Irrigation Leader
Featured,  Interview

Financing Irrigation Projects Lessons From New Zealand

New Zealand’s irrigation schemes are structured and financed differently from most American irrigation districts or projects. Rather than selling water to customers on a year-by-year basis, New Zealand irrigation schemes sell their customers shares that also involve long-term water supply arrangements. Those arrangements, often valid for a term of 30 years or more, guarantee schemes a steady source of income. In fact, it is that steady cash flow that constitutes the schemes’ most valuable asset. When banks lend money to schemes, they do it on the basis of this cash flow.

David Stock is a privately practicing commercial barrister in Christchurch, New Zealand, who has special expertise in water distribution projects. In this interview, Mr. Stock speaks with Irrigation Leader Editor-in-Chief Kris Polly about the structure of irrigation schemes in New Zealand and how they raise money.

Kris Polly: Please tell us about yourself and your work with irrigation schemes.

David Stock: I am a New Zealander commercial barrister. I specialize in commercial work. I used to be a partner at the largest law firm in New Zealand, but I have been working on my own for a few years now. I’ve been working with irrigation schemes in New Zealand for around 25 years, drafting contracts for them and doing their corporate and commercial work.

Kris Polly: How are irrigation schemes in New Zealand structured?

David Stock: Irrigation schemes in New Zealand are typically companies or cooperative companies. They are normally structured so that a farmer who owns a farm and wants
to acquire water for it will take up shares in an irrigation company and concurrently enter into a water supply agreement. That means that there is a complete tie-in: The farm to which the water is to be supplied holds shares in the irrigation company that owns the irrigation distribution system and invests in that company to enable it to invest in distribution infrastructure and deliver a specified volume of water to the farmer, subject to availability.

Kris Polly: Are the irrigation schemes governmental entities?

David Stock: No, they are not. In 1990, the existing government-owned schemes were bought by the farmers who used them for a nominal sum. The government recognized the importance of continued investment in infrastructure, and about 5 years ago, it set up a fund of NZ$90 million (US$59.66 million) to support the establishment of new irrigation schemes on commercial terms. However, that fund has not been used widely because it has been difficult for newer irrigation schemes to establish themselves and obtain the correct financial structure to proceed.

Kris Polly: So irrigation schemes do not have the ability to tax.

David Stock: They have no ability to tax at all, but they have the ability to make charges under the water supply agreement, and if those charges are not paid, then they have the right
to cut off the water and also to forfeit the shares of the shareholder or to take action to recover any monies that are owed. That is a strong covenant, because cutting off the water supply would significantly diminish the value of the farm.

Kris Polly: How do the schemes obtain financing?

David Stock: I’ll give you an example. I acted for a new scheme that had a right to take 17 cubic meters per second (around 600 cubic feet per second) of water out of a river. It was a costly scheme to establish, requiring around NZ$90 million (US$59.66 million), because the water had to be pumped 90 meters (295 feet) from the river up onto the plains to be piped and distributed to the farmers. At the time, that scheme covered 12,000 hectares (29,653 acres); today it has expanded to more than 20,000 hectares (49,421 acres).

When the scheme approached banks to obtain funding, it said that it expected at least 30 percent of the total cost to be covered by shareholders. The banks secured the other 70 percent against the covenants under the water agreements that the scheme held with the farmers, in which the farmers agreed to take water and pay water charges. In other words, the banks banked a 35-year cash flow under the water supply agreements against lending money to the scheme on the basis that those charges would repay most of the capital and meet interest over 35 years.

The banks understand that the farmers have to pay those charges for water to be delivered. Based on their experience of also having banked those farmers, they know that the farmers are earning enough to pay those charges and that the contracted supply of water is critical to the value of the property. Generally, the banks have a good understanding of the dynamics of the industry and the long-term cash flow established by a water supply agreement.

Kris Polly: It sounds like farmers have agreed to pay their water bills not just for this year and next year, but for a period of many years. Is that standard?

David Stock: Yes. One scheme I work with had a 33-year water consent. The banks are prepared to lend against that because they are confident that the farmers will be making their payments for the next 33 years, and they also know that there is a 95 percent chance that the consent will be extended. They will leave some residual debt at the end of the 33 years because they are confident that the water will continue to flow, given how critical it is to New Zealand’s farming economy.

Kris Polly: That is interesting—it is less like an annual bill than it is like a mortgage.

David Stock: Some of these schemes actually take mortgages or encumbrances against the properties to secure the water charges with that charge ranking after the bank, but it’s a tail-end security so that if a farmer doesn’t pay, the banks can access that security through the irrigation company against the farm. That is rarely exercised.

Kris Polly: In the United States, it is my understanding that farmers often pay their water bills at the beginning of the season, and then there is some settling up at the end of the season if needed. How are things different in New Zealand?

David Stock: In New Zealand, farmers build a budget for the year and determine what water charges need to be paid for the entire year. Those base charges are paid monthly to assist with farmers’ cashflow. In addition, during the time that the farmers are actually taking water, they may in some schemes pay a top-up charge for the direct costs relating to the volumes of water they’re actually taking. All the agreements require a direct-debit agreement by which the money is transferred directly from the farmers’ bank accounts to the irrigation company.

Kris Polly: Would you give us an idea of the amount that farmers in New Zealand pay?

David Stock: Charges in an open-rate scheme tend to be around NZ$90 (US$59.66) per hectare per annum. For a piped scheme in which water is delivered under pressure, meaning that pressure will power farmers’ pivots without additional power, the annual charge could be around NZ$750 (US$497) per hectare per annum.

Kris Polly: What is the typical pressure at which the water is delivered in a piped scheme?

David Stock: The minimum would typically be 4 bar, or 58 pounds per square inch. Some of the farmers also have artesian bores. Those farmers may use part irrigation water from the irrigation scheme and also use bore water, which they have to pump from a significant depth (up to 100 meters, or 328 feet). In addition to that, one of the schemes I act for insists that every farmer have 400 cubic meters (105,669 gallons) of on-farm storage to cover any shortages in supply.

Kris Polly: When irrigation schemes borrow money, do the banks consider their assets, or do they focus mainly on the water supply agreements?

David Stock: The banks understand that schemes have assets, which are quite valuable and costly to install or secure, especially the rights to take water, but they also understand that if the farmers are not taking water, those assets have no value whatsoever. The banks are banking the monthly cash flow provided for by the water supply agreements, and the rights to take water, not the value of the irrigation assets.

Kris Polly: Would you elaborate a bit on the share system and how it works?

David Stock: First, a company will look at how much capital is needed for a project and decide what percentage of the money can be obtained from a bank and how much must be obtained from the farmers. On that basis, the company will determine how many shares it needs to issue. The farmers will look at that offering and determine whether the cost and the amount of water included in those shares would benefit their farms. Buying shares in the company, of course, also implies an annual charge. The farmers have developed sophisticated models to show the economic effect that buying additional shares will have on their farms.

I was recently in discussions with a farmer regarding his highly productive 120-hectare (296-acre) farm. He wants a more reliable supply of water. To get it, he is prepared to take up shares at a cost of about NZ$250,000 (US$165,735). The farmers are well aware of the high value that additional reliable water supplies and shares in the company bring to their farming enterprises. Farmers will consult with their accountants to determine whether they should take up additional shares, with future profits in mind. It is all about the business.

David Stock is a commercial barrister and solicitor working in Christchurch, New Zealand. He can be reached at djs@davidstock.co.nz or +64 3 353 1036.