1. Key Findings

Outlined below are the key findings of this study. Unless expressly stated the term "Council" refers to Regional, District and City councils.

1.1 Funding and Evaluation Criteria

Council must manage finite economic development funding across competing demands for core and non-core project support from the community and region.

Councils do not have a formal evaluation and prioritisation criteria when deciding whether to invest time or resources into a project. Projects are reviewed on a case-by-case basis.

Each individual Council, through the adoption of a funding policy, determines its own funding capacity. There is no consistency of funding policies between Councils.

Tangible benefits of irrigation are not fully understood by Councils so it is difficult to compare these to other project initiatives.

Projects with Council champions (Council staff or Councillors) driving the process have a greater chance of accessing Council resources and support and a greater likelihood of future success.

Given the lack of consistency between Councils in relation to investment evaluation frameworks, availability of Council champions, and views surrounding acceptance of funding risks, the initial success of a water enhancement project has an element of "chance" depending on the geographic location of the scheme. By way of example, projects may be undertaken in specific areas where there is an active Council promoting the project. Meanwhile, a project in a neighbouring area which has superior project fundamentals will not proceed because of the inactivity of the Council in that area. It is the role of Government (Central and Councils) to remove this element of chance and ensure that success is based on the most productive use of natural resources regardless of the preferences of the regional governing body(s).

1.2 Council Justification

The common policy objectives and strategic directions from Councils in water enhancement "hot spots" relates primarily to economic, social and environmental benefits driven from employment enhancement and population growth.

Many competing projects have the ability to provide Council with employment and population growth/stabilisation. Projects that can demonstrate the most efficient provision of these benefits will attract most Council attention.

Local government intervention into water enhancement developments is justified where the following three requirements can been met:
- the development will bring significant social and economic benefits to the community/region (Study 5 is expected to quantify the levels of social benefits from water enhancement developments);
- there is an adequate economic return on the investment for Council;
- The project is unlikely to proceed without Council intervention and therefore the benefits it brings will be lost to the region, i.e. the uncertainty surrounding the projects long term success is difficult to determine in the early stages and, without intervention from Council, the private sector would be unlikely to progress the project in isolation.

In a report issued by the Controller and Auditor-General on "Good Practice for Involvement in a Major Project", three key messages were identified for Councils lending money or making equity investments:
- ensure the investment is in line with policy objectives and long term strategy;
- complete adequate risk assessments and risk management strategies;
- ensure the investment generates an adequate rate of return.

1.3 Constraints

There are no significant legislative constraints preventing Councils from undertaking an investment role for a water enhancement scheme. There are, however, certain powers that Territorial Authorities have in respect to water schemes set out in Part XXV of the Local Government Act. It is outside the ambit of this report. The proposed Local Government Bill also extends the powers of Territorial Authorities and the implications of this are outlined in Section 4.2 of this report and further detailed in Appendix 3 to this report.

Financial constraints however are significant for Councils. The scale of the investment required is such that Councils often do not have the ability to raise the funds to support a water enhancement scheme, or if they could raise the funds, this would significantly impact on their ability to invest in other community/regional projects.

Internal financial constraints may be overcome if Councils were able to fund schemes outside of the requirements of their stated funding policy on the basis that the funding is for a specific purpose and that there is a designated revenue stream (also excluded from the funding policy) to meet the funding requirements (effectively off balance sheet financing). For this to be acceptable the revenue streams would need to be very secure to ensure that general ratepayers were protected against any credit risk.

District Councils with smaller rating bases should consider partnering with City Councils to assist with scheme funding provided that there is proof of flow-on benefits for the City business community and general population.

Current Council attitudes will provide a constraint given that they are generally not in favour of committing long-term funds to water enhancement developments. They see Councils role being a facilitator therefore allowing them to provide lower levels of assistance to many competing projects.

1.4 Role of Local Government

The role of Council in supporting water enhancement schemes is likely to be different for each scheme within each region based on the following variables:
- The community/regional economic and social benefits provided by the individual development (how these compare to competing projects).
- The level of funding and support provided to the scheme by private sector investment, and the additional funding required.
- The financial capability of Council to provide support given competing projects.
- The expected return on Council investment.
- Economic return that can be generated from the land in the region.

There is a clear role for Council in championing and facilitating water enhancement development within the region. This support should include:
- Provision of funding for initial feasibility studies (this should be repayable or convertible into equity if the project is eventually implemented).
- General project facilitation, including provision of information, education/training, opening project to Council networks and bringing potential stakeholders together.
- Assisting with community/regional consultation, education and awareness of water enhancement schemes in relation to the Resource Management Act in an effort to improve the speed and certainty of the application result.
- Conducting a study to determining the benefits (economic and social) expected to be derived from the scheme to provide the basis for determining the level of additional project support (if any).
A concurrent study by the author¹ concluded that the most appropriate funding option for a water enhancement development was "project finance". Therefore, the most appropriate role for Council is to assist a scheme to meet the "project finance" requirements. This can be achieved through one or a combination of the following roles:
- Underwriting scheme revenue capacity
  The risks associated with this role need to be managed carefully. This role is only appropriate where a scheme development cannot be staged to meet market demand. Agreeing a formal exit strategy is critical for this role.
- Partial funding provider
  The most appropriate form of Council funding is the provision of hybrid equity (subordinated loans, redeemable preference shares, or convertible notes). This strengthens the equity position of the scheme but allows Council to generate a fixed return with a clear exit strategy. Council funding should be provided on a short-term basis and transferred to a private party when key risks have been ameliorated.
- Providing financial guarantees for secondary security (if required)
  Financial guarantees are appropriate where secondary security is required from private investors. Guarantees are likely to be required over the initial start up phase (i.e. the first 5 years of operation).

Prior to providing assistance to a scheme, exit strategies must be considered and formalised by Council. It is Councils role to realise the Community benefits provided by the scheme. As these benefits will have been achieved when the scheme has been developed and is operational, Council should look to the private sector to takeover and manage the investment for the long term.

1 Gamble 2002a Review of equity funding options Technical Paper 2002/10; MAF, Wellington.

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