High Court Ruling on Crafar Farms: Good Decision, Bad Legislation

Justice Forrest Miller’s High Court’s judgment in the Crafar Farms last week that a cost-benefit assessment should be assessed by reference to some other state of affairs – that is a counterfactual – is standard economics, as is his conclusion that this is not commonly achieved by a ‘before-and-after’ comparison.

A commentator in a weekend newspaper suggested that the Ministers would find it hard to establish a net economic gain for New Zealanders from the sale to a foreign buyer, as any New Zealand buyer could similarly improve the land.

The rebuttable presumption from a national interest perspective should surely be that the sum of the net worth of all New Zealanders is maximised when a New Zealander sells any asset to the highest bidder, foreign or domestic.

To rebut that presumption requires some material considerations that were not priced in the auction process to be identified, followed by a convincing case that the benefits from interfering with the outcome of that process exceed the costs.  It is easy to envisage circumstances in exceptional cases, for example those relating to national security, when this might be justifiable.  It is much harder to envisage over-turning the presumption in the typical case.

Under schedule 1 of the Overseas Investment Act 2005 (OIA) farm land of more than 5 hectares is deemed to be sensitive.  The cost in dollars to New Zealanders of an action that reduces the value of all such land is potentially very large.  A 2009 Treasury/Inland Revenue paper for the Tax Working Group, put the value of agricultural land at about $105 billion.  There are also intangible costs in the form of worsened China-New Zealand relations.

In the current situation, it was Westpac who called in the receiver and Westpac is an Australian-owned bank.  A New Zealand interest arises because actions that reduce the sale price unreasonably in the eyes of lenders will make lenders more cautious to lend on farm land in the future.  That, in itself, could depress the value of farm land owned by New Zealanders.  This is in addition to the China-New Zealand relations issue.

Unfortunately, the relevant statutory framework provides some justification for the above commentator’s view.  Section 14 of the OIA restricts the grounds for consent to matters in other sections that when examined that do not mention the consideration received for selling the land, but they do permit considerations of benefit to a subset of New Zealanders.  Justice Millar documents this in paragraphs 13, 17 and 20 of his judgement.  He records that the assessment of the Overseas Investment Office (OIO) did not make any mention of this benefit in its recommendation.

To ignore the value of consideration when assessing the value to New Zealanders from selling an asset to a non-New Zealander is bizarre.  It is akin to seeing someone trying to assess the benefits to New Zealanders of exporting while ignoring the exporters’ revenues.

Perhaps the OIO ignored the sales proceeds because of its reading of the legislation or perhaps it was because of the Westpac foreign ownership consideration.  Yet it was for the latter reason, was it effectively saying that the land was already foreign owned?

A related concern arises from the OIA’s treatment of New Zealanders’ property rights.  Section 3 of the OIA expressly states that it is a privilege for overseas persons to own or control sensitive New Zealand assets.  The corollary is that New Zealanders don’t have a clear-cut right to sell their land to the highest bidder. (The issue here is not with the tests of good character or compliance with immigration act conditions, it is with other aspects of section 16 of the OIA.)

Paragraph 58 of the judgment explains that the overseas bid offers “numerous non-economic benefits which no New Zealand buyer must offer”.  It states that riverbeds are to be offered to the Crown, along with a historic pa site, public walking access, habitat protection and riparian planting.

To an economist’s eye such considerations look like a non-transparent tax on the New Zealand vendor, since overseas bidders can’t be expected to pay for something that they won’t own.  Such hidden taxes are likely to be unfair since they are highly discriminatory and bypass normal processes for scrutinising tax proposals.  They are also likely to be inefficient because the Crown and the other interested parties are not confronted with the opportunity cost of what is being effectively confiscated from the vendor.  This means there is no transparent test of whether the new uses for the land are the best use from a national perspective.

Richard Epstein, in his introduction to A Primer on Property Rights, Takings and Compensation, here criticised the New Zealand Bill of Rights Act 1990 and the Resource Management Act 1991, the first for refusing to treat the right to private property as one of the fundamental freedoms in New Zealand and the second for the way in which it limited the future use and development of property.

The OIA appears to be another example of the neglect of the need for clarity and respect for private property rights including greater transparency in the taking of rights in land use.

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4 thoughts on “High Court Ruling on Crafar Farms: Good Decision, Bad Legislation

  1. crazy crazy people selling your land, would the Chinese sell you part of china. Will our sovereignty be comprised by china having the right perceived or not to defend its nationals occupy and seize its land by way of defending its overseas possessions or nationals for any reason. The Brits built an empire that way. learn from history.

  2. Pingback: Seventeen-part Tests Are Not Rules | Policy Matters

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