Goal of natural resource ‘royalties’

Why do we need to set out a goal?

Having a defined goal helps design and application of a regime, and measurement of success or failure.

As with any regulatory regime, policy or other decision, it is important to be clear about why we are doing it. In the absence of clear goals, design principles and problem definitions, it is difficult to make up-front decisions about design or develop criteria by which to measure success. Subsequent regime reviews are similarly compromised and changes to established practice can become difficult to achieve.

So what are our reasons? Are they adequate?

The only existing guidance as to why ‘royalty’ type charges should be levied for use of Crown owned or managed resources (other than minerals) in New Zealand is section 64A of the Resource Management Act (RMA) which is specific to coastal charging only.

That section says that regional councils must consider whether to apply a charge after having regard to “(a) the extent to which public benefits from the coastal marine area are lost or gained; and (b) the extent to which private benefit is obtained from the occupation of the coastal marine area”. It does not, however, give any guidance as to what the intent of the charge is or what its level should be, or how to balance private versus public benefits. Council decisions are presumably expected to be consistent with the purpose and principles of the RMA (see part 2 of that Act) but those are fairly broad.[11]

Charging because people are getting a benefit from a public resource provides little guidance on where or how much to charge.

This central government guidance shortfall leaves councils basing their policies on incomplete principles such as “the need to charge for the occupation in recognition of the fact that the private users are gaining a benefit at the expense of the public”.[12] Such a principle does not adequately draw out the reasons why charges should or should not be applied overall or in particular circumstances.

For example it gives no basis for determining which benefits ‘gained at the expense of the public’ should be charged for or what level of return should be sought. When should use of space for a wharf be charged for, and when should allowing public access be a factor? Guidance on these points would help decision-makers.

Charging for use of a public resource simply because a private benefit exists also does not address positive externalities from activities: for example, situations where society might want to encourage an activity because of benefits to the public. Examples include allowing a private wharf or path to be built without a royalty in exchange for public access that will let people reach an otherwise inaccessible scenic site.[13]

What would better reasons look like?

Charging to maximise net benefits provides a clear goal, while allowing for a range of goals and effects to be taken into account and balanced.

Better guidance for decision makers on designing royalties could be linked to existing goals and design principles, set out in legislation such as the RMA and in processes such as the Sustainable Development Programme of Action, which recognise the overlapping goals society has for natural resource use.

Those processes have adopted an approach that where the Crown owns or otherwise manages natural resources on behalf of the people of New Zealand, the goal is to ensure that the resources are used in a manner that maximises the net benefits to New Zealanders. In practice this means allocating, for example, the flow of water in a river between environmental, recreational and farming uses so as to deliver the greatest total margin between the benefits obtained and costs incurred (monetary and non-monetary in both cases).

Applying such a goal in practice requires decision makers to weigh both the costs and benefits of alternative uses, or of alternative packages of uses, and come to a decision based on net national benefit. This is consistent with the broad purpose and matters set out in Part 2 of the RMA.

For example, instead of saying simply that a river should be locked up for environmental protection or abstraction allowed to boost local communities, the relative benefits of different levels of abstractive and in-stream uses can be compared and optimised (to the extent that information is available). Alternatively the charge for private use of marine space can be adjusted to reflect the level of public benefits created or foregone.

A royalty regime needs to allow for and enable changes in use (to achieve highest value use).

The above goal does nevertheless remain a fairly vague directive. It can, however, be translated, as in the Sustainable Development Water Programme of Action, to a usable design principle that any royalty regime should ensure that a resource “is made available over time for its highest value use”.[14]

This does not require predicting up front what that use will be, but creating a combination of regulation and markets that allows resources to move to higher value uses as they emerge, while managing the environmental and social impacts of change (the balance required under the RMA). An example could be a regulation which caps water pollution in a catchment, but does not specify how, where or by whom reductions should take place, leaving those decisions to users and allowing scope for innovation.

1. Any royalty regime should aim to ensure that any given resource is allocated to its highest value use (in the widest sense of value) and allow for that allocation to adjust over time as appropriate.

Such a goal and principle would help decision makers to determine whether or not to apply a royalty, and of what type. Such a decision could take into account a range of factors such as the nature of the use; does it deplete the resource, does it temporarily or permanently prevent other uses, does it have positive or negative externalities etc.

Allowing flexibility for uses to change over time as the highest value use changes helps achieve dynamic efficiency. The extent to which changes can occur without compromising key objectives will vary depending on the resource and the use in question. It may not matter who takes water from a river or who uses it, but where it is applied and the nature of the application (irrigation vs hydro generation for example) may be significant.

The importance of an initial resource allocation will be reduced as the ability to make subsequent transfers increases. Conversely, as transfer becomes easier, the need for ongoing environmental planning and monitoring will increase to manage risks that would otherwise arise only at times of plan reviews. There is a trade-off between risk and opportunity.

More generally, it can be considered whether simply making a resource freely available would distort behaviour such as by encouraging waste or diverting investment from other activities. If so then the decision is whether a royalty or other mechanism should be applied to ensure that use occurs at a desirable level (desirable economically, socially, culturally and environmentally). This is part of the overall goal of ensuring highest value use.

The case for not applying ‘royalties’

The above arguments around when to impose a royalty are also relevant to any decision to waive a royalty. Such a waiver would require proof that it would help achieve efficient use of the resource, not create distortions elsewhere and otherwise be consistent with the various duties of the Crown to those on whose behalf the resource is owned or managed (which may be taxpayers, citizens, native title holders etc).

Operating a queuing system for certain resources (such as bush tracks) instead of charging a market-clearing price represents such a choice. It achieves the goal set in this paper but by a means other than a royalty. Consistent application of waivers would be important.

2. The Crown may determine that a financial return is either not required or can be reduced, or a subsidy applied, in circumstances where:

i) a particular use of a resource has wider community benefits (i.e. net externalities) that exceed alternative uses;

ii) use is non-competing and/or non-exclusive;

iii) charging is not cost-effective;

iv) charging would breach New Zealand’s international commitments; or

v) other methods of achieving the goal are more efficient.

Obtaining a return should be a default with exemptions to be justified, to minimise behavioural distortions.

There may even, in very special circumstances, be a case for not only waiving a royalty but actually subsidising access to a resource which would otherwise be under utilised but for which no economic rent exists.

This may be due to significant positive externalities from use of the resource but limited or no potential (or willingness) to capture rents from users. One example might be encouraging the building of new track and hut facilities to both open up new wilderness areas and take pressure off existing ones, in situations where rationing the first area by price would undermine other objectives, such as equity, or breadth of access.

Either waiving a royalty, or providing a subsidy, would also require proof that the desirable level of use would not occur otherwise, and that the subsidy or waiver represented high priority expenditure.

Finally there are questions of whether a royalty is administratively feasible at a reasonable cost. The following section addresses this and other practical implementation questions that also arise for cost recovery charges and have been covered in the official guidelines for that regime.