Brian Anderson: Little understanding of dam finance plan

The site of the proposed 80-metre Ruataniwha Dam, over the Makaroro River.

I write this to help Tim Gilbertson and others understand how they have been duped by selective and misleading information regarding the Ruataniwha Water Storage Scheme.

In fact I am dismayed how little understanding there is of the dodgy dam financials, notwithstanding the information that is available in the public arena. People have been lulled into a false sense of security by statements such as: "The project will be cash-flow positive in its first year."

That is dodgy accounting at best but even that statement was further distorted at a recent Hawke's Bay Regional Council meeting to now become "break even" at the current level of contracted water sales. Rubbish! That is just smoke and mirrors and that change, coming from the regional council's own financial consultants, is pretty clear evidence that the council was being misled over the financial viability of the scheme.

A simple back-of-the-envelope calculation demonstrates how dodgy the financials are. Contracted water sales sit at 42.8 cubic metres. In the first year of operation then, with water priced at 27.5c per m3, the gross revenue is $11.77 million. That revenue might just cover the total operating costs for the first year of operation. The financial consultants, I suspect with their arms twisted up their backs, and with their dodgy definition, deem that to be "cash-flow positive".

But HBRIC is obligated to provide a 6 per cent return to the regional council on its investment of $80m, and will also be required to provide a commercial return to the other investors too.

Let's be generous and say that the other investors are guaranteed only 5 per cent. HBRIC must therefore find an additional $17.3m each year just to make these returns possible. How does HBRIC intend achieving this? By borrowing, at commercial rates, from banks and by using its only asset, the Napier Port, as security.

This additional debt burden of $17.3m, plus the interest owed on that amount, accumulates every year. It is only offset when, and if, the contracted water sales result is sufficient surplus revenue. Each year HBRIC gets further into debt, and the Napier Port becomes more vulnerable.

Remember, in order to generate an additional $17.3m in revenue (plus interest) something like an additional 62 cubic metres of water must be sold. When will that be achieved?

This is not rocket science. Get this! The promoter of the scheme has to borrow money at commercial interest rates in order to meet the obligations to return a dividend to the investors. Sounds just like a Ponzi scheme!

Lest people think that the financials don't work like this, here is a direct quote from the Deloitte Peer Review of the RWSS business case, commissioned by the regional council:

"In our view, in the absence of subsidised capital from HBRIC and CIIL the RWSS is not viable under the current water uptake scenario. However, the scheme is also critically dependent on capital from parties seeking a commercial return on this investment."

That is a thumbs down, not a thumbs up.

Another independent consultant, P J Fraser, concluded that: "Economic evaluations commissioned by HBRIC show that the entire project has a net present value (NPV) of -$27m when discounted at the public sector discount rate (PSDR) of 8 per cent per annum over 35 years. The notion that the RWSS is a regional, let alone a national, 'game changer' is therefore illusionary."

The Butcher case presented to the HBRC might sound reasonable until you understand that it is built completely on base assumptions provided by HBRIC and their other consultants. Butcher himself is careful to point that out, but the significance seems to have been lost on the previous council.

The presentation by Butcher suggests that there has been no proper risk assessment, no proper assessment of the probability profile for significant variables, no analysis to reach a conclusion on the inter-relationships and dependencies. In other words, it is only the most basic, simplistic and amateurish attempt at an economic analysis.

Exactly where are the 2500 additional jobs going to come from? If you believe that you probably also believe in the tooth fairy.

There are many better ways to improve farming in Central HB and elsewhere. The emphasis ought to be on biological soil structure management to improve water retention, and local on-farm storage. Both are more effective than a dodgy dam, and both contribute more effectively to sustainable management of the environment too.

The best thing that Tim could do is to cancel his contract and then talk to other farmers in the area and help them understand that they, too, have been misled.

- Brian Anderson is a retired engineer and business analyst.