Sunday, 9 April 2017

Historic reform or broken policy: the case of recent developments in township leasing policy in the NT

The path is smooth that leadeth on to danger
Venus and Adonis, line 788

Provision for township leases is a policy innovation introduced into the NT Aboriginal Land Rights Act (ALRA) in late 2006 by the Howard Government in the last year of its time in Government.

The township leasing provisions are an important reform, because there is no market for residential or commercial land in most remote NT communities, and this is itself an impediment and constraint on economic development, and in particular on the capacities of external parties, whether government or private, to fund infrastructure and other developments utilising commercial sources of finance.

Under ALRA, there is a capacity under section 19 of the legislation for traditional owners to lease their land to third parties. This allows both public and private interests to obtain secure tenure over portions of Aboriginal owned land, which is owned communally and is inalienable (ie cannot be sold). This thus allows governments to build infrastructure needed to provide government services for community residents, and in theory at least, individuals whether from within or beyond the local community, to build and own housing, other facilities, or merely use the land for individual purposes.

Section 19 leases are quite common in remote NT communities located on Aboriginal land, but mostly for public purposes. Private or commercial leases are more common in the larger tracts of Aboriginal land beyond communities. Traditional owners, represented and assisted by the relevant land councils, are quite used to negotiating arrangements for the use of Aboriginal lands for private commercial purposes, including section 19 leases, mining exploration arrangements, licences for pet meat harvesting of feral livestock such as donkeys and buffalo, and in a small number of cases, agreements for major resource developments.

Each section 19 lease requires the proponent lessee to approach the traditional owners through the land council, detailed consultations, and consequential negotiations (if any) and the various legal and administrative steps required to formalise the lease, including in the case of more significant leases ministerial approval by the Minister for Indigenous Affairs.

So what are the problems with section 19 leases under ALRA?

There are a number, some of greater salience than others. Of most concern are the arrangements for dealing with land within communities. In my view, the provisions of ALRA, including section 19, operate reasonably well for land beyond community boundaries.

The first issue relates to transaction costs. The cost of consulting traditional owners for a suburban block in say Maningrida may well outweigh the notional value of the land. These costs fall on the Land Councils, but also traditional owners (their time is valuable), and also the proposed lessee, since delays will have financial implications, and in some cases, land councils require lease proponents to underwrite the costs of consultation. These costs can be termed ‘transaction costs’.

There are also what might be termed ‘queueing costs’ insofar as land council consultation resources (both financial and human) are limited and delays in finalising consultation are inevitable, particularly for small portions of land, and particularly if demand for consultation were to grow to multiple requests in scores or even hundreds of community locations across the NT.

There are also potential systemic costs (or the cost of foregone benefits) insofar as to the extent that potential lessees are discouraged from even seeking a lease by the transaction and queuing costs in circumstances where the traditional owners would have agreed in return for a lease payment, the overall economic welfare of the traditional owners will suffer, and the potential lessee will divert resources to her second best opportunity, and thus also bear a cost.

These economic costs feed into higher level policy costs. For example, to the extent that policymakers are keen to maximise homeownership opportunities (a policy I consider to be flawed, but that is a discussion for another day), transaction costs, queuing costs and systemic costs constrain opportunities.

Similarly, to the extent that a public or private leaseholder wishes to access borrowings secured by a mortgage over the land involved, there are two challenges. First, the limited terms of most section 19 leases which are designed to avoid the operation of section 5(3) of the NT Planning Act (link here) which defines leases with terms over 12 years to be part of a subdivision, thus invoking a range of other planning requirements and their consequential costs. The second challenge is the inalienability of the underlying title. Both these challenges work against the preparedness of banks and other financial institutions to provide debt finance.

In turn, at a systemic level, the cumulative effect of the various economic costs of doing business and the policy challenges which deter lending for commercial or residential assets is that there is no market for residential and commercial blocks of land in most remote communities in the NT. In economists’ shorthand, there is deep seated market failure.

This in turn disadvantages the significant numbers of Aboriginal citizens who reside in particular communities, but are not traditional owners for that land. In effect, without an effective market in residential leases, those people are perpetual visitors without substantive rights of residency. The land councils are institutions designed to represent and advocate for traditional owners, but there are strong policy grounds for governments to ensure that long term residents are provided with some level of security in relation to their place of residence. Indigenous interests are heterogeneous, not uniform.

From time to time, various interest groups and individuals have argued for the ALRA processes related to communal decision making over land use, and inalienability of the underlying title to be ‘streamlined’ or weakened in various ways. To date, these arguments have failed to obtain traction, at least in relation to ALRA. Native title is perhaps a different story. See for example my recent posts on the processes for approving some Indigenous Land Use Agreements in native title contexts (link here and here) where I argued that the Parliament was incrementally undermining the communal nature of native title rights if it proceeds in accordance the bipartisan approach recommended by the Senate Legal and Constitutional Affairs committee in relation to their inquiry into the Bill drafted to respond to the Federal Court decision in McGlade.

I take the view that there are strong grounds for maintaining the communal and inalienable nature of Aboriginal land. While some commentators argue that these characteristics are inappropriate constraints on Indigenous rights to deal with their property, my pragmatic view is that the risks of permanent loss of substantial tracts of the Indigenous estate, and respect for continuing traditional Indigenous conceptions of their relationship to the land over much of remote Australia, outweigh the philosophical arguments for change at this point in time.

While undoubtedly Indigenous citizens have the largest stake in this issue, it is worth remembering too that there is a national interest in ensuring sustained land justice for the nation’s Indigenous citizens. Non-Indigenous Australians have a responsibility in relation to these issues too. In fifty years’ time, the case for change to the underlying nature of Aboriginal property rights may well be stronger.

Nevertheless, while communal and inalienable title is in my view an extremely important element of ensuring land justice for Indigenous citizens, and particularly Aboriginal land owners in the NT, the shortcomings identified above in relation to the operation of section 19 within remote communities demanded a response. This was the genesis of the township leasing arrangements (sometimes referred to as section 19A leases) implemented by the Howard Government, albeit in the face of opposition from the two largest NT Land Councils, and also at the time from the federal Labor Party.

In summary form, the township lease model created a mechanism whereby a headlease over the whole of a community could be granted by the traditional owners to a Commonwealth Government entity established by legislation (the Executive Director of Township Leasing or EDTL) for a long term of up to 99 years which in turn would issue sub-leases, consistent with the terms of the headlease, over small portions of the headlease area to third parties without the necessity to substantively consult further. The terms of the headlease can provide for payments to traditional owners linked to the extent to which sub leases are granted. Importantly, take up of township leases was voluntary. The township lease provisions also over-ride the NT Planning Act provisions on subdivisions: see section 19D of ALRA.

Since the introduction of the township lease provisions in 2006, progress has been slow and patchy.

So while the relatively small Tiwi and Anandilyakwa Land Councils have negotiated township leases within their jurisdictions (on the Tiwi Islands and Groote Eylandt respectively), the two mainland Land Councils have until recently resisted implementing the model, and presumably advised communities in their respective jurisdictions against adopting it.

The rationale for the land council opposition seems to rest on concerns that while township leases reduce transaction costs, they also reduce the capacity of land councils and traditional owners to negotiate progressively better terms based on an incremental ratchet of terms and conditions over time (as has occurred with section 19 leases over the past decades). They also appear to articulate concerns that the headlease is being held by a government entity and not an Aboriginal corporation.

The Federal Government has recently announced a number of ‘historic’ township leases on the mainland at Gunyangara (link here and here) and Mutitjulu (link here and here). The historic breakthrough appears to relate to the Federal Government decision to no longer insist on the headlease being held by a government entity.

It is not clear to me what mechanism has been utilised in relation to the Gunyangara lease to place it in the hands of a local corporation. It may be that the EDTL first takes the headlease and immediately subleases it to the corporation. Unfortunately, despite a request for access to the lease, the Minister and his Department have so far refused to release it.

The Mutitjulu leases are based on a relatively recent 2015 amendment to the section township leasing and EDTL provisions (link here) which has the effect of allowing the EDTL to receive a sublease (from the Director of National Parks who holds a lease from the traditional owners) and ultimately for the sublease to be transferred and held by a local Aboriginal corporation rather than the Commonwealth statutory entity, the EDTL.

The design problem I foresee arising from the new ‘historic’ policy is that while the lease to an Aboriginal corporation may overcome the transaction cost and queuing cost issues, in order to sign up the land councils and relevant traditional owners, the Federal Government has given away an element of tenure security which may well make the difference between whether a bank or other financier will lend or not.

In particular, the bank’s recourse to its funds over time is dependent on the robustness of the market for the relevant sublease. This in turn is a function of the term of the sublease, the level of demand for the lease from other potential leaseholders, and crucially, to the robustness of the corporate governance of the owner of the headlease.

To the extent that there is a possibility that a corporation will go into administration or insolvency, there is a possibility that the sublessee’s landlord may change and along with that the approach to administering the sublease terms and conditions, both in formal and informal terms. While a bank has formal certainty that the sublease terms will be honoured by any new headlease owner, the practical  realities are that potential lenders will no longer have the security and confidence provided by the knowledge that the headlease is being administered by a government entity.

To take an example from the mainstream, Canberra residential leases are 99 years, with the underlying title being held by an ACT Government entity. Canberra residents assume that future governments will always renew the leases because they are subject to democratic pressures which would make any alternative approach politically suicidal. Were Canberra’s residential leases granted by a private sector corporation, with none of the democratic pressures facing governments, unknown future Board composition, and unknown future shareholders, it seems likely both that Canberra residents would feel much less secure about their leases (and prices would reflect that) and banks would likely adopt a more risk averse approach to lending funds secured by those leases.

Time will tell whether my concerns about the current Government’s ‘historic’ reforms are borne out in the real world. It is however ironic that it was the former Labor Government which stood its ground on this issue against sustained pressure from the two major land councils, whereas the Liberal National Party Government currently in office, and traditionally much more focussed on driving economic reform on Aboriginal land, has taken the course of least resistance.

Of course, compromise is the sine qua non of politics. However, the art of politics, and especially the art of effective policy reform, lies in knowing when to compromise and when to stand firm.

The risk here is that notwithstanding the fact that the township lease provisions continue to address transaction and queuing costs, the failure to provide absolute certainty to potential lenders will deter such lending, with the result that the systemic reform opportunities inherent in township leasing will not be grasped. These risks will be exacerbated if the Tiwi and Anandilyakwa people decide (or are persuaded) that they too wish to remove the EDTL from their existing township leases.

The case by case negotiation of township leases occurs slowly, with only eight completed in the last ten years. It may well be another decade or more before it becomes apparent whether the compromise adopted by the current Government to kick start the take up of these leases has been successful or not. The risk, indeed in my view the likelihood, is that it will constrain access to mortgage finance on remote communities which adopt the compromise model, and consequently will continue to make commercial and residential investment in these places extremely difficult. If I am right, Aboriginal people will be the losers, and the compromise will be seen to be ‘historic’ for all the wrong reasons.