One of two corporate investors identified as potential backers of the Ruataniwha irrigation scheme has pulled out, citing low returns and concerns users will take too long to sign up to take water from the project.
Listed electricity generator and retailer Trustpower announced to the Stock Exchange yesterday it was withdrawing as a potential scheme investor because it believed the project did not fit within the company's "risk and return framework".
Last September, Trustpower and wealthy South Island iwi Ngai Tahu signed a memorandum of understanding with the Hawke's Bay Regional Investment Company (HBRIC), the investment arm of the Hawke's Bay Regional Council, which is promoting the dam project.
The memorandum formed the basis for the potential investors making a detailed assessment of the viability of part-funding the scheme. HBRIC said at the time that institutional investors were expected to fund between 30 per cent and 40 per cent of the $265 million project.
Since then Trustpower staff have been involved in aspects of the project, including the development of a contract for the design and construction of the dam and associated irrigation network in Central Hawke's Bay.
Trustpower's general manager of commercial operations, Chris O'Hara, said the construction contract for the project had "landed in a reasonable place".
However, the return the company would get on its investment had not reached the required level.
"It's fair to say the returns were always very skinny - and they always are with projects of this kind - so there was always a reasonable chance we weren't going to get there, because it's tight," he said.
Mr O'Hara said while HBRIC had structured a fixed-cost construction contract that put the onus on the consortium building the scheme to complete it for a set price, there was always the risk of unexpected issues cropping up and "large civil projects are ... notorious for running over time and over budget".
"The level of return we were able to achieve in relation to those risks just wasn't enough to get it over the line," he said.
As well as that, there was not enough certainty around the speed with which irrigators would sign up to take water from the scheme, Mr O'Hara said.
"I'm confident that over time, if the scheme is built, it will get full uptake but it's a matter of how long that takes and if it takes a reasonable amount of time it means the cashflows are delayed from an investor perspective and therefore the overall investor return goes down."
HBRIC has received "expressions of interest" from irrigators who have indicated they will take 47 per cent of the water the scheme will be able to provide and the company is going through the process of converting that interest into supply contracts.
HBRIC CEO Andrew Newman told a regional council meeting on Wednesday that it would also be harder to sign up users before the irrigation scheme was built than it would be when pipes were running past potential users' properties.
HBRIC has said the scheme will not proceed if it does not secure initial contracts for 40 per cent of the available water.
Mr O'Hara said Trustpower's withdrawal from the project did not mean it would not be suitable for other investors.
"There are infrastructure investors that are prepared to take a long-term view of returns and are prepared to take returns at a lower level than we would. It's simply because we have limited capital and we've got competing needs for that capital."
HBRIC chairman Andy Pearce said the company was in discussions with other potential corporate investors whom he could not name, and discussions were continuing with Ngai Tahu Holdings Corporation.
Ngai Tahu said it was working through key project issues with HBRIC. Those included commercial criteria and "the involvement of the right investment partners".
"Participation will be dependent on these matters being satisfactorily addressed."
HBRIC is also negotiating debt funding from government agency Crown Irrigation Investment.
Irrigation New Zealand CEO Andrew Curtis said Trustpower's exit provided an opportunity for Hawke's Bay farmers and investors to "fill the investment gap" through a preliminary information memorandum put out by HBRIC this month.
But Mr Pearce said the scheme would still require institutional investor and Crown support to get off the ground.
Hawke's Bay regional councillors are due to vote in late June on whether to invest up to $80 million in the scheme.
HBRIC has set June 30 as a tentative "financial close" deadline date for finalising investment commitments from the various parties.
Regional council chairman Fenton Wilson said the council was still some way off making its decision over the investment and no conclusion could be drawn from Trustpower's decision to pull out.
Mr O'Hara said he hoped the dam was built.
"I hope it's not dead in the water - no pun intended - because I think it's fundamentally a good project and will be bloody good for the district. It just doesn't tick our boxes, unfortunately."