The Role of Local Government
- In most circumstances, there is a critical role for local government in supporting and facilitating the investigation and subsequent development of large-scale water enhancement projects in their area, and in providing partial funding support through the investigation and feasibility phases of the scheme. In particular, this involvement should occur where it can be demonstrated that such schemes will contribute positively to local government objectives (such as expanding the economic and employment base, increasing regional population, improving environmental outcomes, improving the viability of publicly-provided infrastructure etc.), and where it is unlikely that such a scheme will proceed through the planning and development stages without local government involvement, and where the form of local government involvement can be shown to meet council expenditure and/or investment criteria, and where local government has the funds available for distribution given competing budgetary demands.
- The nature of any local government involvement will vary with the stage of the planning process, but will commonly start with assistance in part-funding of the investigation and feasibility studies including an assessment of the community benefits which are likely to arise from the development. Should the scheme proceed, then any local government expenses involved with this initial support22 could be recovered through equity in the new entity, or registered debt.
- In the case where these initial feasibility reports are positive, then local government has an important role to initiate, facilitate and promote the necessary levels of community and stakeholder consultation, and facilitate the "Project" through the subsequent stages in the investigation process. Local government should also support seed funding of initial investigations where these are of public interest. The scope of such investigations might also be to ensure that all options are thoroughly investigated to avoid, if possible, the shutting out of long-term projects that could be in the wider public good. It would seem important, however, that local government does not assume the role of project "champion", which more correctly lies with the actual promoters of the scheme. Rather, while local government can support the proposal (as it would any proposal which generated similar net benefits to the area), it should remain objective and balanced in responding the stakeholder concerns. Local government may also need to mediate between the promoter and other local stakeholders to facilitate the widest community participation and consultation, and to ensure investigations and assessments of effects encompass the wider public interest. It is only at the latter stages of this process that local government needs to consider whether some further financial support may be necessary – in the form of equity23, debt and/or financial guarantees – but this should only be contemplated where all other sources have been approached. In addition, the expected financial return on any investment made by local government is an important factor in its role as custodian of public monies.24
- There is no doubt that some level of local government equity support to the project entity does provide a level of comfort to other equity and debt investors, and such a commitment does make the raising of the necessary capital that much easier. However, whatever form local government involvement may take, it is very important that this involvement is seen as short-medium term, and that there is a clear exit strategy in place (for example, the option to trade shares, take-out clauses, sunset clauses on debt/guarantees, and or conversion clauses).
- In the case of the Waimakariri scheme, the local government opted to guarantee the Bank debt for the initial five years so as to reduce the lender’s risk, an action which has minimal cost to the local government provided the guarantee is not called. Revenue underwriting is also an option25, and will be an important consideration where Project financing or BOOT development scenarios are concerned, but is relatively high risk. In terms of equity involvement by local government, hybrid equity options (such as subordinated loans, redeemable preference shares, or convertible notes), seem to offer particular advantages in that they rank behind senior creditors and debt, and so strengthen the financial position of the entity.
22 Including a return on the funds expended commensurate with the risks involved.
23 There are no significant legislative constraints preventing local government from investing in large-scale water enhancement developments.
24 This was evident in the findings of the Audit Office report into Opuha. However, it should be noted that expected financial returns need to be balanced against expected non-financial returns including wider community, economic and social benefits.
25 Debt underwriting is also theoretically possible, but of limited value.
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