3.3  Key characteristics of rights

When new rights are being defined, certain characteristics will be more important than others depending on the nature of the property and on the objectives of establishing it. Particularly important characteristics are duration, quality of title and transferability.

Quality of title can be a vague term but includes whether the right is absolute or proportional, compensability for changes in the terms of the right, and the existence and nature of institutions to enforce the right.[10] It is therefore crucial to the operation of a rights framework.

Where the underlying property covered by a right is depletable, or where investment can increase the value of property, or prevent its erosion, the duration of a property right and the arrangements for its renewal (if duration is not permanent), become crucial to the incentives faced by the right owner. Those incentives then drive investment behaviour. Examples of where such factors can be significant include aquaculture leases and tourism concession arrangements in national parks.

Within duration, there is a specific issue of whether rights can be defined for sub-periods of time (eg, annual) rather than for their full duration, or whether annual access to permanent rights can be transferred separately. This type of approach has worked well for fisheries, where Annual Catch Entitlements (ACE) can be traded while retaining the underlying Individual Transferable Quota (ITQ), and for emissions trading programmes (Montero and Sanchez, 2002). This ability to divide the asset increases market liquidity and the management flexibility of the owners.

Transferability is also normally strongly reflected in value, but is discussed in its own right at more length below.

3.3.1  Transferability of rights

When property rights are defined or substantially redefined, there is often a call for restrictions on who they are issued to, and who they can then be traded to. The latter is more significant because of its effects on dynamic efficiency. Any problems created by the former are likely to resolve over time if the rights are freely transferable.

An illustration of the impact of transferability is the Individual Transferable Quota (ITQ) system in New Zealand as discussed in Section 6.4. Assets from the 1992 Maori fisheries settlement are to be allocated and distributed to iwi (tribes). Some restrictions have been proposed on transferability to ensure the assets remain in Maori control.[11] Figure 2 illustrates how such restrictions can affect value, using the approach outlined in Figure 1 (Clarke, 2002).

Figure 2 – Transferability and value of fisheries quota

 

Source: Framework adapted from Scott (1988).

The irregular shape and reduced area where transfers are restricted suggest the poorer quality of such property rights, and are likely to be reflected in lower value. This is because the pool of potential buyers for the asset is reduced, the freedom of owners to structure their operations is limited, and the inability to transfer title discourages financial institutions from accepting the asset as collateral for loans. Previous examples of restricted transferability of property rights in New Zealand include shares in agricultural producer boards and ownership of Maori land under Te Ture Whenua Maori Act.

Those producer boards which traded in product historically (A) required growers to hold shares in order to supply required growers to invest in on-farm and off-farm assets in the same industry, thereby (1) concentrating their risks, (2) limiting access to external capital (3) reducing governance pressures on directors and (4) obscuring and reducing the true value of the shares.[12] The alternative approach of (B) restricting share transferability to within the industry allowed diversification of investments while retaining control within an industry group, but at the cost of reducing the value received by those who chose to exit, and creating tensions between payments for product and dividends on shares as shareholdings diverged from production.[13] The latter is a common problem for co-operatives with outside shareholdings. Free transferability of shares (C) allows diversification but at the cost of potentially ceding control.[14]

Restrictions on transfers of Maori land (see Section 6.5) are designed to protect the limited remaining land in Maori ownership. In practice, however, restrictions on the sale of land have raised the cost of changing the use or user of the land and reduced the profitability of any investments attached to the land, as well as the general issues noted above of a smaller market, lower value, limited usefulness as collateral. Restrictions on rental have a similar effect (Johnson, 1972). In addition the difficulty of locating owners and the costs of establishing and operating trusts severely affected the ability of owners to develop land thereby hindering economic development, particularly where land is the only significant asset held.

Precedents from Native American land tenure show the same general issues,and highlights the effect of inability to sell in preventing economic aggregation of land parcels and increasing the fragmentation of title among successors (Anderson and Lueck, 1992).[15] Multiple ownership in turn increases the costs of obtaining agreement among owners, reduces the willingness of individual owners to put effort into development, and discourages uses that may be more valuable but where monitoring of inputs and outputs by owners will be more difficult.

The per-acre value of agricultural output, compared to fee-simple land, was calculated in this study as 30-40% lower for individual trusts and 85-90% lower for tribal trusts. As Anderson and Lueck note this does not necessarily mean the constraints should be lifted, given the cultural and social goals on which they are based, but does indicate that there is a definite economic cost of pursuing such goals. An explicit choice should be made in each case if possible on whether the benefit justifies the cost. This raises difficult issues about a decision-making mandate where decisions are made on behalf of those affected by the state or some other representative group (itself possibly mandated by the state).