If a person or persons were receiving a helping hand (like a subsidy) you would think they would respond with gratitude. Not so with the members of WIL. They have two responses, one is denial, and the other is to attack anyone that suggests they are receiving a subsidy.
Why do people dare to suggest that WIL are being subsidised in relation to the share of the Waimea dam? It is not just me making this outrageous claim Forest and Bird chief executive Kevin Hague questioned why 16 per cent of the fund’s latest grants – making the project the single largest awarded so far – had gone to what he argued was a taxpayer-funded subsidy for irrigation.
If we go back to the beginning (or at least to the beginning of this term of Council) we are presented with a Waimea Community Dam funding policy that was extractive users (irrigators and Tasman District Council/Nelson City Council community water supplies) would contribute one-third of the capital costs of the environmental flows/public good, 30% of the project costs, i.e. 10% of the project costs. All operating costs were to be met by extractive users. That meant that the Council would not contribute operating costs relating to the environmental flow capacity.
Then on the 14th of June 2017 Council was presented with a new funding model because “Waimea Irrigators Limited are at (or near) the limit of their ability to pay.”
“That approach to cost allocation on extractive use has been deemed unaffordable to irrigators especially in light of the increase in estimated operating costs.”
“The JV Working Group is developing an alternative for consideration by all parties that involves the Council covering the full costs of the environmental flows. The Council is also being asked to meet the operating costs on the environmental capacity.”
“The revised allocation of operating costs would see the Council contribute 52% of operating costs and irrigators 48%. This approach would see the Council’s operating cost contribution increase by an estimated $460,000 per annum to $675,000 per annum based on current LTP and dam operating cost estimates.”
Not finished there WIL also required an underwrite of their $25 million CIIL loan so they could get a reduction in interest rates. “the project is ‘in the balance’, unless the Council agrees to go back to the negotiating table with a view to meet the additional costs and providing the credit support being requested of it.”
“The Council’s current strong financial position, in particular it’s lower than budgeted debt level puts it in a position where it can accept the irrigator funding debt being held within the Joint Venture. Debt in the JV or in WIL will be treated as Council debt by credit rating agencies.”
By 19 October 2017 the full extent of the subsidy had become apparent for “the Waimea Community Dam (Dam) project to proceed it is likely that Council would need to agree to the overall funding package and Council’s contribution of $26.8m. WIL have made it clear through the funding negotiations that they are at their potential shareholder affordability limit with this funding model.”
The total estimated cost of the Dam project (excluding incurred project costs) is $75.9 million (m). Under the Dam funding proposal this would be funded on the following basis:
- $50.22m by extractive users, where a secure water supply is guaranteed.
– Irrigators through (WIL) $37.12m
– Nelson City Council’s (NCC) $3.52m
– Council $9.58m
- $22.77m by Council for the benefits that would accrue to the environment and community generally. This would be funded through:
– $7m grant from the Government’s Freshwater Improvement Fund (FIF Grant)
– $10m interest free loan from Crown Irrigation Investments Limited (CIIL) (that Council would need to repay),
– $1.48m from Nelson City Council
– $4.29m by Council
- $2.91m by Council for its share of the additional Dam capacity for future use
“Council would provide credit support of up to $29m for the CIIL $25m loan to the dam company for WIL. The reason for the difference is that from day one, once the loan costs and interest are capitalised, the actual potential maximum liability of the loan would be $29m.”
The “future use” component is the difference between the dam capacity of 7765 hae and the portion that irrigators decided would actually be uneconomic for them service, a total of 850 hae. “Additional capacity in the Dam would be shared on a 50/50 basis between WIL and Council. This results in each partner contributing $2.91m. WIL’s contribution is included as part of their $37.12m contribution as in paragraph 5.1.1 above. Because the use of our additional water capacity has not yet been determined, Council is treating this cost as part of the benefits that relate to the environment and community generally.” It will be serviced from surpluses in Council’s Commercial account.
Not yet finished with the subsidies, there was also the small matter of cost overruns.
There is a $13m contingency allowance for the budgeted dam construction cost of $50m. This provides a high level of confidence (95%) that the dam will be constructed within budget. In relation to project cost overruns, amounts between 0 – $3m would be shared on a 50/50 cost share basis between Council with irrigators, while debt above $3m would fall to Council to fund.
There were also those sneaky costs not shared in the project costs that council would raise a further $2m to $2.7m through a Table loan over 30 years to cover additional project costs to financial close.
How far we have strayed from a water extractor or beneficiary pays model.
Where the principle of user pays and/or direct beneficiaries pay is applied to the Dam project, then the allocation of capital cost relative to the levels of current and future extraction is:
- $37.13m for irrigators (WIL) – 69.9% of $53.13m capital costs allocated to extractive use
- $12.5m for Council – 23.5% of $53.13m
If the $22.77m capital cost allocation apportioned to environmental/community benefits was fully funded by the exacerbators/users at the same percentage of their extractive use, then Council’s share would be $5.35m and WIL’s $15.92m.
“The total cost if transferred to landowners/irrigators would make it unaffordable for them. It represents a 43% increase in the proposed capital investment and the associated costs.”
To Recap
- The urban water user/ratepayer bought more shares (or hectare equivalents) than we will need in 100 years growth.
- The urban water user/ratepayer underwrites the WIL loan from CIIL so they get a cheaper interest rate.
- The urban water user/ratepayer picks up significantly more running costs than their share of the allocation because it is too expensive for irrigators.
- The urban water user/ratepayer picks up all the cost overrun liability (that won’t happen – yeah, right!) because the irrigators are at their limit.
And this is what the irrigators have to say about their subsidy:
On the Waimea Water Facebook page Horticulture NZ Chair and WIL shareholder Julian Raine “there is no subsidization by ratepayers. Irrigators are paying their fair share. This is a myth naysayers have made up. If irrigators do their own augmentation then the rest of the community will pay double the current cost. It’s not rocket science but clearly lost on some. The Dam is a win win solution”
WIL chairman Murray King on Radio Live speaking about the recent protest outside of council “ Probably half the people there were probably in support of the dam.” If 30 supporters are about the same as 300 demonstrators then yes that is the same math that could be used to say the irrigators are paying their fair share.
After being told for the past two years that WIL were at their limit, any more would be unaffordable for irrigators, two weeks after the announcement of a $26 million budget blowout the mayor announced that the irrigators would meet their share. How do they suddenly now find the capacity to meet supposedly an extra $13 million?
Possibly because an MPI case study reveals that:
The dam would also provide close to full water supply reliability for existing irrigators, representing a $2.9 million (or 20%) increase in average annual earnings.
The extra money that the irrigators could contribute is confirmed by Murray King who said:
without a dam, larger irrigators would look to put in their own storage ponds, “which will mean instead of having a community solution, irrigators and the council will end up competing with one another for water”.
“The cost to irrigators to construct on-farm storage will be more than four times what they are currently contributing to the dam,” he said. “If you add the consenting costs and the opportunity cost of the loss of productive land then the figures are even worse.”
Image credit – BENN BATHGATE/STUFF
Perhaps this is why Shane Jones challenged the region’s civic and economic leaders to do the “vast majority of the heavy lifting” to cover the funding shortfall before they could expect “expeditious treatment” of the growth fund application.
He would not be specific about how much extra funding needed to come from both groups, but thought the economic stakeholders were “capable of picking up quite a bit of that (deficit)”
It sounds like from a Government perspective that if the irrigators are not prepared to “step up to the plate” then the Waimea Dam project is dead in the water.
If the dam fails to get across the line the MPI study reveals that the 64% overallocation would best be solved by:
Clawback based on irrigation needs would result in lower costs than flat-rate cuts (an 8.5% drop in average catchment profit compared with a 10.4% drop) and a slightly more even distribution of those costs. This is a logical conclusion, consistent with the approach already adopted by many regional councils.