory process, with impacts on other aspects of resource management. As a general rule transparency is generally a preferable strategy, and we believe that the status of consent renewals should be clarified.
Transaction costs
All parties noted the high transaction costs associated with the current property rights regime. For consent holders these arise when seeking consents, with consent renewals, and in keeping up to date with the political and planning environment. For other stakeholders these arise from having to submit on all consents in those locations where no plan is operative, and in having to keep up to date with the planning process. Some consents require reasonably large sums of money, and the costs for other stakeholders in opposing consents and submitting on plans can run to hundreds of thousands.
It is difficult to tell whether the transaction costs are too high however, particularly for consent holders. The gaining of a consent confers an enormous increase in capital value on a farm property, even if the consent has no independent market value at present. Landholders recognise the capitalisation of the value of the consent [Many responses to the scenarios where property rights were further attenuated were translated directly by landholders into a decrease in the value of their properties.] and while they are not happy having to spend money on legal and expert assistance, they appeared to be not overly upset by it and recognised it as a fact of life. There was no evidence that the costs were prohibitive relative to the value to be gained. The issue of uncertainty associated with quality of title tended to be much more hotly discussed, perhaps indicating where priorities lie.
Other stakeholders on the other hand were resentful of the costs involved for them in defending their rights to the property. These organisations struggled to obtain sufficient funds to hire expertise, and they felt that their cases were much weaker as a result. It may be that in the context of the transaction cost approach to property rights, it is appropriate now to reconsider means of formalising the property rights of these groups in such a way that reduces their ongoing transaction costs in the water allocation and management system. A clearly defined plan and allocation regime would be an important first step, but it is not clear whether this would be sufficient.
