Commercial development and natural resource management on the indigenous estate: a profit-related investment proposal

Economic Papers (Economic Society of Australia), Sept, 2005 by Jon Altman, Michael Dillon

This article assesses the state of commercial development and resource management on Indigenous land in remote Australia. Indigenous landowners control significant assets--over one million square kilometres of land--often with substantial resource rights and income earning potential. The inactivity and missed opportunities on the Indigenous estate are of such magnitude as to represent a major risk both for Indigenous landowning communities, in terms of their future economic and social well-being, and for national and international interests in terms of ecological vulnerability. The article explores the role of government as risk manager in such circumstances and outlines the principles that might underpin any intervention program targeted to the commercial development of Indigenous land. Using the analytical framework for profit-related loans and elements of an existing venture capital support programme, the Innovation Investment Fund Program, we outline the hypothetical skeleton of a new investment scheme to assist development and natural resource management on the Indigenous estate. Our proposal can be conceptualised as a profit-related loan scheme or as a form of capped public investment. It seeks to address key elements of the market failure that exists in relation to financing development on remote Indigenous land, provides incentives for greater private sector investment, and ensures that commercial and social risks are shared equitably between government, private sector investors and Indigenous-owned corporations to avoid problems of adverse selection and moral hazard.

Keywords: Indigenous estate, Economic development, Profit-related loans

JEL Codes: R11, O17.

1 Introduction

This article was initially prepared in late 2004 as an ideas piece for an Academy of the Social Sciences in Australia (ASSA) Symposium 'Government as Risk Taker'. We note that there is widespread policy concern about the economic development problems of remote Indigenous communities, most of which are located on Aboriginal-owned land. But there has been limited policy innovation at any level of government to address this problem. We recognise that there is under-investment on the Indigenous estate owing to market failure and seek to provide an argument for intervention. Our proposal marries two policy objectives with elements of two possible policy instruments. The policy objectives are to address under-investment on the Indigenous estate so that Indigenous economic development prospects, and biodiversity conservation and environmental sustainability, can both be addressed. The policy instrument that might address this investment deficit encompass elements of a profit-related investment scheme and an existing venture capital scheme, the Innovation Investment Fund (IIF) Programme currently administered by the Australian government. We call this proposed scheme an Indigenous Profit Related Investment Programme (IPRIP).

The challenge facing public policy makers is to devise policy instruments that address the gap in commercial development and land management on the Indigenous estate in a way that recognises the existence of both market failure and parallel state failure. Such a program must build on the comparative advantage of Indigenous landowners in local economies and ensure they share a proportion of the risks, while overcoming the structural constraints facing landowners in relation to access to finance.

Our original paper has been modified somewhat for this issue of Economic Papers with its focus on economic development issues relating to northern Australia. But it is also timely because it provides an alternative to a very different policy approach to financing development for Indigenous people in remote communities proposed by Hughes and Warin (2005). Hughes and Warin (2005, p. 1) argue that investment to meet one of our objectives, economic development, will flow automatically from an individual property rights land ownership framework. In our view there are structural reasons, including remoteness and small community size, which will impede significantly enhanced investment irrespective of land tenure. Market failure occurs because--despite the likelihood of significant positive social and environmental externalities from investments on the Indigenous estate--low commercial returns in eco-services and other ventures leads to investment under-supply. We believe that an innovative scheme like IPRIP might provide the best policy option to address the twin problems of under-investment in economic development and natural and cultural resource management (NCRM) on the Indigenous estate. Little assessment is provided of how it is likely to perform relative to other alternatives (besides the IIF) because Australian governments appear reluctant to adequately underwrite either Indigenous development, with associated national benefits and costs savings, or NCRM for national and international benefit. It is hoped that our approach that combines two broad objectives in one scheme might attract policy makers' attention.