There is a point on the highway through the Mamaku Plateau where the steep, winding road begins its gentle descent, the native bush gives way to farmland and Lake Rotorua and a glimpse of Mokoia Island suddenly appear.

This is the first sight of the lakes region for many of the 1.2 million tourists arriving in Rotorua each year, two-thirds of whom are New Zealanders. For me it's the signpost that I've reached home. Although it is 17 years since I last lived in Rotorua, family ties ensure I return often enough. And always that first lake view snaps me out of travel paralysis.

Now it is the image I carry with me, sitting at my desk back in Auckland, thinking about that city I grew up in and the hordes who don their shorts, comfortable shoes and silly hats for a casual stroll around its various attractions.


Doubtless they have little thought for how this city was carved out of a unique relationship between Maori and Pakeha and now faces an issue that could tear its race relations apart.

Aside from the city's pungent sulphuric aroma, which locals don't notice, Rotorua's most striking feature is the equally strong Maori presence. Not only has the tourist industry relied on Maori culture as an integral part of the tourist experience, but here Maori comprise about 30 per cent of the population, compared with 14 per cent nationally.

Because Te Arawa, the local federation of tribes, fought with the Crown against Tainui during the land wars and prevented east coast tribes joining the King movement, it kept a significant portion of its land, and is now Rotorua's biggest ratepayer.

Shops in the downtown area bordered by Ranolf St, the lake edge behind the Polynesian Spa, Eruera and Amohau Sts, are on land owned by Ngati Whakaue, a sub-tribe centred on Ohinemutu and Whakarewarewa. Ngati Whakaue uses the income from rents for what is known as the endowment block to fund education for its people - grants for tertiary students or education projects in schools. A recent campaign has been to improve numeracy and literacy.

The tract of land returned after the railways abandoned it is now the site of the city's new Warehouse-dominated mall developed by another Ngati Whakaue-based trust, Pukeroa Oruawhata. Income from that is to go towards health for local Maori. And the trust also hopes to build and run a casino on the same land once the government lifts its moratorium.

So while Tainui suffered the humiliation of massive land confiscations and now humiliates itself mismanaging the $170 million compensation package, Rotorua Maori have been quietly collecting the rent on their land and redistributing it for the best part of a century.

That it has continued its friendly association with the Crown is no doubt why Helen Clark has chosen to celebrate Waitangi Day in Rotorua this year, rather than again risk humiliation from the more belligerent northern tribes.

Even so, Te Arawa carries a grievance over the Crown's ownership of the lake beds and, in a move that is creating a schism in the city, it is asking for title to be returned.

Arapeta Tahana, head of the Te Arawa Maori Trust Board, explains the iwi's position. When, in 1861, Judge Fenton negotiated the sale of land so Rotorua could be established, the Crown agreed to continue discussions with Te Arawa over the use of the springs and lakes for tourism. Tahana says that was clear acknowledgment Te Arawa owned those resources.

Economic depression and the Tarawera eruption in 1886 crippled further tourism development and the lakes issue abated, until the government put rainbow trout into Lake Rotorua at the turn of the century, and began issuing fishing licences. Not only did the trout threaten native species in the lake, depriving Maori dependent on the lake as a natural food source, but ownership again became a long-running court battle after one of the tangata whenua defied the law by fishing without a licence.

The issue of who owned the lake was then batted around, from the Maori Land Court to the Court of Appeal, and was set aside during the First World War, only to resurface in 1920.

By then Tahana believes the Crown knew it would lose, but Te Arawa did not want to fund a lengthy court battle. So a deal was thrashed out whereby Te Arawa would drop its claim to the lake beds in return for an annuity, set in 1924 at £6000.

The Te Arawa Maori Trust Board was established to administer that income which was tagged for social advancement, education scholarships, marae maintenance and to help the destitute. Tahana says if the annuity had been indexed to inflation it would now be worth $500,000. But instead the Crown pays only $18,000 annually, a figure that has not risen since 1975, and barely allows the board to do anything apart from run off the return of earlier investments.

Tahana realises that if title reverts, the Crown would logically cease to pay anything, "but if it still wants public access, it will have to negotiate."

This is the view which sends shivers up the spines of Rotorua Pakeha.

But Te Arawa is promising it would never deny public access to the lakes. The trouble is that not everyone in Rotorua believes it, especially after the Maori trust which owns the title to Mount Tarawera leased it to a tourism operator and now the cost of being allowed to climb the mountain has risen from $2 to $23.

Mike McVicker owns the Putt Putt Mini Golf course on the main road east, downwind from the sewage plant and the stench of rotting compost. He sits under an umbrella in the summer heat, mobile phone poised, ready to make another complaint to the council.

McVicker is president of the local Chamber of Commerce which has surveyed its members on the issue of lake ownership. Even though neither it nor the council has any control over the decision, 86 per cent said they wanted the Crown to retain the title and 76 per cent said they did not accept Te Arawa's word that public access would be maintained.

McVicker, who attended one of the acrimonious public meetings on the issue, worries that "if Margaret Wilson passes title over all hell will break loose."

"It could divide our community if not handled correctly," says McVicker. "The mayor says he does not want Rotorua to become a Wanganui. We'd lose 50 per cent of the tourist industry overnight."

Arapeta Tahana says they are ignoring Te Arawa's long history of generosity to Rotorua.

So Mayor Grahame Hall is working hard to defuse tensions, claiming the issue is being whipped up by the racist One New Zealand Party, and assuring Rotorua people that if Te Arawa regain the lake beds, it will make no practical difference to everyone's ability to enjoy the lakes. "It will be business as usual, no matter what Te Arawa owns."

Traditionally, business in Rotorua has been dependent on either forestry or tourism. Ross Stanway, the council's business development manager, says you can argue all day about which industry is the more important to the city, so he doesn't bother.

Certainly, tourism injects $463 million into the local economy annually and accounts for 18 per cent of jobs in the city. And although Rotorua was largely established by early governments eager to capitalise on tourism, this life-blood industry remains curiously incidental to the 61,000 people now living there.

Which might explain why cash-rich visitors to the city on weekends and public holidays have trouble finding shops that are open.

Scotty Watson runs the local Bernina Sewing Centre and an organisation called Ready to Retail, which is trying to inject some competitive aggression into Rotorua shopkeepers and bring them up with the idea that shopping is now a recognised leisure activity. Arresting the flow of shoppers out of Rotorua into the arms of more savvy retailers in neighbouring Tauranga and Taupo is becoming critical.

The problem, says Watson, is that Rotorua has too many "lifestyle retailers." Meaning they like to have nights and weekends off and because they have been in business for so long and are debt-free, they can afford to snub their noses at the tourists.

A think-tank on the future of Rotorua retailing is about to get underway. Watson sees a niche in offering an alternative to the malls springing up elsewhere in the Bay of Plenty by developing attractive main-street shops run by specialists and open consistent and longer hours.

Because its attractions - mudpools and geysers, bushland and lakes - occur naturally, Rotorua never had to work at attracting visitors, until the last decade, when Taupo became a serious competitor.

Although it attracts a little over half of the numbers that flock to Rotorua each year, by the 1980s Taupo was working harder at polishing and promoting its image while Rotorua, victim of a combination of Rogernomics, the rural downturn, and a dearth of inspired local leadership, was looking no brighter than a tired timber town. The loss of jobs in the forest saw unemployment rocket to a staggering 23 per cent. Longer queues began forming outside the banks on benefit day.

By 1991 Grahame Hall, farmer turned local body politician, was a deputy mayor embarrassed by the scruffy downtown and lakefront. With civil engineer Paul Sampson, he set out to transform the central district with attractive paving, parking precincts, roundabouts to ease the traffic flow, a cafe strip with room on the pavement for al fresco dining, and canvas sails soaring above the town centre. Five years and $30 million later, Rotorua's streets are now lined with terracotta, and according to Grahame Hall, who became mayor in 1993, the gold has followed.

The redevelopment attracted investment - principally the new Novotel hotel near the lakefront - and with it jobs.

In the summer of 2001 the mayor, relaxing at home on the outskirts of town, talks happily about how the redesign lifted both the economy and morale in Rotorua and says that now, in line with national trends, unemployment runs at around 6 per cent. Total number of visitor nights spent in the city rose are up by 23 per cent since 1992.

Although more prosperous than nearby Kawerau, Opotiki and Whakatane, which are among the country's poorest towns, economically Rotorua lags behind Tauranga. The Index of Deprivation prepared by the Bay of Plenty Regional Council in 1999 shows that although Rotorua has a higher proportion of seriously wealthy, it lacks the prosperous middle class that is driving the heady development in Tauranga and has a much higher proportion of poor people than the national average.

That might explain why midwife Steve Chadwick last year became the first Labour politician in 38 years to win an election in this traditionally true-blue town. That and the fact that her opponent was National's energy minister, Max Bradford, whose popularity was largely indexed to the electricity reforms.

Hardship might also explain why Rotorua is gaining a reputation as a gambling town. In the 90s it earned a new nickname, Roto-Vegas. Today the disapproving say they have counted 300 pokey machines within the central city, mostly in shops that have been converted to bars with blackened windows and where, one hot January afternoon, I watched a full house of 18 women of various ethnic origins sit resolutely before those brightly lit bandits.

Although not originally from Rotorua, Chadwick is representative of the place perhaps more than she realises. She is married to Maori lawyer and former local newspaper columnist John Chadwick and the couple's home in Kawaha Point, one of the city's higher-toned suburbs with expansive lake views, is distinctive for the Maori motifs that adorn it. Chadwick says she considered herself bicultural until she and John moved to Rotorua 20 years ago and she discovered how much more about Maori custom she had to learn.

And although she finds Rotorua deeply conservative - she fell out of step with her constituency when she supported changes to the prostitution and matrimonial property laws - and suspicious of carpetbaggers, she refutes any suggestion that it is also a racist town behind its bicultural exterior.

What she sees instead is an impoverished town with only 1 per cent annual growth, compared with the 19 per cent enjoyed in Tauranga and, like her government, she wants to address the pockets of deprivation.

Looking from her front deck, across the lake and the city to the hills of Whakarewarewa forest behind, she refers to the "wall of wood" surrounding Rotorua which is ready to be harvested. Trouble is, she says, so many jobs were lost in forestry in the 1980s that there are now too few people in Rotorua with the necessary skills to get the new forestry jobs that are going to open up in the next two years. A working group of industry players, education bodies and Work and Income has formed to look at ways of attracting school leavers into forestry careers.

But if Rotorua is envious of Tauranga - its booming neighbour with the better climate whose total population has overtaken it and whose real estate prices are starting to resemble Auckland's - its officials are careful not to say so.

Business development manager Ross Stanway says it is always good to have a prosperous neighbour putting people and investment on your boundary. Mayor Grahame Hall says that Tauranga is still to address the infrastructure upgrades Rotorua has already completed and MP Steve Chadwick says Rotorua never wanted the boom and bust cycles that typify Tauranga.

But they all agree that while Rotorua might be one of the jewels in the crown of the packaged tour operators, it does a poor job catering for the independent traveller. News that Tranzrail was considering cutting passenger links with Rotorua at least forced the visionaries in the city to think of novel ways to move people from Auckland into Rotorua. A historic steam train like the Kingston flyer perhaps?

And although plans to upgrade the airport to cater for transtasman flights are being discussed, Air New Zealand spokesman Cameron Hill says the airline has never considered Rotorua to have prospects as an international airport. It withdrew its domestic jets from the Rotorua route in June last year leaving it to smaller propeller craft, and no amount of airport upgrading is going to persuade it to re-introduce what was fast becoming an uneconomical service.

Still Rotorua boxes on. This summer it is reporting its highest tourist numbers ever, driven by the low dollar which makes it a cheap destination for foreign travellers and has persuaded many New Zealanders to holiday at home.

The push is on to return Rotorua to the point where it began - as a health spa to which the weak and weary retreat to take the waters and possibly, says Chadwick with a cunning grin, get a discreet nip and tuck as well. She sees opportunities for both the private sector and the public health system.

After all, the health benefits of bathing in the thermal water were what prompted the government to make its first tourism investment in 1908 by building the Tudor-style bathhouse, a structure that has become a Rotorua icon and now houses its refurbished museum.

Nearly a century later, Rotorua is rediscovering what it's there for.