On Monday HB Today published part of a Talking Point I submitted, neglecting to run the final several paragraphs (after promising to publish in its entirety). The column is about the flawed and now largely outdated and misleading assumptions that HBRIC/HBRC have used to sell the proposed $600 million dam.

In the scale of human history, HB Today’s omission is not a big deal. However, here in Hawke’s Bay, $600 million is a pretty big gamble, and the risks involved should be very well understood.

In a nutshell, my column, reprinted in its entirety below, argues that the financial and economic assumptions made way back in 2011-12 to assert the economic ‘upside’ of the proposed dam have largely become indefensible (some were back then), but have not been re-examined since. Yet extravagant claims of the project’s regional GDP and jobs benefits persist.

What’s especially appalling about this is the refusal of five HBRC councillors to including a reassessment of these key fundamentals in the brief for the review of the project to be undertaken by the Council’s ‘independent’ advisor, Deloitte.

Hence the conclusion of the piece … why examine the facts when a sprinkle of fairy dust will do?

Here’s the full Talking Point.

Awaiting the Dam Fairy

Ever since HBRC and its development company (HBRIC) first started trumpeting predictions of bountiful jobs and GDP growth from the proposed dam back in 2012, advocates of the project have eagerly awaited the Dam Fairy and her magic wand.

However, a closer look at the consultant work that underpinned those claims reveals: 1) how carefully guarded those claims were, even back then; and 2) how significantly the real world has changed since then, leaving many of the original key farm profitability and macro-economic assumptions in the dust.

Significant CHB and regional economic benefit has always been one of two pillars of the asserted case for the dam – and importantly, given as the key justification for a $80 million ratepayer investment in the scheme to the neglect of other priorities.

The second pillar is the claim of environmental improvement. I believe the dam will in fact cause further degradation of the catchment, but that’s an argument for another day.

Here I want to address the economic claims.

These rest upon a series of early reports predicting how land use would change – adding more and different output and profit on a farm-by-farm basis – if only stored water were made available. The authors of the Macfarlane and Butcher (and other reports) made assumptions about shifting farming systems (e.g., more dairying, more orchards and vineyards), water and commodity prices, costs of mitigating environmental impacts, and the actual productivity of farmers.

Each report built upon the ones preceding, accepting previous assumptions without challenge. Hence claims of 2500 ‘new’ jobs and $235 million in added annual value to the region’s GDP were born.

But consider the fine print.

For example, in estimating farm profitability, Macfarlane used a water price of 20 cents per cubic metre (but the price is actually now set at 26 cents, with an inflation clause). He also forecast a substantial shift to dairying; an assumption HBRIC now dismisses.

In the meantime, though, another consultant assigned to translate Macfarlane’s projected farming intensification into job and output growth, assumed all water would be taken up within 8 years of the scheme becoming operative (even HBRIC would smile at that). He said 500 of the permanent farm jobs (out of a total of 1,160 such jobs) would come from increases in orcharding and vineyards. Local experts dismiss that prospect, noting far better conditions for such growth elsewhere in the region. Moreover, the consultant said regarding his other projected 1,090 jobs (in processing support): “there is enormous uncertainty with these numbers because of the uncertainty as to the mix of irrigated land uses”.

So half the originally predicted 2,500 jobs (eventually got trimmed to 2,250 jobs after closer scrutiny, are strongly hedged by the consultant. And the most of the other half come from predicted activities – orcharding and grape growing – with dubious prospects in CHB.

That consultant also estimated up to 9,000 containers (TEUs) of additional produce coming through Napier Port; HBRIC rhetoric has inflated that number over time, with no supporting analysis, to 15,000 containers.

Regarding his overall job and GDP projections, the consultant cautioned: “The impacts reported here should be seen as the likely upper limits to the net impacts on the community.” A warning long since buried. And all this only at 100% water uptake.

Two other sets of assumptions are even more disturbing.

The first involves nutrient leaching. Consultants considered the cost of cutting back the nitrogen leaching that everyone concedes would increase substantially with intensified farming. Ten different types of most likely post-irrigation farming systems – dairying on various soils, cropping, orchards – were modeled. Not surprisingly, the more mitigation measures were needed, the less profitable per hectare the farm, eventually to the point of unacceptable returns on investment.

That report concluded: “The HBRC decisions will be: the acceptable level of nitrogen losses from farms to achieve a target water quality; the mechanisms necessary to achieve and police farm nitrogen losses; and finally the acceptable rate of return from the scheme.”

Here you see the seeds of HBRIC/HBRC’s attempt to minimise the need to address nitrogen leaching in its phosphorus-focused Plan Change 6 proposal – an approach the Board of Inquiry soundly rejected. A decision HBRIC/HBRC still can’t swallow.

The second assumption involves farmer productivity. After considering ALL factors that might adversely affect the economic viability of the scheme, Macfarlane concluded the single most critical factor was that every farmer using dam water had to be a “top 20%” farmer – using best practices in every phase of their operation – to achieve the levels of productivity (and profitability) upon which rosy economic predictions for the scheme were based.

He says: “We note the severe impact on profitability incurred if the investment generates only average productivity. For that reason farmers not wishing or able to generate top 20% performance will either need to decline participation, sell, or transfer management of the property to another person.”

But not a week goes by where the farm media doesn’t bemoan the reality that most farmers will never attain such ‘superstar’ status.

Indeed, these days HBRIC advocates simply promise that a new breed of CHB farmer will arise from the ashes of the failed ones to grow highly valuable crops we haven’t yet dreamed of – 70% turnover within five years.

At the end of the day, ratepayers are being asked to make an $80 million bet on that prediction (leaving aside adverse environmental consequences), with even greater financial risk if the prediction proves wrong.

To build a convincing economic case for the dam, one must ignore the hedges and caveats in these original reports and latch on to only the most optimistic of the assumptions. No fresh assessment using realistic assumptions has been done, but the ambitious claims remain.

A cascading set of outdated ‘best case’ assumptions – this is how a house of cards is built. And why the builders of the house must fervently trust in the Dam Fairy.

Meantime, HBRC is promised soon an independent assessment of the project’s financial viability by Deloitte. Unfortunately, given the resistance of five councillors, Deloitte’s brief specifically excludes re-examining the issues I’ve raised here.

Fairy dust will do.

Tom Belford

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9 Comments

  1. Tom

    Is there a mechanism within the Regional Council or for that matter the district councils to hold a referendum……and put the matter to bed once and for all?

  2. This is beginning to sound a lot like the TPPA. People unable to think outside the square and merrily going down the path of ‘business as usual’. Like our present national government HBRC has it’s head stuck firmly in the sand and can’t hear or see anybody or anything that doesn’t fit in with it’s flawed thinking. Surely something that is this important, both environmentally and financially deserves public input!

  3. Tom, congratulations.
    Totally unbelievable as to how our elected members are representing our best interests.
    Hopefully the hopeless Napier councillors will be thrown out at the forthcoming elections.

  4. Good article Tom.

    It has been pretty obvious from day 1 that the “business case” supporting the Dam was amateurish and superficial. The sensitivity analysis, which tested the likely return on investment, was very superficial and completely unrealistic. It doesn’t surprise me one little bit that institutional investors have shied away from the project.

    But, yesterday there were headline news reports saying that HBRIC had not yet secured an institutional investor to underpin the project. Surely this then constitutes a total failure since none of the fundamental criteria have been met. It was notable that there was absolutely nothing in HBT this morning regarding the failure to secure an institutional investor.

    It is time for the HBRIC directors to show us they have some balls, to execute their fiduciary responsibility and pull the plug on this fiasco.

  5. I agree with Brian Anderson, but regretfully the “gang of five” are totally committed to getting the dam built. I remember Christine Scott pronouncing at one meeting “the Dam must be built”, with emphasis on the “must”.

    The best the ratepayers can do is hope that an investor may be found who wants to finance and control the whole deal, including final dam ownership and setting the water price. There is no point in hoping that the HBRIC directors “have balls”, the number of failures to reach the “targets” voiced by their CEO and their inability to act after each one, says it all in that matter.

  6. Tom, you have provided a very clear overview of the nonsense that the Dam proponents cling to. The McFarlane report forecast Milk solids price more likely to increase rather than decrease from the $6.40/kgMS used. The overnight GDT slipped again and the $3,200/tonne required for a $4.50- $5.00 payout seems remote (impossible ).The more knowledgeable commentators look at the continued increases in milk production from Ireland, Holland and E.U (+48%; + 13.8%; + 6%) in the past year as an indicator that current returns of $NZ <4 – $4.50/kgMS (for commodity based production) will not increase for some time.
    This is $2/kgMS less compared to the Farm Economics report. About $1 million less income for the "typical dairy farm" than the report assumed.
    Even the best dairy farms in the best rainfall regions’ will be barely profitable. It certainly makes irrigated dairy unprofitable when water costs are included.
    But as Tom states, only a high uptake from dairy can use sufficient water to justify the scheme and to keep the distribution area down to a manageable size vs. distribution costs. But dairy increases Nitrate and phosphate leaching by 300-600% due to the added Phosphate and Nitrogen that must be applied to get the required response to the irrigation water. Intensive cropping uses less water (also less sold and wider distribution network and pumping required) but increases N leaching even more than dairy/ha. These are figures HBRC are choosing to ignore even though water quality issues are already obvious and worsening.
    It does not need a "name" firm to figure the project is now even more a nonsense than before.
    As the figures are more widely understood, an increasing number of ratepayers will also reach that conclusion. It seems the more perceptive farmers have already”

  7. Another excellent article Tom that is right on the money.

    There has always been two main issues with this dam. One being the actual financial and physical practicalities of it and the other being the process by which we work through these questions in order to evaluate the proposal.
    Our elected councillors are entrusted to be the responsible guardians of rate payers assets and their environment but unfortunately we have continually seen some councillors bury their head in the sand and refuse to hold HBRIC to account for its actions and continuing failure to meet set targets and deadlines.
    Your comment Tom which says “that Unfortunately, given the resistance of five councillors, Deloitte’s brief specifically excludes re-examining the issues I’ve raised here.” is most concerning as here we apparently have a Regional Council deliberately misrepresenting the facts as they know it to be today to entice capital investors and farmers into the scheme. Some people would see this type of fudging and misrepresentation of the facts bordering on fraud.

  8. yeah, it is a great article, Tom. Didn’t Deloitte conclude, in their first evaluation, that they could not make a definitive judgement on the scheme because they did not have access to all the information they needed?
    Hopefully (that word gets overused in this debate), they will have enough information to clearly pinpoint the financial “break even” quantity of water that needs to be sold before the scheme proceeds. That will still not enable them to make a judgement on the long-term viability of the scheme and any financial liability faced by ratepayers.
    As a Napier voter, I am constantly embarrassed by the behaviour of the Napier members of the Regional Council in this matter.

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