Crafar decision overturned

The Court has now decided that the OIO’s decision was a poor one. I’m no lawyer, but the key point of the decision seems to be that the OIO used the wrong counterfactual in assessing the benefits to New Zealand.

For any cost-benefit analysis, such as the OIO has to conduct, one of the most important elements is the baseline that you assess the projected costs and benefits against. It is called the counterfactual, because it is the situation that you you think will prevail if you don’t do the thing you’re assessing. One of the most basic mistakes in such analyses is to compare future benefits to the current situation, since it is extremely unlikely that the current situation will be unchanged in the future. For example, if Milk NZ doesn’t buy the farms then someone else will at some stage, and they will then do some work and try to turn a profit from the land. Thus, the land won’t remain in its current state if Milk NZ’s purchase is blocked by the government; yet, that is exactly what the OIO assumed would happen!

So it sounds like a good decision by the Court and I’m really surprised that Key has been saying that the test has changed, unless he’s referrring to a different part of the decision. If the OIO is routinely conducting CBAs by comparing the factual to the current state then its hard to have much confidence in their assessments. Hopefully that is not the case and this was merely an oversight. Either way, this isn’t a decision against Milk NZ and Pengxin: it reflects poorly only on the OIO’s work and probably won’t change the final outcome.

Update: Bill Kaye-Blake thinks about it a little more generally.

  • swan

    But shouldn’t the OIO consider what the hypothetical NZ buyer would do in the factual as well as the counterfactual? 

    Presumably an unsuccessful NZ buyer with capital is far more likely to invest that capital in NZ in another investment rather than a prospective Chinese investor.  So foriegn investment, even if it does exactly the same thing as an NZ investor would, will likely lead to an increase in aggregate investment in NZ.  Or am I missing something?

  • Both factual and counterfactual scenarios should include any relevant effects.

    I don’t have personal experience with this type of CBA so I can’t say for sure whether the investment by an unsuccessful NZ bidder should be included. It is arguable that home bias effects could cause Fay to be more likely to invest in NZ, but that may depend upon the allegiances of his consortium and who is financing it, too. Even if the home bias caused some of the money available for this bid to be invested elsewhere in NZ, it may then drive out other investment, rather than being truly additional. It’s not as though NZ has a problem accessing international capital markets so it’s also dubious whether the investment would cause a welfare increase, even if it was additional.

    Overall, I’d say it’s probably not going to be an effect that would change the ranking of options in a CBA; although, at this point, I’m completely making things up 😉