The Role of Central Government
- Central Government plays a pivotal role in the framework under which large-scale water enhancement projects are initiated and implemented – specifically relating to the legislative and regulatory umbrella which puts bounds on individual and corporate activity, as well as the policy framework which guides central government action. It could also have a direct interventionist role in cases where there are instances of "market failure".
- In the water enhancement area, there are two main legislative areas that impinge on developmental activities. The Resource Management Act 1991 (RMA) controls resource consents for the take and use of water for periods of up to 35 years, but the legislation includes wide-ranging powers to Regional Councils to review consents at any time, and alter or revise consent conditions. These powers clearly introduce a large element of uncertainty to the projected financial viability of schemes that rely on water access and, in particular, adversely impinge on proposals that are subject to Project finance, or BOOT/ PPP structured investments. In the light of this, central government may need to consider additional legislative protection for investors in a scheme where existing consent conditions have been met, but where Regional Council reviews within the original consent term adversely impact on water access.
- The Electricity Industry Reform Act 1998 (EIRA) prevents electricity lines companies from significant investment in water enhancement schemes with hydro-generation capacity, and this may restrict investment in those schemes which have multiple-use capability. Government could therefore consider providing dispensations for investment from those entities that do not have power generation as their primary income source. Similarly, tax depreciation rates for water enhancement investments are relatively conservative when compared with other developed economies, and accelerated depreciation write-offs may encourage multi-nationals to more actively consider investment in New Zealand.
- A recent study concluded that there is no strong evidence of market failure that justifies significant central government involvement in the development process. Where there are information gaps, there is a role for central government to undertake/fund appropriate studies to develop the information base, and/or disseminate information so that informed decisions can be made. Examples of this include the application of take or pay supply agreements and the application of the BOOT funding and PPP models to water enhancement projects26.
- In some individual cases, there may be justification for a greater role for central government in providing financial assistance to the feasibility studies that are necessary background, as well as the resource consent process itself. This consent process, including the assessment and possible modelling of effects and stakeholder consultation, is a high-risk activity that proponent groups have had difficulty funding, but they do generate public good information. This work, previously carried out by catchment boards, now falls on scheme promoters if they want to progress their proposal. Current central government grant programmes27 have excluded supporting this activity but there may be justification for central government to part-fund this activity if the relevant local authorities are unable to do so due to financial constraints. However, it can be argued that this should only occur where these funds can be converted to debt or equity once the scheme proceeds, and with an appropriate conversion ratio that recognises the investment risks involved with such seed financing. Central government underwriting of shares should only occur when there is an appropriate exit strategy in place28 and the shares are openly tradeable. Finally, in cases where there are demonstrated net environmental benefits generated by the development project, there may be a case for a direct government grant in recognition of these public goods.
26 For example, there has been little research on the development and application of take or pay supply agreements in the context of large-scale irrigation developments. Investigation of how best these agreements would be formulated, and the advantages and disadvantages of differing formulations, would be useful.
27 For example, the Sustainable Farming Fund.
28 Such an exit strategy may incorporate defined repayment terms, or subject to a number of key performance indicators being met, a private sector party agrees to take the investment over from the Council within a defined period - see also para 29.
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