Garden of Eden or White Elephant?

With requisite farmers, an investor, and lenders apparently at the ready, will the Ruataniwha dam proceed, or will it remain contested for several more months? Standing in the way are hurdles including a lawsuit and an election.

On May 26, the legal appeal mounted by Forest and Bird, challenging the land swap necessary for the dam to proceed, will be heard by the High Court. The ‘loser’ in that venue might indeed appeal to the Supreme Court. So long as this or any legal threat to the project remains, it would seem unlikely that HBRC (and perhaps HBRIC lenders or investors as well) would dare to commence construction of the project.

And of course, the election of the next regional council in early October might bring a different majority view as to the wisdom of the project.
So it’s not a bad time for taking stock of the dam situation.

As it stands today, the proposed Ruataniwha dam has a $905 million price tag – $333 million to build the dam itself and its distribution network, $16 million in development costs to date, and an estimated $556 million in on-farm costs required to adapt farming systems and provide reticulation to actually use the water.

For ratepayers the financial exposure consists of $80 million the Regional Council would invest in the project, plus potentially $36 million in HBRC water purchases from its own scheme (presently in public consultation), plus any risk presented by earning insufficient funds to repay loans (and interest) with the Port as collateral.
And then there’s environmental impacts.

Are we looking at a white elephant here, or a Garden of Eden in Central Hawke’s Bay?

Key condition

In April, the Ruataniwha scheme confronted a major milestone – the requirement to sell 45 million cubic metres (cubes) per year in water contracts to Central Hawke’s Bay farmers.
On the day of reporting (April 27), the figures were as follows:

• 42.8 million cubes in signed contracts, representing contracts signed by 196 farms from the eligible pool of 400-450;
• 3.0 million cubes ‘advancing’ to completion; and,
• 2.7 million cubes committed in ‘call options’, where the buyers commit nonrefundable fees for the right to make future purchases.

These various commitments total 48.5 million cubes, seemingly sufficient to meet the ‘condition precedent’ set by the Regional Council as one of several such milestones for the project to proceed. HBRIC chairman Andy Pearce predicted on the day that the total would reach 50 million cubes by June.

The 48.5 million cubes would initially irrigate 15,700 hectares. Given the water’s present price, it would appear the average farmer-participant would be committing about $68,000/year in water fees.

HBRIC CEO Andrew Newman boasted that the April commitments signified “the CHB community has unequivocally demonstrated its commitment to and desire to see the Ruataniwha water storage scheme go ahead”.

A bit of overstatement, as 200 eligible CHB farmers – half of the farmers in the scheme footprint – have said ‘No’ to the scheme.

Where does it go from here?

The significance of the initial uptake for the water is twofold.

Financial risk

HBRIC contends that about 43 million cubes sold is the threshold that would deliver a positive cash flow from the scheme. This is still to be independently confirmed.

It also becomes the platform from which long-term water uptake builds, which is an area of contentious projection. HBRIC holds to a ‘base’ case that predicts 100% uptake of 104 million cubes by year 15 of operation. Its ‘severe’ case predicts 82% uptake in that period. All HBRIC scenarios presented so far assume 64% uptake (about 67 million cubes) by the time the dam would be operating in three years.

The uptake rate after financial close becomes an important factor in whether the scheme can meet an HBRC-imposed requirement that the scheme yield a 6% dividend per year to the Regional Council throughout its life of 70 years. In its base case, HBRIC would need to borrow, cumulatively, $25 million over the first 15 years of the scheme to pay that return; with 82% uptake, it would need to borrow $72 million to pay the same return. As daunting as those figures are, there’s also the risk that the true ‘severe’ case might be significantly lower than 82% uptake.

Moreover, CPI increases in revenue are modeled at 2%/year. At 2% CPI (the long term average) the dam income increases by 50% every 20 years – the projected income goes from $27 million at full uptake to more than $40 million annually. If CPI tracks at the more recent 1% level, the annual income only rises to $33 million. That’s a big difference.

An independent review of these projections is due in May, but it’s not clear whether or how Deloitte’s will construct a true worst case set of uptake and inflation assumptions and resultant revenue … or whether they will simply confirm HBRIC’s spreadsheets add up.

Further complicating any financial risk assessment is understanding what conditions, if any, might allow scheme participants – the 196 farmers – to withdraw from the scheme. I’ll come back to that issue.

Finally, it’s important to note that the monies possibly borrowed by HBRIC to meet the annual 6% dividend are not the only – nor even the most significant – borrowings required to get the scheme off the ground. At this writing, the complete financial construct proposed for the scheme – investments and borrowing – is still confidential.

What is clear is that any borrowing by HBRIC and any of its subsidiary companies, such as the joint venture operating the dam, would need to be secured by HBRIC assets (think: Port).

“… the CHB community has unequivocally demonstrated its commitment to and desire to see the Ruataniwha water storage scheme go ahead.”

ANDREW NEWMAN

Economic benefit?

It’s clear what the 196 farmers signed up for the scheme might get. Assuming they’ve made prudent decisions about how irrigation can improve their productivity, they would stand to earn more income, and more generally look forward to some increase in the capital value of their land, given both water rights and enhanced on-farm infrastructure. Some might invest just for the latter reason.

What farmers actually would do with their irrigation water – and how well – determines the degree to which the rest of Hawke’s Bay might benefit. HBRIC’s lead consultant on farm economics has emphasized that farmer productivity is the key to making the irrigation scheme succeed:

“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 their property to another person.”

HBRIC expects that 70% of CHB properties in the scheme would change hands within five years. So much for strengthening Central HB’s social fabric.

And what does the rest of Hawke’s Bay get?

The HBRIC-promised ‘Garden of Eden’ to unfold in CHB boils down to the array of land uses actually expanded or adopted by scheme farmers.

HBRIC data, representing the farming/land use intentions of the 196 farmers who have signed water contracts, indicates we can expect the following farm allocation (by water volume contracted):

• Mixed arable    49%    (30%)
• Dairying    22%    (35%)
• Sheep/beef/dairy support    26%    (19%)
• Pipfruit/grapes    2%     (16%)
• Other    1%

However, in the brackets above are the land-use assumptions used in the most recent estimates used by HBRIC’s consultant to calculate the economic benefits of the scheme for the region. At the time (April), the consultant touted the possibility of substantially more orchards and vineyards in CHB under the scheme as the chief driver of the scheme’s improved job and GDP prospects.

Councillors Rex Graham and Peter Beaven, each with decades of hands-on experience with orcharding, as well as a broad spectrum of HB pipfruit and grape growers they and I consulted, ridiculed the consultant’s assumptions.

Nevertheless, ignoring that expert feedback, HBRIC ‘refreshed’ its benefit estimates from the scheme to more than 3,500 ongoing jobs and a boost to regional GDP of $380 million a year.

What’s required, at the very least, is that HBRIC consultants go back to the drawing board to re-calculate the economic returns that will accrue to Hawke’s Bay from the land use actually anticipated by current signers of water user agreements.

Until then, HBRIC’s job and GDP claims should be regarded as garbage in/garbage out.

Damn the environment

To address the environmental impact of the dam, we actually need to start with the CHB sewage treatment fiasco.

About eight years ago, a public meeting occurred in the Havelock North Community Centre, where attendees gave then-regional council chair Rex McIntyre a grilling over the deteriorating state of the Tukituki River.

Responding to an appeal initiated by two committed environmentalists, David Renouf and Bill Dodds, the Environment Court – over Regional Council objections – had just set new tougher sewage treatment standards for CHB to meet by September 2014 … plenty of lead time.

Clearly there was already a recognized pollution problem with the river.

Despite the deadline, CHB did nothing for years, then in June 2012 the Regional Council – recognising a continuing wastewater mess would threaten its case for the dam – presented its proposal to dispose of treated wastewater on land, and indeed bought the land to do so and planted trees on it to soak up the nutrients.

But CHB rejected that subsidy, and pursued a Rube Goldberg approach that isn’t working to this day. CHB is on the verge of failing to comply with the new standards.

Eight years gone by, problem still not fixed. Yet HBRC assured the Board of Inquiry on the dam and Plan Change 6 (the plan to ostensibly clean-up the Tuki) during its 2013-14 hearings that this problem was getting resolved … an assurance that the BOI accepted at face value.

The proposed dam was first mooted in 2009. To the existing wastewater problem, the dam would introduce the spectre of more pollution from intensified farming.

A stakeholders group started in mid-2011, on which I served. A year later, two key reports were on the table.

First, the Macfarlane report – a desktop projection of what land uses would emerge after irrigation was made available. This same analysis underpins all economic projections – jobs, farm profitability, GDP impact – surrounding the scheme, as described earlier.

And based on Macfarlane’s predicted land uses, a modeling study that acknowledged the existing pollution, and predicted a 25% increase in nitrogen leaching from intensified farming, along with a 15-22% increase in phosphorus loss.

This increased nutrient load sounded scary to Forest & Bird, Fish & Game and other environmentalists.

And even more scary to HBRIC and the Regional Council. Here you see the seeds of the Council’s failed attempt to minimise the need to address nitrogen leaching in its Plan Change 6 proposal.

HBRC came up with an environmental plan that downplayed nitrogen loss, which could be expensive to mitigate, and didn’t really attack it. They focused on phosphorus, which they saw as cheaper to control. Their consultants were warning that serious N mitigation requirements would make irrigation unprofitable in many cases and reduce overall return on capital below its cost … not appealing to dam advocates.

The P-focused approach was telegraphed in the infamous Tukituki Choices consultation document, which then-regional councillor Tim Gilbertson, a staunch supporter of the dam, described as “thinly disguised propaganda” that “treats the reader as an idiot”. That document and the draft Feasibility Report for the scheme were both presented to stakeholders at our very last meeting in August 2012. And we were asked to approve both on the day. Environmental leaders strongly objected.

In their report to Council, the dam project team noted environmental stakeholders were not supportive, but overruled them. HBRC approved the feasibility study forthwith – this being the key decision that officially commissioned HBRIC to advance the scheme.

All of this landed in the BOI’s lap in 2013-14.

Now, if the Council, which pretends to be an environmental regulator, had seized the environmental challenge seriously, demonstrating it had a programme to restore the health of the Tukituki – clearly putting the catchment on a positive trajectory – then a fruitful stakeholder discussion might have occurred regarding if and how future intensification might be accommodated.

Instead, the Council put forward its weak mitigation plan that the BOI soundly rejected as “hands off”.

The BOI noted that the nitrogen load in irrigated area would increase 70%, from 2,970 tonnes/year to 5,059. They also noted that phosphorous losses would increase, and would need to be substantially reduced to below even current levels.

Accepting the critique of environmentalists, the Board took a tougher stance on nitrogen pollution in particular, noting in the process the irony that the Council’s chief science consultants had in other venues actually endorsed the approach the Board was now ordering.

The Board’s plan sets a target limit on N (the so-called DIN limit), maximum leaching rates for different soil types, and requires Farm Environmental Management Plans (FEMPs) that commit each farm to operate within those limits. Not a bad outcome on paper.

Four regional councillors – Barker, Beaven, Graham and myself – applauded the BOI decision. But HBRIC was horrified that a DIN limit had entered the picture and fought to squeeze the requirement down. Litigation ensued.

So, where are we now?

If the dam proceeds, it will be operating before there’s any evidence that Tukituki pollution is being reduced. What happens if the Tukituki is turning to custard because of dam-induced farming intensification?

The BOI judgment clearly states that, given farming intensification, there might well be a need to toughen up the FEMPs of dam customers over time. But there’s the rub.

Under the rules, it is HBRIC that oversees the environmental behavior of its irrigator-customers. HBRIC, who needs the steady revenue from irrigators, decides how tough to be on them. And if it’s too tough and farmers don’t agree on required mitigation measures, they can pull out of the irrigation scheme, with a consequent loss in scheme revenue.

Couldn’t happen?

Back in 2008, a HBRC hearings panel, including councillor Christine Scott, approved additional water allocations for dairying in CHB, rejecting the contrary recommendation of the HBRC staff, which already considered the Tukituki over-allocated. Why? Because the farmers involved had already made their infrastructure investment.

Who seriously believes HBRIC or HBRC would roll back intensified farming to protect the environment after $905 million had been invested in this storage scheme?

Effectively, we have ceded control over the ecological and recreational health of the Tukituki to HBRIC and its subsidiary water company. We’ve got the foxes guarding the hen house.

And it gets scarier still, because the leadership of HBRIC, setting the tone, is disdainful of the BOI’s environmental regime. HBRIC delights in explaining how irrigators in the scheme, given various twists and turns in the BOI consents, will essentially never have to comply with the environmental targets. At best they might be asked to try harder.

So, the dam would present us with major increase in nutrient load in the catchment, to be mitigated by yet-to-be-tested farm plans overseen by the dam operator. There can be no doubt that intensified animal farming, whether dairy or beef, will lead to more nutrient loading into river systems and the soil and eventually the ground water. HBRC will measure that impact in the rivers. And the challenge will be how (and whether) individual farmers are identified as responsible and required to mitigate their effects.

HBRIC expects that 70% of CHB properties in the scheme would change hands within five years. So much for strengthening Central HB’s social fabric.

A sketchy situation, compounded by non-compliant wastewater treatment in Waipawa and Waipukurau.

Not a confidence builder if you care about the Tukituki!

Lately we’ve been offered a hastily-conceived ‘opportunity’ by HBRIC to purchase so-called ‘environmental flows’ (i.e., stored dam water) to help mitigate environmental problems with the Tukituki – at a locked in cost of $36 million. Ironically, this would make HBRC the largest single purchaser by far of its own dam water!

Of course, putting more water into the catchment might well be useful; the concept deserves more robust examination. But even if the utility of some amount of ‘environmental flows’ were established, ratepayers would already be subsidizing the dam to the tune of $80 million (with a rate of return about half the level of the institutional investor), plus a heap of borrowing.

It’s not at all clear why ratepayers should need to pay additionally for environmental benefits the dam should be providing already as its highest priority.

We’ve put the cart before the horse here.

Before adopting a $900 million water storage scheme, the Regional Council should first demonstrate that it can and will ensure a cleaner, safer river by reducing nutrient loads and increasing minimum flows. And by far more aggressively promoting and incentivizing land use and soil management practices that are suited to dry conditions and improving water retention in the Tukituki catchment, as well as on-farm water storage.

Only if it is established that environmental ‘headroom’ in fact then exists – to safely accommodate more intensified farming – should we consider a major dam, and explore its financial viability within that proven environmentally sustainable regime.

Until then the proposed Ruataniwha scheme seems far too risky for the environment, too dubious in terms of economic benefit derived from quantum invested, and too financially risky for ratepayers.