4. Council Legislation & Regulation Constraints

The key legislation impacting on Council involvement with large-scale infrastructure development is as follows:

4.1 The Local Government Act 1974

This Act is currently under review (see Local Government Bill below). One of the key principles of the Act is that the costs of any expenditure are recovered from the person that accrues the direct benefit. If Council were to incur costs in relation to supporting water enhancement development, then these would need to be recovered from those receiving direct benefit. Determining the direct beneficiaries from a scheme is a difficult issue for Councils. Clearly land users in the irrigation district receive an immediate benefit by way of capital appreciation in land values through additional productivity, however, identifying and quantifying off-farm community benefit is more difficult. Study 5 addresses some of these issues by providing an assessment criteria framework to assist in determining the community socio-economic benefits provide by water enhancement development.

The Act allows Council investment in a range of business structures (companies, trusts, partnerships) provided the investment is for the purpose of performing a Council duty, function or power under the Act. Council functions incorporate community and regional development powers and therefore allow debt and/or equity investment in water enhancement schemes provided these remain within the parameters set by Council investment and funding policies.

Councils are required to set funding and investment policies and then sign certificates of on-going compliance at the end of each financial year. While these policies provide constraints on Council borrowing and investment, the policies are developed by individual Councils and may be altered through Council resolution. As a result, there is no consistency in these policies and parameters between Councils.

The Act allows Council to give financial guarantees to external organisations with the exception of LATEs. This effectively means that Council cannot give a financial guarantee to a company in which it holds 50% or more of the equity or controls a majority of the company. Depending on the legal and funding structures selected this may include a water enhancement development. This is not a significant constraint as Councils are able to circumvent this restriction by issuing uncalled capital to LATEs, and effectively using the "call right" as a guarantee for private debt.

The Act allows Council to use rates as security for borrowings. This is a critical provision given that the new Rating Powers Bill (see below) allows for more specific rating within a region. Council may secure borrowings, for provision of debt or equity to a water enhancement scheme, against the future rate takes from the area of benefit to limit financial exposure.

The Act prevents Councils from borrowing in foreign currency. This is not considered a significant constraint given that overseas lenders were not considered an appropriate source of funding for water enhancement schemes within Study 2 – Equity Funding Options.

4.2 Local Government act 2002

This Act, which comes into force on 1 July 2003, provides more discretion for Council to invest in external business provided the investment enables Council to promote and action the social, economic, environmental and cultural well-being of the community in the present and the future.

All other provisions relevant to water enhancement schemes as discussed above, remain largely unchanged i.e. Council is still required to have a funding and investment policy, rates may still be used as security, LATE guarantees are still excluded as is foreign currency borrowing.

4.3 local government (rating) Act 2002

This Act takes effect on 1 July 2003. The key thrust of the new provisions is to more closely align those receiving the benefits of Council services with the cost of funding that benefit. The Act allows more flexibility for Councils to set targeted rates for service beneficiaries and gives Council the power to levy a rate targeted to users of a water enhancement scheme. This gives Council additional freedom when considering funding options for these schemes.

Firstly this allows Council to secure any funding provided to a scheme (debt, equity, guarantees and underwriting) against future rates of a targeted benefit area. Secondly this allows Council the option of funding and owning the scheme with the ability to rate water users with a targeted rate to recover the cost of debt and administration.

When setting targeted rates, the area of benefit needs to be considered carefully. Water users are clearly the primary beneficiaries of a scheme, however the wider community also benefits, particularly other businesses². An equitable rate would need to address this issue.

The Act provides that different rates can be attached to different categories of property i.e. rateable categories may include:

property within the irrigation district – to recognise benefit to land owners;
commercial property – to recognise benefits to local business;
general property – to recognise general community benefit.

The Waimakariri District Council went through such an exercise when it provided a guarantee for the scheme debt. This guarantee was secured 80% by a special rate over the scheme area and 20% by general rates. This was an estimate used to reflect the wider community benefit from irrigation.

4.4 The Resource Management Act 1991

The RMA does not specifically constrain investment in water enhancement, but does provide a significant hurdle for attracting investment. Private investment (i.e. debt and non-landowner equity) is very difficult to source prior to a scheme receiving resource consent. This is primarily due to the uncertainty surrounding the result of the consent process and the extent of time required completing the process.

The earlier a scheme can secure resource consent in the development process, the sooner private investment will be interested.

The outcome of the consent process can be critically dependent on the consultation undertaken by the promoter. This has been evidenced in the recent granting of water consents for the Barrhill Chertsey scheme following goodwill negotiations and co-operation prior to the consent hearing. Facilitating the consultation process is a key role that Councils can and should play to assist schemes at this phase. Council can assist schemes by removing some of the uncertainty and time delays in the consent process therefore providing a more attractive investment environment for private sector participants.

2 See Ford 2002 Economic and Social Assessment of Community Irrigation Projects Technical Paper 2002/13; MAF, Wellington.

Contact for Enquiries

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PO Box 2526
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