Ever wondered why conservation covenant conditions ultimately result in a loss of economic (farming) value over time? Are you getting compensated for that loss?

Definition of “protection”.

There are definitions in the Conservation Act that are unclear. Current practice is the definition of “protection” is applied in a way that favours conservation interests at the expense of economic (farming) values. The definition of “protection” in the Conservation Act is as follows.

“Protection”, in relation to a resource, means its maintenance, so far as is practicable, in its current state; but includes-

(a).Its restoration to some former state; and

(b).Its augmentation, enhancement, or expansion:

Our view is that protection of a “resource” means “its maintenance, so far  as is practicable, in its current state”.

Points (a) and (b) in our view, simply say it may include the restoration or enhancement of the “resource” but not its degradation. Conservation covenant conditions we have reviewed imply that “protection” must include restoration, augmentation, enhancement, or expansion. Which is correct? We believe The Act intended that the first view apply.

Watch those conditions!

If “protection” means the resource’s maintenance in its current state then covenant conditions should reflect that. If a landowner agrees to the “resources” restoration to some former state or its augmentation, enhancement, or expansion then the covenant conditions should reflect that agreement and compensation paid accordingly.

Unfortunately the current practice is covenant conditions include restoration, augmentation, enhancement or expansion as standard.

We don’t see evidence of compensation being considered for the inevitable degradation of economic (farming) values, over time

Government policy.

The approach appears counter to Government policy which requires, where appropriate, the use of conservation covenants as opposed to Crown ownership, to protect exisiting resource (indigenous values) and maintain economic (farming) values.

Intending users of conservation covenants, whether leaseholders, freeholders or the Crown, should seek clarification of the term “protection” as defined in the Conservation Act and its proper application.

The practice of applying standard covenant conditions intending to restore, augment, enhance, or expand resources precludes maintaining economic output. The Government policy of maintaining conservation and economic values using covenants appears at risk.

Landowners considering a covenant must read conditions very carefully. Question the definition of protection used to justify conditions. Otherwise the maintenance of your resource may be under threat.

Issue 7 - June 2010

In recent times there has been much debate on the difficulties of obtaining finance for primary industries. There has been criticism of the banking industry by the primary sector and a tightening of lending requirements by the banking industry.

The rules have changed. The practice of maintaining debt to equity levels by introducing capital gain is over. Cashflow is the benchmark. It must satisfy the financial demands of borrowers and lenders.

Borrowing criteria should be based upon the ability to service the debt from core revenues. Revenues from the investment against which debt is secured, meaning servicing principle and interest from on farm cashflow.

An investment should have the ability to stand up on its own, without tax break considerations or underlying revaluations propping up debt to equity ratios. There is always the risk that rules will be reviewed or market corrections will destroy balance sheets. Banks look after their own balance sheet first, they have to.

With farming, as for any other business, the investment should be sustainable on the basis of its productivity value without relying upon appreciation of market value to maintain debt to equity.  These values can be different and borrowing against market value simply increases dependency on and defers the repayment of debt. It will result in an increasing and unsustainable debt burden recoverable only by selling the property. This unsatisfactory situation can be transferred to family successors but if they have to settle siblings and parents at values above economic worth they are simply perpetuating and increasing the problem.

By and large value is determined by the level and efficiency of the economic activity being undertaken. In farming, market value has in many cases got ahead of economic value. Borrowers and lenders got around this because over time even unsustainable debt was well covered by appreciating market value. We now have a market correction. This changes the baseline for rural investors and lenders. Lenders must be looking at their own balance sheets and borrowers should be keeping debt at an optimum.

Rural Investing: The Balance

Borrowing requirements include the need to demonstrate acceptable debt to equity ratios such that the business is able to service the debt. If the farm asset cannot sevice proposed debt from operations then off farm income may need to be introduced, off farm non productive assets sold to increase equity or simply don’t go there.

Development: Getting Prepared

In recent times development debt rather than purchase debt has come to the fore. This is especially so in the dairy industry. Our sources indicate that dairy conversions are on average costing 20% or more than estimates submitted for loan finance. This suggests to us that rigour is required around identifying costs and preparing documentation for contractors to price works. There is also questions to be asked around managing projects with significant building, mechanical and electrical elements.

Managing debt and good planning around costs cannot be underestimated. Debt, used wisely is a powerful ally. Debt not used wisely is fatal.

Issue 6 - April 2010

Non Governmental Organisations (NGOs) and Lobbying

We have recently analysyed submissions for a tenure review on behalf of a client. There was a number from a range of NGOs. Interestingly three were received from one organisation. One from the area branch, one from the regional office and one from a director of the national organisation. Is that an issue? Possibly, because it skewed the response statistics. All three were remarkably similar. Did it matter? Not in this case but there were inaccuracies, as there were in the submissions of those organisations that may have relied upon circulated content to frame their own responses.

The Analysis

 We took the opportunity to analyse these submissions in detail using our ecologist. The findings were interesting. Let us consider two cases. Carex muelleri noted as threatened and sparse in a submission is actually classified as non-threatened and naturally sparse. Carmichaelia vexillata (native broom) was noted as threatened. This plant has been re-classified as declining and the NZ Plant Conservation Network  notes that “…it must be recognised that without browsing animals many of the habitats occupied by this broom would vanish due to weed growth”. There were other examples of incomplete or inaccurate observations being made.

Why the errors?

There are two possible reasons. These are, either the submitters base information is flawed or the intention was to mislead. Which one doesn’t matter. The principle at issue here is that NGOs are viewed as being the watchdogs of the public interest and yet the standards that need to be observed to hold that title, without condition, in this particular case were not apparently being met.

The Lesson

The lesson is simple and there are two parts to it.

When making submissions make sure they are accurate because many people will rely upon them without question and only a small number, such as ourselves, will examine them in critical detail. There is nothing so counter productive than getting it wrong and there is nothing as unfair as incorrect information being used to make a decision. Unfair on the families and organisations directly involved, the taxpayers who may fund it and even the ratepayers who stand to lose rates revenue on land placed in the conservation estate.  Interestingly it is also unfair on the NGO membership many of whom would be upset to see the organisation they chose to support damaged by clumsy work. 

The second part deals with analysing submissions. Examine these in detail. Every claimed fact should then be subjected to a review process for accuracy. Ensure this process is robust.

One lesson all submitters can take from our experience is that NGOs are very well organised and vocal. There is some benefit in being similarly organised.

Anyone sitting in judgement of your submissions and analysis is entitled to have the very best and most reliable information in front of them to consider. This achieves two purposes, it will shorten timelines and ultimately save taxpayer, and your own costs plus it will more likely result in an optimum outcome.

Natural Amenity Tourism

It is that environmentally friendly?

Currently there is a focus on natural amenity and conservation tourism and the economic benefits it may produce for the local and national economy. We hear about sustainable farming and the need to meet the true cost of production which includes maintaining or improving environmental standards. What of the need to apply the same sustainability standards to natural amenity and conservation tourism activities? We seem to accept that conservation tourism activities are environmentally friendly.  Or are they?

In recent days Andrew Penniket of the Otago Conservation Board initiated the campervan debate. In his article in the ODT on Saturday the 20^th of February he made one telling point many of us relate to. He noted: ”I would start at the Haast Pass summit and the Blue Pools which are particularly fouled”. Good point, but why are they fouled? My guess is campervans are in the minority of vehicles crossing the Haast Pass so what is the cause?

The Blue Pools are popular. The Department of Conservation has provided excellent access to them and there is good parking on the highway. In every respect the Department must be complimented for its efforts in providing ease of access to such a beautiful amenity, a Lonely Planet Guide highlight I am told – except on one point. It underestimated demand and has consequently under resourced site management. My belief is that the fouling referred to by Andrew Penniket is directly related to the creation of a tourism demand for which the social and environmental impacts have not been adequately considered, initially or over time. Throughout the Country similar amenities have been established without due or adequate consideration to the social and environmental impacts. The Department is not alone and should not be singled out for attention but its sites are higher profile and a lot of highly principled public debate takes place that fails to account for the stark and pragmatic reality of the true cost of public amenities whether managed by DoC or councils or any other agency for that matter.

The question must be asked, if the Blue Pools were a private venture what conditions on site management would a district or regional authority requ, ire? If it were a DoC concess, ion , what would it require?

Our thoughts are that if it were privately run facility or was a factory or farm, impacts on the environment would come under greater scrutiny.

The Otago Conservation Board, to its credit, has stood up and said something about campervans but in its haste has missed the root cause. If you create demand for access to tourism and conservation amenities it will have social and environmental impacts, not always positive ones. These must be identified and managed. In isolated rural areas the social and environmental impacts may be less visual to the majority of people but they can be significant to local residents and off-putting to tourists, both domestic and international.

In 1994 the OECD adopted a base line principle known as the “beneficiary-pays-principle”.

Translated this means that anyone providing an amenity should be paid for it by those who benefit. In a private commercial model this is done through a charge that recovers the true cost of providing the amenity. In farming it includes costs for environmental management.

In DoC’s case the direct beneficiaries are often subsidised by taxpayers or in territorial authority cases by ratepayers. The romantic argument is that in providing for the greater good nonusers are prepared to pay in the knowledge that it is available.  Our view is if taxpayer or ratepayer funded agencies are creating demands that are not accounting for the social and environmental impacts it is not a funding issue it is a management issue.

Increasing pressure for access to rural recreational opportunities is resulting in the legal status of access being examined and questioned by intending beneficiaries. This can lead to claims that “implied dedication” has taken place or simply that the mere act of public money having been spent on some access makes it a public asset.

Do your homework to determine just what was intended. The claim may be valid but if it represents a threat to your operations, quiet enjoyment or property value it would be unwise to accept those claims without conclusive validation.

What does that tell us? Keep asking for justification. If you are facing similar issues do the homework first. You may just be more informed.

The concept of creating a conservation economy based upon the sustainable exploitation of the conservation estate is commendable. The traditional stewards of the high country are also increasingly being recognised as responsible land managers applying sustainable farm management practices in this iconic landscape.

Many high country farmers have embraced the tourism opportunities that have traditionally existed and are certainly emerging in high country recreation and tourism sectors. Is this present activity simply a precursor to the conservation economy that DoC is being encouraged to adopt? 

Are we going to see land paid for by the taxpayer, acquired by tenure review, for example, returned to economic use? Now that DoC is facing the same need for fiscal restraint as pastoral farmers are we going to see the emergence of a DoC High Country Tourist Bureau? Are we going to see public/private partnerships using a mix of conservation estate and private ca, pital , or the disposal of, conservation wise, marginal land to the private sector, for tourism, in return for protective mechanisms?

What is evident is that DoC is inconsistent, nationally, as to how it operates tourism concessions. It does not appear to have the internal infrastructure to effectively manage some of the commercial operations currently operated. It has tax, capital servicing and rates advantages that could debase existing private tourism investment. If you examine its annual report, income from external sources is minor. The methodology for allocating operating rights on conservation land has come under increasing pressure and the Milford Sound aircraft landings allocation process shows that. Watch for developments on St James Station! The Department’s actions to date do not appear to encourage long term private investment commitments because of security of tenure issues. Where have we heard that comment before?

Experiences since the high country policy and the conservation economy announcements have been mixed.

The indications are that some DoC and NGO interests may argue that land currently in pastoral farming use will provide better returns, not in farming but in tourism. The conservation economy concept may be viewed as an additional tool to secure pastoral land for recreational tourism. Tourism controlled by DoC? Some parties are pursuing covenant conditions that would render pastoral farming uneconomic and may subvert policy intentions. Indeed the point has been made that DoC could make more money managing the property for tourism rather than it remaining in pastoral farming.

In some cases no one can be sure of the intended outcome or what assurances or agreements were reached. It also means that claims can be made by parties that cannot be refuted, either in part or in total. It also means that claims can be made about “implied dedication” or the use of public funding and public use conferring public access rights or more specifically “prescriptive rights”.

To quote BE Hayes from his book “Roading law as it applies to unformed roads”.  Public access rights over private land may not be established by historical use over land subject to the Land Transfer Act. All private land (including pastoral leases) is subject to the Land Transfer Act in New Zealand.

“Implied Dedication” can occur and the high profile case of Stony Batter on Waiheke Island is a case in point. However in a further article by BE Hayes entitled “Roading law as it applies to unformed roads - The Sequel” he makes the following point. “Use by the public generally, and almost always over a period of years, is an essential element of a dedication at common law, provided that a clear intention to dedicate the land as public road may be attributed to the owner”.

What this means is the local council that may have maintained a road over your lease or your freehold cannot claim “implied dedication” unless there is evidence the, current or previous, owners have indicated their approval.

We have a case where a Government department crossing private land on a council maintained road to operate a commercial venture is claiming “implied dedication” rights.  Further it is using this argument to avoid an access charge.

What can a landowner do about this?