Listener: 4 August, 2012.

This column has previously advocated making greater use of market mechanisms to allocate the use of water. New Zealand has a comparative abundance of water, but we benefit if it is allotted as efficiently as possible.

Those familiar with the issue acknowledge the argument, but many point out that the “P” and “M” words have made it politically infeasible. People object to privatisation, and there are complex issues of property rights involving Maori. This Government therefore showed considerable chutzpah by tackling both P and M head-on in proposing to partially privatise state-owned enterprises (SOEs) that use water for hydro, thermal cooling and geothermal generation.

At least I think it was political audacity. It would be the most incompetent Government in my lifetime if it had not realised privatisation of SOEs reliant on water would end up at the Waitangi Tribunal, and probably in the courts, in order to sort out Maori property rights.

Economists can’t tell you what entitlements Maori own. That is a matter for the courts and legislation – perhaps following negotiations between the Treaty partners, assisted by the Waitangi Tribunal. In the case of the foreshore and seabed legislation, which involved issues not unlike water rights, such negotiations (as took place) were done badly. What economists can contribute is an understanding of the property rights.

You might think that since water comes mainly from the sky, nobody can own it. Certainly it makes no sense to spend time discussing who owns the rain that has been drenching us recently. But some rain ends up in the lettuces we eat. By then the water is privately owned; it was privatised somewhere along the way. If we can clarify where that happens, we might expect the water could then be used more efficiently.

Ownership rights are very complicated. Suppose you have a picture. You can sell it, you can rent it out, you can lend it without charge, you can charge for its image and so on. There are also many possible rights to water. Even if it ultimately runs to the sea, there are opportunities to use it, many of which may be charged for.

Very often water’s use is regulated by resource consents. Although there is no charge for them, they are valuable (so users spend money to acquire the ones they need). For instance, Mighty River Power – the first state-owned company the Government wants to partially privatise – has consents to generate power using Waikato River water.

Consider what would happen if the consents were revoked. In that unlikely event, Mighty River would have to stop producing hydropower, and its sharemarket value would collapse. So the consents have a value. It follows that a partial privatisation involves selling 49% of those valuable consents to private shareholders.

The Maori position – or at least one Maori position – seems to be that as long as the property rights are held by the community, Maori are happy to leave them there. But as soon as they are privatised they demand their Treaty rights be recognised and they get a share of the proceeds.

This approach is independent of what those (yet to be decided) rights are. Intentionally or otherwise, the Government has opened a Pandora’s box of water rights, which should keep the lawyers busy for a long time.

Following the release of all the troubles, Pandora found Hope at the bottom of the box. An economist might expect to find efficiency gains there, but they are small beside the political and legal issues, if the travails of the foreshore and seabed are any indication. Let us hope that the freshwater dispute will be settled with less misunderstanding, acrimony and political fallout than riddled the last comparable one. Any resolution will involve more than chutzpah.