Labour could have knocked the water debate out of the park; But the economics of its royalties policy just don't work; Let's hope they get some nationalistic headlines out of it before questions are asked

By Alex Tarrant

Labour this election had the opportunity to knock the water pricing debate out of the park. Jacinda Ardern’s announcement Wednesday was instead a nod to politics over policy.

On the face it, the headline announcement that all commercial water users would be charged based on usage was a welcome addition to the water allocation and pricing debate in New Zealand this year.

But going beneath the surface throws up more questions than answers. These mainly stem from the policy’s central theme of different royalty rates applying to different water users, and depending on the quality of water used.

I made my views clear on this issue back in March. Let’s have a proper water pricing debate that encompasses all water use. We also need clarification on who owns water before we go about charging for it.

Labour looks like it doesn’t want to get too deep into the ownership discussion ahead of the election. On one hand, the party says it will work to resolve Treaty of Waitangi claims on water. On the other, it maintains that ‘we all own it’.

This indicates the lesson Labour learnt from the foreshore and seabed issue was, ‘let’s say we all own it but that Maori also have claim to it,’ and hope no one questions that before election day.

The announcement is a nod to politics over policy. Ok, let’s not be too surprised by that – we’re in an election campaign. Some credit should be given to Labour for at least talking about the issue, while National’s eggs are all sitting in the basket of the government’s Water Allocation Advisory Group, which won’t be reporting back until the end of the year.

But in effort to garner headlines focussed primarily on those nasty water bottlers that then send the stuff to China, Labour’s policy already runs the risk of mispricing water, meaning any allocation market might not run properly.

Different royalty rates will apply to different water consumers, and in different regions. Ardern tried to smooth this over by saying the government’s current commodities royalty regime already prices a natural resource like gold different to gravel.

Keen readers will notice that the two resources used in the example above are different to each other.

The policy document implies a greater per litre charge will apply to water bottlers than farmers. The basic economics of this imply water use would then shift from bottlers to farmers. More water for farming would imply more farming. Labour doesn’t want this, so why do the economics of the policy encourage this?

Of course, quantities that are allocated currently for bottling and farming are vastly different. Still, the economics behind the policy don’t seem to have been thought through that well if Labour’s intention was to have a comprehensive debate about the issue.

The policy document indicates it will also be the quality of water that counts. For example, water from a spring in the middle of nowhere that can be branded on a bottle as “pristine” should be charged at a different rate to water that is found in a river running through dairy country.

Well, good luck imposing water quality standard charging as well as volumetric charging at the end of all those pipes. Such a move could also encourage users such as bottlers and farmers to use the least clean alternative they can find, but which would ‘just’ be clean enough.

Try explaining that in Fonterra’s branding story or on the sides of those exported bottles. “Yeah the government’s water pricing regime encourages us to use the least clean ‘good enough’ alternative possible and actually means there’s not much of an incentive to change.”

Finally, the policy indicates households and councils won’t be subject to royalties for water use. I know this might fall into the nit-picking basket, but creating an incentive for regional councils to enter the water bottling/exporting or farming industries isn’t exactly what the economics of the policy should be encouraging.

This is definitely one for the basket of: ‘nice try, and let’s hope it gets a lot of heart-tugging nationalistic headlines and cements the urban vote before anyone starts asking detailed questions about it.’

Is it really that hard to just have a grown-up, comprehensive water allocation and pricing debate in this country?

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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62 Comments

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Yet again a new tax from Labour, and this time they are using a mallet to crack a peanut. It should be targeting overseas water exports only. Pretty simple, you just charge a tax on the amount of water exported. It shouldn't be applied to farmers and food grower, as taxpayers will end up paying more, by pushing up food prices. This will affect low income earners the most, as much of their money goes on food. I want a change in government, because it is needed, and think JA could make a good PM, but these types of policies make it hard.

Are saying we should let farmers do what they like in case it affects food prices?

It won't affect food prices - as we are told time and time again, the price we pay locally for milk and/or any other agricultural commodity product in NZ reflects the price received on int'l markets by growers. If input costs increase here, one of two things happen: producers become less profitable or they find ways to improve productivity and thus, maintain existing margins.

Define 'producer' first, Kate: there are a lotta tickets to clip here....

  • The grower/farmer/primary producer
  • the co-op/marketing board (e.g. Fonterra, Zespri, etc)
  • the first-order market (e.g Turners & Growers)
  • the logistics operators (e.g. Linfox)
  • The final point of sale (supermarkets, gas stations, corner dairies, restaurants, fast food outlets)

Every one of them use Water (processing, produce freshness, site or vehicle wash-down) and everyone has a say in final pricing. As with financial instruments and Local Government, the more hoops/steps in a chain, the more Modest Fees....

Careful wotcha Wish for....

The final four operate from commercial/business premises which are likely metered (just like residents) - aren't they? I didn't think the policy related to water provided via local government/reticulated services?

My understanding is the policy relates only to water as the commodity (bottlers) and irrigation users. But must admit - have only read this summary of the policy at this stage.

I wash the cars on my car yard. Why won't I pass on that cost as just another business expense?

I manufacture food and health regulations are quite specific that I must clean my plant with extensively with clean water every day. Why won't I pass on that cost as just another business expense?

Every time my concrete truck delivers concrete to a building site they have to be cleaned out with water. Of course the concrete itself uses water. Why won't I pass on that cost as just another business expense?

If I am a commercial user of water and the fire service use my water pipe to fight a firewall on the opposite side of the road, how will they metre the specific amount of water they used from my supply and how do I get reimbursed?

I have an older model car that has been using a bit of water, small hole in the radiator I have to get fixed, but I am poor so can't afford to get that fixed until next month. Will this mean that free water at the petrol station will disappear?

My business is part of an iwi and because we own all water we don't have to pay for it, does this mean I can start businesses in every sector that use large amounts of water and drive everyone else out of business with my lower costs?

I am an investor who sees an opportunity in exporting water, so what is to stop me paying a small fee to an iwi who owns "free" water and exporting it at a cheaper price than my competition?

There are many practical questions here. Water is not *just* a resource, it is also necessary for life and prosperity.

To my knowledge, commercial business users in areas where water supply is reticulated to their premises (your examples above) already pay via metered supply. Or am I wrong on this count?

And the statement that "iwi own all the water" is just plain wrong in terms of precedent already set in a number of Treaty settlements - the claims to Maori rights in respect of freshwater resources are being resolved in relation to governance and guardianship - not "private property rights/ownership" in the sense you are implying.

file:///C:/Users/user/Downloads/R12-Meredith-gibbs-maori-claim-to-freshwater.pdf

I suspect you are correct, there is a cost to reticulation but also suspect that cost reflect the costs of infrastructure delivery and not royalty for the resource itself.

I haven't done any research but fear the cost of resource would soon way out strip the cost of the delivery.

Which would lead to regulation like the electricity industry. Net result, major cost increase for one of life basic necessities over long periods of time.

Sounds like you align with NZ First policy;

Water must not be taxed or subjected to any charge beyond the recovery of capital, and the operational costs (including a fair rate of return) of taking storing and reticulating it for the uses intended.

http://www.nzfirst.org.nz/environment_and_conservation

In that regard he aligns toward National's position. But there is a significant difference between NZ First and National;

Rights to take and use water are available only to New Zealand people (citizens and permanent residents) and New Zealand owned companies, and must not be alienated to overseas persons or interests whether directly or indirectly.

Meaning, any agricultural land in overseas ownership (ditto for water bottlers) would be excluded from consideration for any water take permits, whether via irrigation schemes and/or direct take permits.

And in that regard - a big difference between NZ First and National.

Thanks for that.

The invisible elephant

National are the open-market laissez-faire party who are pouring large amounts of taxpayer subsidy (in intervention), into irrigation of lands that would not make the cut or cut the mustard without those subsidies

The raw test is would these government-subsidised irrigated farms survive if they had to pay commerical rates for their water?

I would like to know. In fact we "should" all like to know before reading all this scare-mongering

My point is why are farmers even being involved as this is a political policy in response to all these overseas companies setting up bottling plants and exporting water, and not having to pay for the water, and the public outrage from that

According to Steven Joyce, charging for water supplied for irrigation has been a Labour policy since 2014;

https://www.stuff.co.nz/national/politics/95594321/labour-targets-commer...

Sounds like they are attaching it to this policy, to bundle them together.

Why is exporting water that has been taken straight out of a spring, different from exporting water that has first gone through a cow?

Um, water from a cow flows down - water from a spring flows up?

Is it really that hard to just have a grown-up, comprehensive water allocation and pricing debate in this country?

Any time, yes.

In an elections year, yesyeysyesyesyesyes

Isn't the election the debate?

Believe it or not - my impression thus far is that I like NZ First's ideas on water policy;

http://www.nzfirst.org.nz/environment_and_conservation

Last party anyone is actually looking to on this very vexed issue. And as far as the request for that grown up conversation - their intention to develop a National Water Use Strategy is to my mind the way to go but then you have to entrench it it law somehow..

Way back in 2003, the Labour Government development a Sustainable Development Programme of Action for New Zealand;

https://www.msd.govt.nz/documents/about-msd-and-our-work/work-programmes...

It got a way down to implementing the actions - lots of conversations and research done by MFE, but National promptly dumped the programme in favour of promoting irrigation/storage and amending the RMA (including the introduction of that National Policy Statement on freshwater).

I do wonder whether we would have been better to sort out allocation/use issues first (understand and fix volume/flow by individual water body) - and then tackle quality.

Don't you have to sort out ownership and liability issues first before anything else?

Maori own the water - and no doubt the royalties I guess

And the liability?

No way Hosa

No. Freshwater is in terms of the Treaty much like other mineral resources where royalty regimes are in operation. My understanding is that the question in terms of the Treaty relate to rights conferred with respect to shared governance (kawanatanga) and specific guardianship (kaitiakitanga) obligations on Maori as the Treaty partner;

https://teara.govt.nz/en/document/4216/the-three-articles-of-the-treaty-...

Good thoughts, thanks Kate. Without digging very far into it, my initial reaction is I would be very wary of standing up royalty schemes that establish contractual obligation and legal precedent before clearly marking out concerns over future liabilities and extent of common rights.

I don't want private ownership of everything and rights of commons must be carefully and correctly enshrined to last.

Not sure what your concern is - are you saying that you don't think that water is a common pool resource?

Sorry for not being very clear.

I meant commons as in a legal common ownership and in its widest sense (all New Zealanders), so if water is owned by iwi it cannot be a commons.

I believe water is a commons (by my definition) and until that legal state of affairs exists entering into binding legal contracts for supply to private owners (including iwi) is dangerous and could end in near total private ownership of water in NZ.

In my argument I classify royalty schemes as such contracts, so not a big fan.

Not against commercial users paying to some degree, but very wary of those payments just driving up the cost of living for everyone. The desire to make commercial users pay might be outweighed by the common need for cheap clean water.

It has been looked at legally via a number of Treaty settlements already. See the paper attached earlier. And since then, there have been further similar settlements (Lake Taupo, Whanganui River are two that come to mind).

History will decide if such settlements were wise and not the cart ahead of the horse.

An ill-thought our policy by a political party during election time! Who would have thought?

Jacinda is a natural leader, what an amazing speech on water today! she has guts and is willing to take the bull by the horns - the bull being the dairy industry

and the entire farming/horticultural industry; i.e. anywhere outside Auckland

Dairy accounts for approximately 50% of irrigation water used.

Businesses will simply pass the cost onto the consumer which is exactly what should happen.
This water tax will be paid by the consumer at the supermarket checkout.

Time to go off grid and install water tanks?

Of course only the rich can do that, so I guess the poor will end up paying. Again.

That would be stealing.

I guess my diabolical plan to install a vast funnel out beyond my fence line stretching over the neighbours will be out too.

Yeah right because consumers pay a cost based price. Consumers pay whatever much they can afford independently on the manufacturing cost.

this water policy was born DEAD in the Water ...and indeed , it is another TAX that cannot escape the trained eyes of the public no matter how much spin Alex Tarrant and others would put on it ... A blunder and ill cooked policy is just that - a Blunder!!....

I suggest that Ms Ardern takes leave for 3 years, get her head around these important policies and do some serious homework , come back in 3 years with a good plan and fresh horses!- maybe she could then combine the effect of positive charm and intelligent workable plan for the country , she might even govern alone then !!

What is wrong with another tax? Are you suggesting the taxes we have at the moment are perfect and the government shouldn't consider changing who pays tax? Taxing people for going to work is the best tax possible, and taxing pollution and natural resource usage is a blunder?

lol, the blunder is introducing another tax that is next to impossible to administer - saying that taxing pollution and Natural resources is a very naive statement Mr. Jones !!

The blunder is: Labour has put out this water policy so we can at least have a debate and they wont do anything before sitting to the round table with everyone involved and sort it out then on how they are going to implement it --- Jesus !!! what do you call that, an achievement? ---- Has NZ become a training field for amature experiments???

It is all pointing toward an Inexperienced Team that (for the time being) is proving that they are still in Damage Control Mode dishing out one ill studied policy after another ... obviously just to Counter what the opposition is putting out there - lol, without even knowing what they can or can't afford !! but that is the easy part , if they can't just tax the hell out of the people - that is the Blunder Mr. Jones

The blunder is: Labour has put out this water policy so we can at least have a debate and they wont do anything before sitting to the round table with everyone involved and sort it out then on how they are going to implement it --- Jesus !!! what do you call that, an achievement? ---- Has NZ become a training field for amature experiments???

Sounds like you're describing National's approach to immigration changes. Put the first draft out there to prompt discussion.

The problem is, if left to National this will likely take nine years of inaction followed by a working group to meet and return some thoughts in another year's time.

lol, yeah .. whatever Rick!

It is about fairly distributing tax. It should be done so lowest income people proportionally pay the same amount as high income people. But that isn't generally the case, and this sort of policy won't help if it creates more costs in producing food.

What's wrong with another tax. My god you must be rolling up the Labour manifesto and smoking it. Given any further opportunity this lot will tax NZ to a standstill, that's all they know. They don't need to be invited or encouraged, they would make KIng John look like a coin collector.

Tax payers are the fabled money tree, so of course she will increase tax. GST and stupid property speculation driven rent is already taxing the poor past what they can afford (que working for families rent subsidies), so it can only come from those earning more money. Personally Id suggest taxing non citizens operating here utilising profit shifting (Google, Apple, Alibaba, Microsoft etc), and those leveraging gain of domestic assets (Overseas owned water bottling, overseas property flippers/speculator, overseas empty house tax etc) as the easiest option because their votes do not count in NZ, but that's her call.

Current Government doing little to protect the averageman taxpayer in this country. If you want an greater appreciation of how Maori must have felt getting swarmed by Europeans, try living in central Auckland for a while. Its not how were changing, its how quickly were doing it.

Agree it's a little bizarre that so much load is being made the burden of everyday working taxpayers, while many are making hundreds of thousands in untaxed income (calling it "accidental capital gains"), and those rich enough are hiding the income from the tax man.

It's certainly time that those getting a relatively free ride start to contribute rather than everything being foisted upon everyday wage-making employees.

I suggest to you:

1. You haven't actually defined what you mean by the "rich" but, the top tax payers in NZ already pay the majority of tax in this country.

2. There is no way to "hide" tax from the NZ tax department inside NZ; or almost anywhere throughout the OECD.

3. There is no legal way to avoid paying taxation in NZ, regardless of how "rich" you are. Every "tax scheme" I have ever seen is in fact a way to defer tax. The days of running secret credit card out of the Caymans is long gone and was illegal even back in the day.

'Hiding' and CG aside, the real issue is the number of our loss making businesses - for example, Treasury a few years ago explained that nearly 2/3rds of all residential property businesses pay no tax (i.e., they recorded losses). Not sure what the percentage is for agricultural businesses, but I suspect there is a lot of loss-making in that sector as well.

Okay, but that is only the property sector and I think the debate of capital gains tax is alive (which I am in favour of, except for the family home because I believe people should have a basic right to housing without encumbrance).

No trading/farming business that can't get capital gains can survive making losses. In the end they simply go bankrupt. Doesn't that just illustrate how hard starting a successful business is?

1. I've never targeted the generic "rich", and by reference have actually been fairly careful to steer clear of high income with PAYE, who indeed do contribute a good share.

2. I never said hide tax, I said hide (or disguise, or artificially reduce) income. Tax avoidance is legal and certainly used. Kate has often commented on here to this point, with a lawyer suggesting she do the same because "everyone's doing it". Indeed, we're only having the discussion of how to address corporate avoidance because of transfer pricing and other such measures to do just this.

3. To my other point - we're still allowing highly favourable treatment of income gained through property investment because "Whoopsie, capital gains accidentally! I totally didn't mean to do that."

That stats tell a story too:

The amount of benefit fraud uncovered dropped from $41 million in 2013-14 to $24m by 2015-16. In that same period, MSD spent $49.5m investigating benefit fraud and overpayments.

By comparison, Inland Revenue (IRD) uncovered $1.2 billion in tax "discrepancies" in that period, recovering $349.1m from tax non-compliance, and $13.7m from fraud.

http://www.stuff.co.nz/dominion-post/news/88924330/Benefit-fraud-v-tax-a...

So, from a use of taxpayer dollars point of view - for every dollar we spend on investigating welfare discrepancies, we get $0.09, and for tax fraud, we get $6.07. Clear to me where the emphasis needs to be.

There seem to be some very basic misunderstanding here.

In the context of taxation, "income" is a word that has very specific meaning as defined by the tax department; as to what is and what is not taxable income.

If the tax department declare a capital gain to be not taxable - then ipso facto it cannot be taxable income (for tax purposes). The idea there are 'untaxed incomes' becomes a nonsense statement (for tax purposes).

The conclusion that capital gain is a hidden income for tax purposes is not supportable because the tax depart declared the gain was not income to begin with.

Accusations of 'free rides' levelled against legally abiding people is inappropriate.

Your accusations would be levelled against governments who set up such definitions for taxable income and not against those paying their tax.

I would also suggest the idea you can "hide" income is a very short term goal that will not survive any tax audit. People can break the law if they choose, that's why we (the community) need to fund a tax compliance team.

I agree the debate has to continue as to when a capital gain should be taxed.

Let's remove the word income then - and be careful not to mix points together.

I worry you're laying back on technicalities or discussions of what is acknowledged current policy, and by consequence perhaps missing what is a philosophical point that some gains in wealth are being taxed heavily while others are being taxed very lightly or not at all, and that this is something we should consider rebalancing.

There's no reason we should be privileging one source of gain in wealth while harshly penalising another - and it's especially unfortunate when the ones we choose to tax heavily are those that affect most the ones at the bottom of the heap. (Those who lack the ability to generate money in the untaxed way.)

The quite separate point to this was that those in this situation also lack the ability to avoid tax in technically legal ways that are available to those with more resources. Ye olde tax avoidance, not tax evasion - the distinction being a well-discussed topic. Mea culpa on the fact I should've worded things better...Use your words, Rick, use your words!

I get you are not a fan of no capital gains tax on property, neither am I. I agree with most of what I hear Gareth Morgan say describing the downside of the policy, although not all his solutions.

I can be pedantic sometimes, but if we don't define phrases correctly we end up talking at cross purposes and therefore ineffectively.

On your point about transfer pricing I will add this. In the computer industry (of which I am a part) multinationals setup their tax with the knowing and agreement of tax departments worldwide. Of course, they did not do it for your or my specific benefit but this debate is not one sided.

1. If they designed and manufactured the product elsewhere why should they pay the majority of tax in NZ? They should pay the GST and PAYE associated with their local company for sure (but they do that).

2. Every country would like the multinational to declare the majority of profit in their particular tax jurisdiction, the issue in its current form is insoluble. So we get to the silliness where the Irish tax authority is defending its arrangements with Apple against the European authority, of which it is a member. All because Apple built their business according to the rulings of the various tax departments - who made those rules.

There is no point lambasting multinationals. Tax authorities should lambast each other and sort out a workable arrangement before pretending this was all caused by greedy multinationals.

Agree, and they are working on that right now. So - in agreement with the point I was making, looking at ways to address what is a fair share for different participants in societies, each generating their wealth.

It takes 1000 litres of water to produce 1 litre of milk and 2000 Litres if its a canterbury dairy farm.....it takes only a small fraction of this water to grow crops/ veges instead of growing grass for dairy farming, and so much more for irrigated dairy farms that should never have been set up in the first place. They are going to pay the price for their unsustainable ways

link?

http://www.vegans.co.nz/vegan-blog/1000-litres-of-water-to-make-1-litre-...

On a non irrigated Waikato farm we budgeted for around 115,000 litres of water per day in the height of summer.

~100 litres per cow (650cows) at the trough, and 25,000l for plant and shed wash each milking. Feedpad was on grey water.

These were big girls producing 25 litres at peak per day.

115,000 l water / 15,000 l milk = 7.6 : 1

Water conversion to milk is an interesting one. I have a minor itch that the figures assume that as soon as the water enters the animal/shed it is all "gone" when arguably some of it returns to the water cycle.

"A dairy cow typically excretes 25 litres of urine per day from 8-12 urinations" Dairy NZ Factfarm

So your at the trough figures of 100 litres per cow could arguably subtract 25 litres as going back into the water cycle for a net use of 75 litres per cow?

Changes your figures to 73,750 lt water / 15,000 lt milk = /115000 = 4.9 : 1 and this is ignoring whether the shed used water also ends up back in the water cycle either through application to land or evaporation...

Then the milk gets consumed by people in a liquid form including its water content which is likewise excreted in urine back to the water cycle.

"Each day, your water intake is about 2000-3000 mL (2-3 liters). You take in about 1200 mL from fluids, 1000 mL from solid food, and 300 mL from oxidation (metabolism).

Your daily output is also about 2000-3000 (as long as you are healthy and do not have a fluid/electrolyte imbalance). That output is about 900 mL from insensible water loss from your skin (perspiration) and lungs (breathing out air). The output is also about 100 mL in feces, and about 1500 mL of urine."

So roughly 50% of your fluid intake is excreted as fluid again back into the water cycle. Some 50% of that 1 litre of milk consumed goes back out again into the water cycle?

Be interested in someone with better skills discrediting, critiquing or developing this fully further. Note I am not putting forward an opinion about the quality or otherwise of the by-products of the water use and its effects - simply the volume of water "used" vs the returned to the water cycle.

Looks like Ardern has abandoned hope of winning over regional and rural NZ, given this policy to whack farmers with a water tax. People in towns that have been economically revived because of irrigation, will be keenly aware this move will directly impact on them.

I have long reckoned this could have been better handled by introducing a plastic bottle tax, because I have come to believe that is a larger issue than water extraction itself. Maybe up the cost of retaining the right to suck it out, put a limit on it from any one place, and make any water extraction for bottling as is joint venture only for foreign companies. Even the water from Tuning Forks Creek piped out to a boat could be covered by this by simply assuming that water will end up in plastic bottles, whether it does or not. That way the almost instinctive discomfort at the idea that foreigners can just waltz in, buy up a bit of land and extract water in huge amounts, especially when NZers are now facing, no matter where you are, the prospect of all public water supplies being treated.

Shame Alex did not interview Winston Peters on this subject. Imitation in this case is a fail from Labour. NZ First have had their water policy out for over 12 months and effectively targets any bottled water for export paying a levy/royalty and 25% of that royalty would go back to the region where the water came from. Economics of this is clear in his policy statement and not an attack on farmers as Labour are planning. In response to another poster saying that Maori do not own water, others may be interested in reading an article on www.nzcpr.com - Our foreshore and seabed now massively at risk from tribal claims. Over 500. This is massive and not getting a public airing and yet will affect every person in NZ if successful. Details in the article.

That we are not getting anything for the water pumped out of the ground and sold oversees or used for irrigation is a great lie!! and is totally misleading.
Say company A sells a lot of water oversees, at the end of the year they make a healthy profit of 10 Mill.
The company pays 30% tax = 3 Mill which the Gov. receives from that water. But that's not all. The company pays wages, also from money coming in from oversees, the workers pay tax on there wages, the Bottle makers get paid also with the same overseas earned money and so on! A great spin off for NZ
Basically the same is with irrigation on farms. Lots of payback !!
There is a lot of water and I mean a lot in NZ and the beauty of it is, it renews itself constantly. Not like oil!
You can leave it in the ground and it runs at the end into the sea, because of more taxes.
Is Labour just too jealous and too naive??