What are banks looking for from irrigation projects?

21 Aug 18

Column written by Christchurch Partner David Goodman, published in a Water and Irrigation feature in the Ashburton Guardian.

With the pending demise of Crown Irrigation Limited from funding either new or expanding irrigation schemes there is an increasing focus on what bank requirements are for lending to irrigation projects. The key question is what is the bank looking for in the irrigation scheme and its shareholders?

A high level question for the bank will always be, is the scheme affordable. Scheme directors and shareholders through there surveys may predict a certain uptake at a certain water charge, a certain price per share and water charge per hectare. It will form the view that the share price and water charge is affordable. The bank may take a different view of the risk and its appetite will vary depending upon its exposure to irrigation and the sector. On any given day one bank may have greater appetite for risk in the sector than another bank and this can change.

Having asked the question in relation to the affordability of the scheme the bank will look to see the necessary legal structures are in place to ensure that the shareholders must pay the irrigation company the water charges owed. The ability for the irrigation company to recover water charges to repay principal interest owed to the bank is fundamental. It will look to see that there is a valid constitution in place containing an express provision on the part of the farmer to enter into the company’s current water supply agreement. The water supply agreement should provide the company with a clear and broad authority to charge water charges and recover interests and costs recovery on those water charges if required. Lastly the bank will be looking to see that the constitution and water supply agreement has teeth and that the company has the power to enforce the provisions of the water supply agreement in the event of default through the cutting off the water supply, redemption or surrender of shares.

It is important to appreciate that the constitutional and water supply provisions are necessarily tough for the greater good of the scheme. If one or two shareholders/farmers default on a payment of water charges it is in the interest of the remaining performing shareholders/farmers that the company is in the position to take strong action to enforce payment. Often individual farmers may see the constitution and water supply agreements as draconian and a surrender of their property rights. Putting in place a new constitution and water supply agreement that will meet the banks requirements and protect the company as a whole requires careful drafting and explanation to shareholders so that they understand that the provisions are there for the greater good.

Having put in place the necessary constitution and water supply agreement it is necessary to properly administer and maintain the company. Often companies will make a significant investment in constitutions and water supply agreements and then fail to properly administer the water supply agreement ensuring that new farmers in the scheme enter into the water supply agreement. The bank will be looking to site all the water supply agreements as a condition precedent to drawdown or alternatively receive the certificate from the irrigation company’s solicitors certifying that a certain percentage are current and signed up e.g. 95%.

In addition to water charging requirements the bank will be looking to see that the company’s liability to farmers for non-supply is suitably limited and that there will be an ability to sign the rights under the water supply agreement to the bank in the event of receivership.

In addition the constitution and water supply agreements the bank will be looking to see that the company’s key infrastructure is secure. Typically this means that there are necessary water consents in place to take water and easements supporting races and pipes. It is not uncommon for gaps in easements to be discovered when due diligence is undertaken in respect of irrigation scheme there is some merit in front footing the exercise and making sure that the schemes house is in order before approaching the bank. The bank will do due diligence on the company’s take and land use consents. The simpler the consenting arrangements the easier it is for the bank to understand. In particular the bank will be concerned that the company owns and controls all the relevant consents and complex arrangements where third parties or shareholders hold some of the consents will not be attractive to the bank. Lastly in terms of extensions or new schemes where significant construction is anticipated, the bank will be looking for step in rights in respect of the construction agreements and tripartite agreements between the construction company, the irrigation company and bank. These arrangements can be complex and require lawyers with the appropriate construction and banking experience.

The level of due diligence that will be undertaken by the bank and its lawyers for significant loans cannot be underestimated. Legal costs can be significant if extra unforeseen work is required to get your house in order. Any irrigation schemes or projects looking to borrow significant sums should ensure that they are “match fit” before the term sheet is signed up.


Find online version of Water and Irrigation feature  here  on page 20