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Water A sector under pressure
“When the well’s dry, we know the worth of water”
Benjamin Franklin, 1746
August 2015
Auckland office: +64 9 353 9700Wellington office: +64 4 498 5000
www.minterellison.co.nz
Water is the oil, the gold of the 21st Century.
Because water means resilience - and productivity - for NZ Inc., there is little doubt that it will be the big issue this century for New Zealand and the world. There are many recognised - and as-yet unknown - issues that will be exacerbated over time by climate change and population growth.
In New Zealand, the many known water issues competing for attention include delivering desirable water quality levels, the role of iwi, over-allocation of water through resource consents and getting it to the places where it is most needed.
At a time when many New Zealand rivers are already at their allocable limits - with farmers, councils and investors facing a multitude of hurdles in undertaking large-scale irrigation projects - the long “what to do about water” discussion is only trickling along at a regulatory level.
“The Government has chosen not to make wholesale changes quickly.”
A regulatory environment running at a trickle…Rachel Devine, a Minter Ellison Rudd Watts partner and leading expert in environmental and planning law, says that although Environment Minister Dr Nick Smith has confirmed that a priority over the next twelve months is progressing the Government’s next phase of Resource Management Act reforms, only slow steps have been taken so far to address water issues.
“The Government knows water laws can be improved and has been chipping away at reforms” she says. “Some of the water quality debate has been addressed by changes to the National Objectives Framework (NOF) last year. However, the Government has chosen not to make massive wholesale changes quickly, and it has sought further guidance from the Land and Water Forum and the Iwi Leaders Forum.
“Any suggestions the Forum provides will then need wider consideration before laws change. That said, it is likely hard decisions on the allocation will be made in the medium term and at that time we can assess the impact on the market.”
...as over-allocation concerns growWhatever the detail this further guidance contains, it will be released at a time when there is intense competition between users for water, particularly electricity generators and irrigators in the South Island, as recognised by MERW partner Sarah Sinclair.
“We know water is critically over-allocated, and many rivers are already at their limits,” she says. “The wine industry, agricultural,
electricity generation and farming sectors are all competing for it - so who should be the winner?
“The debate is encapsulated in the proposed Waitaki River catchment water allocation regional plan change. One economic impact study says that the North Otago and South Canterbury economies could lose nearly 400 jobs and up to $42 million a year if the allocation plan for the river is not changed, with two thirds of farmers who irrigate from the Waitaki River set to lose about $30 million a year in farm income. And then there’s a significant iwi interest as well.
There is however some commentary out there that the figures are lacking detail and what is being presented is a worst-case scenario.”
“It’s a no-brainer that water equals productivity and that’s why rural users want it. You can see this issue coming at us like a freight train.”
David Gilbert, MERW partner and property law specialist, describes land ownership and access rights around water as a “particularly vexed issue”.
“Clarity of ownership and clarity of easements are the tips of the iceberg. How do we structure deals and get the correct bundle of rights so these projects are bankable?” he asks.
Gilbert says that obtaining the appropriate rights to run pipes along - and build on – land that can cross numerous boundaries is only the start of the work. “Securing the rights as a bundle, so whoever runs the project - private or public - can access all required land across boundaries, is essential. Clearly, there will be material project issues if a link in the land chain is missing. Relying on the agreement of a minority of dissenting land owners who are vital to the project is a major trap to avoid. These land access arrangements need to be documented and be certain from an early stage.
“If one farmer, let’s call him George, signs an agreement, but his dad technically owns the farm, the land owner has not been bound to the agreement. George could be the beneficiary of a trust that owns the farm, but he is not the landowner. If George then agrees to an easement, with no reference to what the easement terms were and the bank later needs to enforce against George, it becomes a major problem.”
Doing research and planning early on with a property rights expert can help plot a course that evades the dangers lurking beneath the surface.
CARVING THE RIGHT PATH: Obtaining property rights
“Land ownership and access rights
around water is a particularly
vexed issue.”
Sinclair says that when allocating a finite resource we should ask how we best use it - and that project teams should consider their options to make the most of the resource.
“We won’t get much increase in demand for energy infrastructure in the near future, so are the energy companies thinking about maximising the water efficiency of their existing assets? It would be interesting to get more projects going where irrigation and energy generation align. An example is creating double use, whereby a generator uses the water and then it is used as irrigation. This approach would be valuable to all parties.”
Getting the project ready for bank funding Many irrigation projects will require bank funding to be economic. Given the usual large proportion of bank debt funding and the fact that the banks will need the project to be constructed and perform to get paid back, projects need to be structured carefully to ensure that they are bankable. If they are, there’s plenty of appetite among the banks in New Zealand to fund irrigation projects.
Tom Fail, leading MERW project finance partner thinks that there is no ‘one size fits all’ model for bankability, “which is lucky because each project is different and has different risks that need to be considered and managed”. Fail is quick to point out however that there are some key themes and the big point here is that irrigation companies that need bank funding should be thinking about bank requirements from the outset and getting them structured into the projects and project contracts.
The good news is that even though there are lots of different matters to think about (land access, environmental obligations, appropriate payment terms etc) they should all come together nicely if well managed. Fail agrees, commenting that “We see the water user agreement as being the lynch pin for the
projects – getting this document right and signed up by water users is a really important milestone”.
Naturally, getting the project economics right is vital for all the project participants. Fail also thinks that there is more room for
economic enhancements, such as ‘double use’ and also storage options for water, which provides greater reliability.
But let’s not kid ourselves. There’s a lot to manage in getting these projects to the point of funding and it isn’t necessarily intuitive. Our partners are frequently talking to irrigation companies at the early stages of their projects about the big risks, how to consider and mitigate them, and how to present those risks to stakeholders. Fail says “it’s about getting the right structures in place, all with a view to getting on the most efficient track to project funding and completion”.
“We see the water user agreement as being the lynch pin for the projects...”
DON’T JUST GO WITH THE FLOW: Carve a path together
Keeping our focus on the future
There are many moving parts to the water use conundrum in New Zealand, but our experts all agree that there are plenty of opportunities, and by working together we have a chance to deliver world leading projects.
The Government is taking steps to get more projects up and running – and completed
With planning we can achieve great things with our water – great water quality, efficiency and productivity
The role of iwi is important, and collaborating early over allocation and transfer can achieve great outcomes for all
Projects can be achieved if you start your plan with funding and completion requirements in mind
Stakeholder unity is key to getting a project off the ground correctly. Aligning interests and gaining clarity around land ownership and easements is essential
People think water doesn’t have property rights and it’s not commoditised - but it does and is, so address these matters early on
There is plenty of bank funding available for bankable projects - the discipline and analysis that banks can bring to the table can also be very helpful
The productivity gains for NZ Inc. from well-used water will be significant - it’s worth taking the time at the start of a project to collaborate and determine the right path to completion
Auckland office: +64 9 353 9700Wellington office: +64 4 498 5000
www.minterellison.co.nz
Contact usTom Fail
T +64 9 353 9913
M + 64 21 966 835
Rachel Devine
T +64 9 353 9912
M + 64 21 521 299
Sarah Sinclair
T +64 9 353 9984
M + 64 21 532 995
David Gilbert
T +64 9 353 9978
M + 64 21 634 190
There are roughly 30 water projects out there in various stages right now. While there are many rocks in the stream in front of them - challenges that need to be met - the quality and quantity of water available must be an outcome we all keep our focus on.
It’s also clear that there needs to be a joined up approach to tackling our water projects; Government, iwi, landowners, developers and asset owners. And this is not just advice for New Zealand – this is a global issue.
UN Secretary General, Ban Ki-moon recently said:
“We must connect the dots between climate change, water scarcity, energy shortages, global health and food security. Solutions to one problem must be solutions for all”.
We couldn’t agree more.
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