Irrigation Schemes – Co-operative vs Private Equity Models

18 Jun 15

With the possibility of one or two exceptions, all irrigation companies are run on co-operative principles whereby farmers pool resources to build and maintain their scheme to make the cost of irrigation more affordable.

By sharing resources, farmers lower the average costs of capital. Sharing key infrastructure such as intake races results in lower delivery costs to individual farmers. Increasingly, administration costs such as consenting and compliance adds to further costs and contributes to the need for famers to pool their resources.

Schemes are run on a cost recovery basis, with water charges being levied to repay and service debt borrowed for capital improvements and meet on-going operational costs. There is no profit or return to farmers, with farmers making profit on the farm.

Other co-operatives in the agri-sector such as dairy, meat, rural supplies and fertiliser may return rebates to their members, but in the case of irrigation companies there are typically no rebates. Water charges are set to limit the amount of taxable surplus with any surplus being retained as emergency funds for future capital improvement.

Some schemes are actual co-operatives registered under the Companies Act 1993 and the Co-operative Companies Act 1996, while others are simply standard companies registered under the Companies Act 1993 only.

For example, Amuri Irrigation is not a co-operative company but Waimakariri Irrigation is. Central Plains Water is not a co-operative company nor is Rangitata Diversion Race, but a number of companies under the Rangitata Diversion Race are, including Ashburton Lyndhurst and Mayfield Hinds. Opuha has recently become a co-operative company but Morven Glenavy, North Otago Irrigation and the Lower Waitaki schemes are not co-operative.

I will deal with the relative advantages between a simple company under the Companies Act 1993 and the Co-operative Companies Act 1996 in a future article, but regardless of whether an irrigation company is a simple company or registered co-operative, they are run on co-operative principles.

The pros and cons of the co-operative/community model versus the profit model has been brought into sharp focus by the proposed Ruataniwha project. The scheme (if it goes ahead) is to be built and developed by a limited partnership comprising several investors that include Hawkes Bay Regional Council through its subsidiary, Hawkes Bay Regional Investment Company Limited, the Crown through Crown Irrigation Investment Limited and a number of institutional investors.

The scheme is to be implemented on a build, own, operate and transfer (BOOT) basis with the assets transferring back to the community after a 70 year concession. The concession period is basically the period where the limited partnership makes money and is repaid for its investments.

There is a provision for farmers to invest in a limited partnership and form part of the initial BOOT transaction, but they will not be investing in the same way as a water user does in a community irrigation scheme. That is, there is no connection between the number of shares they hold and the right to water. The water they are supplied is at an arm’s length basis by the limited partnership to the water user/farmer pursuant to a ‘take or pay’ agreement with a profit margin.

So what are the pros and cons? Advocates of a community owned/co-operative scheme argue the advantages are that the scheme is owned by the farmers/water users who can control their own destiny through their ownership of the scheme. Further water charges are on a cost recovery basis allowing the farmers to make a profit on the farm. Farmers are not exposed to the risk of increased water charges from what effectively amounts to a monopoly provider.

The disadvantages of a co-operative/community structure, is that the structure is unattractive to outside investors, limiting the ability of the scheme to raise capital for future development. In addition, community irrigation schemes are sometimes criticised for having a lack of governance and management, or governance and management not of the same quality that would exist if there were private investors.

Turning to the privately owned model, advocates note that risk is spread through outside capital investment. The farmer can concentrate on investing on farm. In addition private investment brings stronger disciplines, governance and management. The disadvantage is the natural distrust that farmers will have of the commercial model which can lead to increased uptake risk. Because of the need to keep costs down and make the water attractive to farmers, the commercial returns may not be sufficiently attractive for outside investors, as was recently the case for Trustpower and Ngai Tahu with the Ruataniwha project.

In reality, many established schemes are quite capable of funding their expansion through farmer equity and relatively cheap bank debt. It is the new greenfield schemes that tend to require outside investment to bridge the gap between farmer investment and the cost of the project.

The gap in the past has sometimes been filled by the local council or a power company. The government has established Crown Irrigation Investment Limited (CIIL) to bridge the gap in the marketplace, but to date that investment has been limited to a small investment in Central Plains Water.

It will be interesting to see what role CIIL plays in the future and whether its adherence to strict investment principles such as the investment being ‘investment ready’ and being a ‘lender of last resort’ are maintained or a greater flexibility emerges.

This article was published in the Winter 2015 edition of Irrigation NZ news.

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Prepared by David Goodman