Brian Anderson: Real beneficiaries of dam are not ratepayers

The site of the proposed 80m Ruataniwha Dam.

It is interesting that John Palairet found it necessary to redefine the term "break-even" in his comprehensive review of the Ruataniwha Water Storage Scheme financials for the Hawke's Bay Regional Council.

He defines it as "the scheme generating sufficient revenue to cover its operation and first priority bank service costs as a minimum". He goes on to suggest that this can be achieved at the current contracted water uptake of 42.8m m3.

This is just financial nonsense. Ignore any real costs you don't like until you achieve the result you are looking for. Really!

This is a continuation of the attempts to pull the wool over councillors' eyes regarding the financial viability of the scheme by trying to convey the level of comfort that is normally accorded a proper definition of "break-even".

In fact the revenues in year 1 do not even result in a positive cash-flow, and require the scheme sponsors to take on additional debt just to cover the interest rates demanded by the banks, and to provide the returns that are required by the institutional investor, CIIL and the HBRC itself.

If water sales in year 1 amount to 50m m3, then the revenue generated [at 27.5 cents/m3] is $13.75m. [Actually it is less then this because early sales are discounted.] That is sufficient to cover the operational costs, but cannot provide the required returns on capital invested. HBRIC will be required to fund the shortfall by increased Port of Napier dividends and bank borrowing.

A proper, economic, definition of "break-even" is the situation where the accumulated revenues are equal to the accumulated costs [including interest and dividends], from the commencement of the project.

When does this occur for the RWSS? Not until 30 years into the project, Yes, 30 years!! Until that time HBRIC must continue to borrow money [and pay interest on the borrowed money] to cover the returns that are required by the institutional investor, CIIL and the HBRC itself.

Mr Palairet has described this arrangement of borrowing so heavily against future earnings as "unorthodox".

He forecasts the debt required for HBRIC Ltd to satisfy HBRC's 6 per cent requirement ranges from $7.6m to $44.5m in year 10 depending on uptake, $32.2m to $52.8m in year 20 and $55.2 to $80m in year 30.

A better term might be "a grand Ponzi scheme", with all the financial risks being carried by the Regional Council and its ratepayers, as they get deeper in debt just to ensure that commercial rates of return are available to the institutional and commercial investors and the banks.

Do councillors find this situation, where HBRIC must commit to an extended level of debt than would otherwise be required in a more orthodox situation, and be totally constrained in terms of investment opportunities in other capital projects as a result for perhaps the next 30 years, to be tenable?

It should not provide any level of comfort to councillors when they realise that the initial $80m investment does not actually provide any return for something like 30 years, and that in the meantime the escalating level of debt required to service loans and provide attractive commercial returns to the institutional investor and banks will continue to constrain its activities for many years to come.

Just who are the real beneficiaries of the RWSS? It's certainly not the HBRC and its ratepayers.

Brian Anderson is a retired engineer and business analyst.