Governance, Funding, Planning, Design and Socio-Economic Impacts of Large Scale Irrigation Schemes

Terry Heiler. Heiler and Associates Ltd., Christchurch

"...(DO WE) ATTEMPT TO CAST REALITY INTO THE MOULD OF POLICY OR DO WE DO THE OPPOSITE....POLICY MUST ACCOMMODATE REALITY." 1

A. Putting the Discussion in Context

Water Enhancement projects for large-scale irrigation development in NZ are investment opportunities of national significance, and deserve serious consideration.

The contribution of the current suite of new irrigation proposals to GDP is estimated to be in the order of $2,000 million under conservative land use and market assumptions.2

This represents an annual increase on 1.6 percent in GDP, most of which is in the form of export income.

Long term, international studies predict a world food shortage as populations increase and land and water resources reach limits of development - demand for high quality food exports will inevitably increase.

NZ is as well-placed to adopt modern, efficient and sustainable irrigated agriculture as any nation. NZ has natural advantages of climate, soils, drainage and water resources. The NZ skill base in the agricultural operations of high-tech farming is internationally proven.

Many leaders from the agricultural sector argue that a strong part of a national development strategy should be to build on what NZ does well - produce market-acceptable export agricultural products -- as well as pursue the new knowledge agendas. Proactive development of irrigated agriculture may be a one key component for realizing new agricultural export opportunities, and it has strong user support.

This discussion reviews the reality of current proposals for increasing the area of irrigated agriculture in NZ, and the issues that have emerged as various interest groups throughout the country have tackled the problems of getting these proposals to a stage where they can be objectively assessed. The review suggests that a more supportive policy environment may be required.

B. What Defines Large Scale Water Enhancement Projects

  • initiated by a community of interest to meet objectives unrealizable by individual initiatives
  • located in areas where water enhancement is required and designed to improve the availability of water for a variety of purposes
  • in the NZ context at the present time, the consumptive water use will be dominated by interest in new irrigation development from the enhanced availability of surface or groundwater resources
  • associated objectives may include improvement in long term security of water supplies for urban communities, and will all be aimed at improvement in natural environmental flows where these are sub-optimal and in exploiting environmental enhancement opportunities
  • there are often significant cultural issues involved that require understanding and resolution
  • the projects will normally involve substantial infrastructure development requiring investments beyond the capacity of the community members to finance without access to third party debt or equity capital
  • the project scale will be such as to be of interest to a range of stakeholders outside of the proponent communities, including local and central Government, environmental interests at the local and national levels, and to the local economic communities affected

C. What is the Current Level of Interest in These Projects

  • at the present time in NZ there are some 10 individual proposals of substance for large scale water developments under investigation at various stages. These are located in areas from Otago in the south to Wairarapa in the north..
  • the total area of irrigable land involved totals about 300-400,000 ha, which can be compared with the currently irrigated area of 500,000 ha. The largest single proposal involves an area in excess of 80,000 ha.
  • the capital requirements involved in the off-farm infrastructure provision is in excess of $2,000 million
  • associated investments for on-farm developments are estimated to be some $1,500 million
  • the investigations to date of these proposals have involved costs of about $6 million, with about $2 million coming from the pockets of the proponents and the balance $4million from other funding support facilities - local and central government facilities.
  • The results of economic and financial studies of these projects have shown the investments to be positive, so long as the funding needed can be arranged satisfactorily.
  • the high level of interest from the farming community and the advanced stage reached in developing the current suite of proposals, plus the number of additional proposals in the pipeline, shows clearly that the issues involved need to be addressed - the reality is that the current interest in unlikely to disappear.

D. What Are the Particular Issues Involved In These Development Options That Make Them Different?

  • Large scale water enhancement projects possess the following characteristics:
    • they require significant up-front capital investments
    • they are long-term - with appropriate maintenance, they will operate successfully over periods that cover a number of generations of the communities they service
    • they have a restricted direct-user market
    • they generally supply a single service - water enhancement
    • they are a catalyst for significant land use and social changes
    • they require access to private land for associated infrastructure
  • The Resource Consent Process presents formidable hurdles for water enhancement projects, because of the scale of the developments. There is recent experience that suggests that the securing resource consents to USE water will become a bigger issue than a resource consent to TAKE in dealing with water enhancement projects. Regional Councils have little experience in dealing with developments that relate to large areas of irrigated land.
  • There is a major challenge in dealing with the large number of potential water users and to find the resources to undertake awareness raising and education to ensure that informed decisions can be made - especially as these decisions are likely to involve substantial changes in business operations and life-style.

E. Development Pathways for Water Enhancement Projects

The remainder of the presentation outlines the ways in which a typical water enhancement development proposal might develop. This allows the identification of some of the key issues that need to be addressed at each stage of the development.

Experience to date shows that it is important to avoid or minimize the potential problems that will be encountered. The lessons learned are based on actual experiences and need to be discussed so that these proposals can proceed to decision points with minimum time and costs.

The detailed list of tasks involved during the development pathway could be regarded as a preliminary checklist for project developers.

From this analysis, a number of common issues have been identified that have impacted on all of the proposals. Some of these issues have been studied in depth with the support of MAF. The main part of this presentation is highlight these issues and the responses that have come out of the MAF-supported investigations. These will provide the basis for later discussion in this session.

For the purpose of discussion, the development pathway for a typical water enhancement proposal can been divided into 6 main clusters of activities, as follows.

  1. Proposal Genesis and Initial Planning
  2. Pre-Feasibility and Feasibility
  3. Resource Consents
  4. Marketing, Pre-Sale and Implementation Funding
  5. Final Design and Construction of Main Infrastructure
  6. Operation and Maintenance

The separation of task clusters given above ignores the need to identify some tasks in the early stages that will require action throughout later stages. In other words, the process is not linear - there is a good deal of overlap between stages, a point often overlooked by initiating groups. A breakdown of the tasks in each cluster makes this clearer.

Genesis and Initial Planning

  • the first steps - farmers/ local government initiative
  • form the interest group entity
  • finding champions at scheme, local and central government levels
  • agree on administrative roles and responsibilities
  • first strategic plan for whole project accommodating later stages
  • communication strategy
  • secure funding for initial scoping studies
  • preliminary identification of options - technical, economic, financial, environmental, interest
  • design a work plan and identify people and financial resources needed
  • assess the form of entities needed at each stage

Pre-Feasibility and Feasibility

  • scope and cost options for securing studies - assess long-term implications/capture
  • prepare Terms of Reference
  • secure funding and appoint advisers
  • identify promising proposals and screen with community
  • proceed to full feasibility and costs
  • carry out comprehensive risk analysis
  • identify funding requirements and options for accessing capital
  • identify resource consent requirements and likely costs
  • action communications with users
  • give leadership and support to local focus groups within community
  • plan a communication strategy with concerned resource consent parties
  • anticipate land access issues
  • devise strategic plan for next stages

Resource Consents and Legal Issues

  • secure the funding for resource consents
  • appoint a project manager
  • Terms of Reference and appoint advisers
  • identify who/what will be applicant and implications
  • check the land use designation issues for land involved
  • marketing strategy to stakeholders involved in resource consent discussions
  • consult with concerned parties involved in resource consent
  • prepare resource consent applications
  • anticipate need for pre-hearing requirements
  • accelerate communication with water users to identify take-up, equity and debt financing needs
  • prepare legal basis for take/pay commitments
  • focus attention on financial requirements for implementation
  • finalize commercial structures for next stages
  • revise strategic plan

Marketing, Pre-Sale And Funding

  • develop pricing strategy
  • financial business plan
  • formal plan to market and target maximum early legal commitment to purchase water
  • conduct field days etc for technical and financial implications of land use change
  • support and service local focus groups
  • finalize implementation and operating commercial structures
  • final risk assessment
  • water trading issues
  • finalize legal/insurance aspects
  • identify and action land access issues
  • decision to proceed in consultation all parties
  • revise strategic plan

Final Design Details, Construction

  • continue sign-up
  • land access finalized
  • manage financial aspects of construction, cost control
  • monitor risk developments
  • commission infrastructure and monitoring systems
  • revise financial plan as needed
  • establish operation and maintenance entity

Operation and Maintenance

  • financial plan for operation and maintenance entity
  • check compliance requirements of final resource consents
  • monitoring systems
  • best practice operating and management procedures
  • continuous improvement to scheme efficiency
  • initiate and manage water trading system

F. Key Issues to be Addressed by Initiating Groups

Issue: Resource Quantification Responsibilities

In some proposals, the understanding of the surface or groundwater resources of interest is inadequate to either assess adequacy for the proposals or to develop resource consent applications that satisfy regional council requirements. In such cases, the costs and difficulties of developing the resource information are beyond the resources of the initiating group. Even given access to financial resources, many natural resource quantification problems require long term data. This is an issue that relates to the responsibilities of regional councils under the RMA, but the fact remains that proponents are increasingly faced with having to engage in costly data collection operations that may or may not add to long-term resource understandings.

Issue: Funding the Early Stages

A common problem facing all development interests is gaining access to financial resources in the early stages of the proposal development - these early stages include all activities up to and including gaining resource consents. These stages are high risk insofar as the financiers are concerned. The potential water users typically advance modest finance to "get started", but access to additional finance becomes increasingly difficult, especially when there is a need for professional consultant input.

Central Government has assisted project initiators with funding support (67 percent of costs) up to the full feasibility level through the Agmardt Water Studies Fund and subsequently through the Sustainable Farming Fund (SFF) administered by MAF. This has generally been sufficient to take the proposals to the pre-resource consent stage.

Funding for the resource consent investigations requires that some of the components of the proposal in key areas be developed to a stage that satisfies regional council requirements. Legal expenses will be incurred. Costs additional to feasibility level studies that are involved in the resource consent process are not supported by the SFF, and they may be very considerable. Some schemes have "hit the wall" in accessing funds for this purpose from their constituencies, because of the costs and perceived risks and uncertainties involved. Private external financing for this stage will not be available either, because of the risks involved. This issue has proven to be a major constraint for initiating groups.

Issue: Governance Structures

A variety of governance structures have been adopted by the initiating groups at early stages - incorporated society, limited liability company, cooperative company, trust and ad-hoc committee. One reason for the need of a legal structure is that the body will be managing monies from third parties - members, shareholders and support funding agencies. The other reason is that the body may have to enter into contracts with others - consultants, for example.

Little attention has been given, however, as to the most appropriate form of the governance structure that may be optimal for later stages.

Issue: Funding Models

In the early stages, it is usual for the later problem of how the scheme may be funded to be put on the back burner - in the first place, the costs are not known, the likely uptake is uncertain, there are other matters of immediate concern, including the search for early stage funding.

It is important to realize however, that an appreciation of the possible funding models for scheme implementation is needed to guide the way that the investigations proceed.

Issue: Sources of Funding

The capital requirements for scheme implementation are very considerable, and generally beyond the financial resources of the initiating groups. In the early stages, little if any thought is given to possible options for scheme financing. A critical factor will be the scale of committed take-up in the early stages.

Some groups have assumed that central and/or local government may be the source of debt or some equity funding, and that finance from commercial banking sources can be secured in much the same way that seasonal or farm development finance is arranged. These issues have yet to be confronted by some of the groups involved, but have been investigated under MAF-supported studies. A much-discussed and related issue is whether equity should be offered to the non-farming community or to speculators

This is an area that should be canvassed early in the process as it may have an impact on the way that the early stages are structured. At the extreme, it may be that the initiating group is interested in private equity capital or in a BOOT3 type of providing the required services - both options would indicate commercial governance structures at an early stage.

Issue: Resource Consents

When community groups look to large-scale water enhancement proposals the activities are necessarily public and the process takes a considerable time. There is a real risk that individuals from within the community of interest of the proposal may make resource consent applications in the interim period, that may jeopardise the long-term strategic community initiatives.

There is a current issue that such lawful actions by individuals will result in strategic options and optimal resource development objectives being foiled and lead to piecemeal developments, and it is a matter that concerns regional councils under the RMA regulations.

Issue: Land Access

The larger schemes are likely to involve large water storages and require land for canals and scheme structures. This raises the issue of whether the initiating group has the capacity to manage the land acquisition problems involved.

Initiating groups may have to involve local government to enhance the options open acquiring land, or investigate the associated land designation issues that may assist. Failure to settle the land access and acquisition issue could scuttle development proposals.

G. Main Issues Identified in MAF-Sponsored Studies

The MAF-sponsored studies included: 

  1. a review of corporate and financial structures, 
  2. equity and funding source issues, 
  3. role of central government, 
  4. role of local government, 
  5. international experiences in public-private implementation arrangements, and 
  6. the socio-economic impacts of large-scale irrigation schemes.

The first study has been issued and is available through MAF4, and the remaining five studies are at the unpublished final draft stage and are still not finalized. Consequently, the issues and responses reviewed hereunder in regard to the unpublished studies represent the on-going discussions that have been generated and do not necessarily reflect the outcomes that may appear in the final versions.

These studies relate directly or indirectly to the main suite of issues being faced by the water enhancement development groups, as presented above.

Corporate and Financial Structures

Scope

This study was carried out by Deloitte Touche Tohmatsu, (DTT) funded by MAF and a number of irrigation groups. It was commissioned to provide a resource document for community-based groups to assist them in determining the most appropriate business/legal structures, funding structures and pricing mechanisms.

Findings and Suggestions

  • The study examined a range of possible legal/business structures for owning water enhancement schemes
    • partnerships
    • cooperative companies
    • limited companies
    • trusts
    • unincorporated associations
  • Each was assessed against the following criteria:
    • continuity of existence
    • shareholder/member protection
    • access to funding - public and private
    • flexibility of capital contributions
    • transferability of interests
    • restrictive provisions
    • taxation implications.
  • The study noted that each scheme should assess its own requirements before deciding on the most appropriate structure, but its general conclusion were:
    • limited company offered particular advantages in regard to shareholder protection, transferability of interests and access to private and public funding - key issues for many schemes
    • maximum control of assets was afforded by cooperative companies and trusts
    • early taxation losses were best captured under partnerships

Equity and Funding Options

Scope

This study was one of five commissioned by MAF and undertaken by DTT, to identify a feasible range of equity arrangements for the financing and development of water enhancement projects and to analyse the most promising in terms of business structures, potential investors, risks to participants and risk management strategies.

Findings and Suggestions

  • In regard to funding the early stages of development and implementation funding, the study found:
    • the projects have characteristics attractive to certain types of investors as long as risks can be managed
    • there will be different funders for early seed financing and for implementation stages
    • non-water user private sector financing of stages before resource consents are secured is unlikely because of high risks and support from local and central government is helpful
    • once resource consents are secured, a range of financing options can be explored
  • In regard to the funding for the later stages - post-resource consent - there are three main funding models that need to be explored:
    • business finance, requiring high (>50%) security required, and medium term lending - the conventional model
    • project finance, where lower equity is involved (20-50%), security is secondary because longer term customer contracts are in place, and longer lending terms involved
    • BOOT arrangements, no equity requirements from users, external ownership for a period, and long-term contacts required
  • The question of the possible sources of funding was investigated, the question of debt financing and equity financing was explored:
    • the most appropriate debt financiers are banks, government and institutional investors
    • the most appropriate equity investors are water users and government
    • private equity investors - speculators - may not be interested unless they are able to trade water rights
    • the presence of an institutional body - local or central government - to underwrite the scheme is a key issue for private investors - debt or equity - but the risks of this need to be assessed
  • The issue of the corporate structure indicated that an early consideration was required because:
    • schemes need to be appropriately structured to attract private investment by separating water rights and other equity with share classes - private investors do not want to be caught in the take-or-pay contracts of water users
    • risks to financiers are a function of corporate arrangements - partnerships or cooperatives may not provide financier comfort
  • BOOT arrangements require special consideration - BOOT operators have their own requirements that are different to other classes of financiers which include credit worthiness of water users, risks under the RMA, the NZ legislative and control environment
  • Risk sharing and transparency
  • The study identified several particular characteristics of the NZ investment environment that need further investigation to facilitate private investment from external financiers or water users involved;
    • the lack of security to long-term access to water under the RMA is seen as a key risk to funding providers
    • the NZ tax depreciation environment is less favourable than in other jurisdictions.

Role of Central Government

The issue of whether or not central government had a role in the development of water enhancement projects has been identified as a key area of confusion amongst initiating groups. There is already access to funding support from central government under the SFF provisions, to provide seed funding to the feasibility level. The Government has therefore taken a role. This role has been a major factor in the development of proposals to date, and the role of central government in later stages has been raised as an issue. A study was undertaken Butcher Associates to examine this question.

Scope

This study looked at whether there is a role for central government in assisting with the development of water enhancement projects, and if so, to define what that role should be. The study looked at the social and economic reasons for any involvement and assessed whether there were reasons why government support in this sector was justified compared to other sectors where similar regional benefits may result.

Findings and Suggestions

  • The study examined if there was a clear case of market failure in the development of water enhancement projects, so as to justify some role for central government. The study identified 5 possible causes of market failure:
    • failure of farmers to act in their own self-interest because of sort-sightedness
    • failure of financial markets to support schemes even when they were viable using national viewpoint risk preferences and discount rates
    • high transactional costs precluding commercial interest
    • failure of market to account for non-market benefits
    • difference between risk preferences between individuals and society
  • From the viewpoint of market economics, the study suggested that there was no strong evidence of market failure that would indicate a leading role for central or government in assisting the development of water enhancement projects
  • Some evidence was found that the commercial private sector expected higher returns from investments in these projects than could be justified, indicating financial market failure.
  • The case was made that some government assistance may be justified in the early stages of the investment because of:
    • high risks in early stages that contra-indicate private sector interest
    • when there are net social and environmental benefits indicating positive public-good outcomes
    • the need for facilitation and support given a complex policy environment
  • If government was to be involved in a financial sense it was suggested that:
    • this should be limited to assistance with seed capital in early stages, converting this to equity when scheme proceeds
    • government share equity should be sold at a profit to reflect risk exposure as soon as practicable
    • government should facilitate the entry of non-landowner access to shares to allow the private speculative market to be involved and reduce the need for government assistance
    • government may consider underwriting early share offerings to a limited amount and to dispose of there entitlements as soon as practicable at a profit
    • a concern of the study was that government assistance to any one sector in preference to other sectors that may be associated with similar outcomes - that is, picking winners - was likely to be distortionary in a national economic sense.

Role of Local Government

Scope

The study of the role of local government in water enhancement projects was carried out by DTT, and was directed at: assessing the recent involvement of local government in the Waimakariri and Opuha water enhancement projects; review of the current basis for prioritisation of investments in local government; investment capability; exit strategies and legislative constraints.

Findings and Suggestions

  • In regard to funding and evaluation criteria in the local government arena, the study found that:
    • there is a high level of competition for discretionary funds, and that there is no formal evaluation and prioritisation criteria - investments are considered on a case-by-case basis
    • local government sets its own budgets and therefore funding capacity in line with its community aspirations
    • the benefits of large scale irrigation investments were generally not understood by councils, unless there is a champion at the council table
    • these factors introduce an element of "chance" in whatever position is taken by local government in supporting a water enhancement proposal in their area
    • there was a role for central government to facilitate a more consistent approach from local government based on productive use of natural resources in the national interest.
  • The study identified areas that would justify local government involvement in water enhancement projects and suggested that:
    • there had to be demonstrable and significant social and economic benefits captured within the region
    • any investment was likely to make economic returns
    • the proposal was unlikely to proceed without council intervention and therefore the benefits would be lost to the region
  • Under current local government legislation, the study found that there were no constraints for involvement, and suggested that:
    • internal constraints to investment support could be addressed if off-balance sheet funding could be justified
    • smaller councils will always suffer from lack of investment capital and a regional approach involving larger urban councils should be considered
    • current attitudes within councils act against large investments - there is a preference for a larger number of smaller projects
    • council sees its main role as a facilitator of the larger projects
  • Given its analysis, the study suggested that local government should consider support for water enhancement projects in the following areas:
    • seed funding for initial feasibility studies - repayable if project implemented
    • general project facilitation
    • assistance with community consultation and with RMA requirement compliance
    • detailed studies of local significance of developments
    • provision of hybrid equity - subordinated loans, redeemable preference shares, convertible notes - to strengthen the equity position of the scheme and allows a clear exit strategy

International Experiences

Scope

This study was undertaken by Heiler and Associates and looked at the international experience in using Public Private Partnership (PPP) models for funding infrastructure projects in Australian, UK and other jurisdictions, and related these to the issues of funding water enhancement projects in the NZ context.

Findings and Suggestions

  • The study identified the reasons given for the use of PPP funding models as follows:
    • greater cost-effectiveness in managing project risks
    • savings captured and benefits enhanced by better time-to-delivery
    • access to private sector innovation and management skills
    • lower demands on governmental operating budgets and reduced fiscal deficits
    • better value-for-money for communities and government
  • The review of international experiences indicated that:
  • PPP is not a panacea for delivering infrastructure projects, but its use is increasing in all jurisdictions
  • Early PPP experiences in the UK have been modified by other countries to suit local political and economic circumstances
  • Difficulties have been experienced where the private sector party has been responsible for direct liaison with individuals or communities - a switch to private sector-community organisation-individual communities models more acceptable
  • NZ experience in PPP funding is limited and future success will depend on success with the early initiatives that may be taken
  • PPP stakeholders are concerned about some aspects of the NZ investment environment, especially in regard to the long-term security of access to water under the RMA provisions
  • PPP investors are not keen to be involved unless there is a commitment to proceed with the PPP model if analyses show benefits when compared with other financing models
  • There is a strong interest from PPP investors in becoming involved in water enhancement projects in NZ, so long as the investment environment is supportive
  • Insofar as relevance to the NZ situation is concerned, the study suggested that:
  • Government should explore the requirements of the PPP investment players and assess if any changes are needed in the investment environment to address concerns about stability and security
  • If there is a commitment to seriously pursue this investment model, a suite of possible PPP investment opportunities should be identified where it is judged that implementation difficulties are anticipated to be minimal

Socio-Economic Impacts

Scope

The purpose of this study, carried out by the Agribusiness Group was to establish the economic returns from investments in large scale irrigation projects from a national, regional and individual viewpoint, and to track the social changes that occur with affected communities. The study studied the Lower Waitaki and Rangitata regions as examples of the with- and without- investment situations.

Findings and Suggestions

  • The study developed an assessment framework to compare the results from the two study regions that may be suitable for conducting ex ante impact studies of proposed water enhancement projects. This assessment identified key measurable parameters that captured:
    • measures of commercial viability from the viewpoint of farmers and promoters
    • measures of economic contribution from the viewpoint of central and local government and communities
    • indicators of social impact from the viewpoint of central and local government and communities
  • The results of applying the assessment framework to the two study areas showed that:
    • there was a 14 percent return on capital employed in irrigation development
    • increase in annual output per 1,000 ha ranged from $2.5 million at the farm gate tp $9.7 million at the national level
    • irrigation development was associated with a net population gain of 15.4 percent compared to a net loss of 0.6 percent in the adjacent area over the same period
    • irrigation development was associated with a trend to a younger population with a higher income and employment status

Concluding remarks

This broad-brush review has attempted to inform the Conference about the reality of some of the issues being faced by proponents of large scale water enhancement projects in NZ, and to present the current thinking on how some of the main issues may be addressed.

Some key issues of policy are the subject of current debate - role of government, security of access to water under the RMA, the investment climate for private sector investors, amongst others.

The interest in water enhancement within the community is strong and unlikely to disappear. Given this interest, the potential contribution to wealth creation at the national level and the strategic issues involved in such large scale developments, there needs to be a review of the match of the related policy environment in its widest sense, to the reality of the situation as described.

1 From an article "Globalism: an idea whose time has passed", Colin Teese in News Weekly, July 13, 2002.
2 Based on 400,000 ha of new irrigation with a national GDP contribution of $5 million per 1,000 ha.
3 BOOT: Build, Own, Operate, Transfer
4 Financial Structures for Community Owned Irrigation Schemes, report prepared by DTT and issued by URS to Central Plains Water Enhancement Committee, December 2001

 

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