Water Enhancement Projects
Current Developments
- There is currently some 500,000 hectares of land under irrigation in New Zealand of which some 165,000 ha is under communal irrigation schemes that range in size from 500 – 30,000 hectares. A further 300-400,000 hectares of land is currently under consideration for communal schemes by some 10 interest groups located from Otago in the south to the Wairarapa in the north, and additional schemes are being formulated. This indicates the very high level of interest in communal irrigation development, an interest that is likely to escalate because of the commercial pressures on farming businesses.
- All of these potential schemes have wide-ranging ramifications – for the farming communities which are promoting them; for the communities within and adjacent to the areas where these developments are proposed; for the resource use mix and environment in the local areas; and for the institutions which are involved in planning and regulating the development process. Once approved and implemented, the concomitant changes are largely irreversible, and have the potential to generate significant social and environmental impacts. The major challenge faced is to be able to make informed decisions with adequate knowledge of options and likely outcomes at each stage of the development process.
- Large-scale water enhancement projects have certain characteristics that differentiate them from other investment projects. They are generally initiated by a community of interest, require heavy up-front capital expenditure, have minimal salvage value, have a long-term economic life, commonly supply a single commodity (or, at best, 3-4 commodities2) to a restricted market, and require access to private land in multiple ownership for water transfer and storage. A recent study of water resources in Canterbury argued that storage will be an essential element in meeting future water demands3. There are often significant cultural and environmental issues associated with the proposals, with a large number of stakeholder groups ranging from the local protagonists to central government. If developed, the projects act as a catalyst for significant land use change as well as changes in land ownership. The complex nature of the projects and the large number of stakeholder groups with associated economic, social, cultural and environmental agendas makes the development process relatively complex and time consuming. Typically, the development phase takes 5 to 10 years before water is available, and the intensification of land use that then becomes possible with the availability of the irrigation water may take a further 10 years or more before the full potential of the project is realised.
The Development Process
- The development pathway for a typical water enhancement project can be subdivided into six clusters of activities: Stage 1 - proposal genesis and initial planning; Stage 2 - pre-feasibility and feasibility investigations; Stage 3 - resource consent; Stage 4 - marketing, pre-sale and implementation funding; Stage 5 - final design and construction; and Stage 6 - operation and maintenance. Each stage provides for a different role and function for the various stakeholder groups, and the funding requirements and associated risk profiles vary depending on the stage of the process – for example, although the funding requirements for the initial stages are low relative to the capital requirements during the implementation phase, the risks associated with that funding are high because of the uncertainty as to whether the development will proceed or not.
- Historically, the method of procuring large scale water enhancement projects through the public sector was the Design and Construct (D&C) model, with the government being closely involved with all stages of the process including providing the finance. However, new variants in implementation modality now include Public Private Partnerships (PPP), and an array of funding arrangements4 including business finance, project finance, or Build, Own Operate (BOO) variants5. While there are no examples of PPP in the New Zealand irrigation sector6, it is likely that once this modality has been tried and tested in other large-scale infrastructure projects (such as roading), and the appropriate policy and legislative background put in place, that water enhancement projects could also follow this path.7
- The stakeholder groups involved in the various stages of the process will vary – initially, in the first stage it will involve mostly local farmers and sector interest groups, with local government becoming involved in Stage 2. Central government may become indirectly involved – for example, funding support was available from 1999 via the Contestable Water Studies Fund established by Agmardt and central government, but this has been replaced by the Sustainable Farming Fund, administered by MAF. Stage 3, the resource consent process, will inevitably involve participation from a large number of stakeholders, reflective of all the interest groups potentially affected by the proposal. Once the appropriate consents are obtained, then the significant funding requirements mean that both equity and debt capital providers become heavily involved, together with those enterprises involved with finalising scheme designs and subsequent construction/commissioning (Stage 5).
- The resource consent process presents formidable hurdles for large-scale water enhancement projects because of the scale of the development, the diversity of interest groups potentially affected, and the high transaction costs involved with the Resource Management Act. These costs can be considerable (involving experts in a number of areas, legal counsel etc.), and there is considerable difficulty in attracting external finance to support this stage since the perceived risks from the outside investor’s point of view are high. This means that the costs up to and including the resource consent stage need to be largely borne by the proponents of the water enhancement project (with possible assistance from local government and special purpose funds such as the SFF8) with alternative outside funding sources supporting the development once the resource consent is approved (since the overall project risks are then perceived to be significantly reduced).
- In addition, the fact that Regional Councils have little experience in dealing with complex water management and allocation issues compounds the complexity of the problem, in that commonly there is an inadequate information base on the water resource – its characteristics, yield, variability, interdependence between surface and groundwater resources etc. – and often scheme proponents have to bear the costs of generating this information. Since this information often has public good benefits, contributions to funding by both local and central government can be justified, but it is likely that scheme proponents will still bear significant costs.
- In general, where large-scale water enhancement projects can be designed for multiple uses, benefiting a number of various stakeholders – then the costs of the development process can be more widely spread and the project itself is likely to have wider support. They may also generate considerable opposition from disaffected parties - for a characteristic of the large-scale water enhancement projects currently under investigation, is that they require access to significant proportions of the water resources on a regional basis. They therefore are of national importance, and need to be considered within a long-term strategic planning framework.
Social and Economic Impacts
- Large-scale water enhancement projects have the potential to generate significant social and economic impacts. From irrigator and financier perspectives, it is the financial return on the investment and the associated risk that are the key issues. From the viewpoint of the local community, and of local government, issues of impacts on output, employment, value-added and the spatial dispersion of these impacts are important in an economic sense. From a social perspective, it is issues such as the probable impacts on population, occupation/employment, income levels, and community services that assume importance. For the debate that will emerge during the development process to be well-informed and factual, information is needed about the probable affect of the proposal on this raft of socio-economic indicators.
- The study into economic and social assessment of community irrigation schemes attempts to address these issues, by firstly identifying a range of assessment parameters that could be applicable and of interest to each group of stakeholders, and then reviewing the method of quantifying probable impacts on each of these relevant parameters. It concludes that the most significant assessment issues are related to: (i) the expected land use change; (ii) the timing of land use and land ownership changes; (iii) the location of "flow-on" impacts9; (iv) the necessity to carefully evaluate changes that will occur directly as a result of irrigation; (v) the need to understand the on-going process of social change in the community as a benchmark for what is likely to happen with the advent of irrigation; (vi) the need for representative farm models to be selected when assessing probable land use changes; and (vii) the need to be forward looking in determining future scenarios of costs and returns.
- This economic and social research then studied land use and social patterns in the area encompassed by the Lower Waitaki Irrigation Scheme and compared what had happened with a comparable "dryland" area in the Rangitata. As for direct economic impacts, the analysis concluded that the overall investment in irrigation had achieved a return of around 14 percent per annum on total capital, increased output in the district by $3.4 million per annum per 1000 ha, and generated a net increase in full-time employment (FTE) of just under 13 persons per 1000 ha. Population in the area has increased by about 16 percent due to irrigation, household incomes have risen, and the scale of enterprise in the area has also increased (compared to Rangitata). While these results cannot be extrapolated to other areas, they indicate the likely social indicators that will be affected by irrigation development. However, it should be emphasised that whether social impacts such as these are viewed as beneficial or not depends on the various stakeholder groups in the community, and often there are widely divergent opinions from different sector groups on this issue.
2 Irrigation water, stock/domestic water, electricity, and/or flood mitigation
3 See Lincoln Environmental 2002 Canterbury Strategic Water Study, prepared for Environment Canterbury, MAF and MfE. MAF Technical Paper 2002/06.
4 See Deloitte Touche Tohmatsu 2001 Financial Structures for Community Owned Irrigation Schemes. A report prepared for several irrigation groups, funded by the Ministry of Economic Development and managed by the Central Plains Water (Canterbury).
5 Including Build Own Operate Transfer (BOOT), and Build Operate Transfer (BOT).
6 Kaipara District Council is in the process of undertaking one of the first BOOT projects in New Zealand to fund a wastewater treatment station – see Deloitte Touche Tohmatsu 2002a Review of Equity Investment Options p. 25. Interest in PPP is growing, particularly with respect to development of roading infrastructure in Auckland.
7 For further background on PPP, refer to the proceedings of a conference held in Auckland in August 2002 – a copy of these papers is available from MAF Policy.
8 The Contestable Water Studies Fund and SFF have been used for initial surveys to identify key environmental and social issues, but have not been available to provide financial support to the RMA consent process itself.
9 The localities that will experience the majority of the "off-farm" impacts.
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