Agenda of Regional Council Meeting

HAWKE’S BAY REGIONAL COUNCIL

Wednesday 16 March 2016

Subject: HBRC Environmental Flows

Reason for Report

1. At its meeting on 24 February 2016 Council resolved the following in respect of a letter received from HBRIC Ltd in relation to a proposal for Hawke’s Bay Regional Council (HBRC) to access additional flows from the RWSS for environmental purposes.

1. Agrees that the decisions to be made are not significant under the criteria contained in Council’s adopted Significance and Engagement Policy, and that Council can exercise its discretion and make decisions on this issue without conferring directly with the community and persons likely to have an interest in the decision.

2. Acknowledges the potentially significant environmental benefits of an additional 30 million m³of water for the Tukituki system over the next ten years and an additional 4 million m³of water per annum from Years 10-35 over and above the flushing and other flows provided for by the resource consent.

3. Approves, in principle, entering into a 35 year Water User Contract with Ruataniwha Water Limited Partnership, as proposed in the letter from HBRIC Ltd, subject to:

3.1 The Ruataniwha Water Storage Scheme proceeding;

3.2 Advice from Deloitte, as part of Council’s due diligence process, that it is satisfied that the cash flows from the RWSS will provide for the costs of the purchase of 4 Million m³ of water per annum from Year 10 onwards; and

3.3 Confirmation from staff and HBRIC Ltd that the net position of dividend paid by HBRIC Ltd less the cost of the Council flows will be consistent with the HBRIC Ltd Statement of Intent

4. Notes that by entering into a Foundation Water User Agreement Council will be creating an asset which at any future time it may sell all or any part of its available water.

2. At the Council meeting discussions were held on whether or not this decision was “significant” as assessed through the Council’s Significance and Engagement Policy. Councillors indicated support for the obtaining of an expert opinion on the need for public consultation on this decision.

3. Advice has been received from Audit New Zealand on this matter, and is now reported to Council for further consideration.

Discussion

4. Immediately following the Council meeting on 24 February 2016 staff contacted Mr Stephen Lucy of Audit New Zealand. Following on from this phone call we wrote a letter to Mr Lucy outlining a proposed process for public consultation on the decision. This proposal was described as:

“It is our proposal to recommend to Council that a variation to the Financial Strategy be set out in the Consultation Document covering the Annual Plan 2016/17 which is currently being finalised. We would set out in that Consultation Document, the proposal to clarify the 6% return from the RWSS in line with the amended paragraph to the Financial Strategy as shown in the attachment to this letter. It is our view that this change would not trigger an amendment to the LTP as set out in section 97 of the Local Government Act.”

5. Mr Lucy’s advice in response is:

“As you know, whether an LTP requires amendment is a legal test. As auditors we are unable to give you legal advice. However, in carrying out our role we are required to assess aspects of Council’s legal compliance, including considering whether decisions taken by Council required it to amend its LTP. While you have provided us with some information about the decision, we would need further information to provide you with a conclusive view on these issues. However, based on the information that you have provided us with, we consider that the Council may need to amend its LTP. This is because of the proposed change to the financial strategy and because it appears that the Council would be undertaking a significant new activity which is not provided for in the LTP. Given the significant amount of money involved, and the contentious nature of the project, we would expect the Council to be seeking legal advice on these issues, if it hasn’t already done so.

In making the decision about whether an LTP amendment is required the Council will need to give specific consideration to how the in principle decision affects the LTP. I consider that you will need to give particular consideration to the following matters:

5.1 How the in principle decision will affect the financial strategy as set out in the LTP.

5.2 Whether a change to the financial strategy would also require an amendment to the revenue and financing policy. I note that section 103(4) of the LGA 2002 requires any significant amendments to the R&F policy to be audited, which means a formal SCP consultation would be required.

5.3 Whether the provision of water for environmental flows is provided for as an activity of Council in the LTP.

5.4 Whether the probable size of the financial cost of the in principle decision (I understand from media reports that this is $35 million) reflects a significant change to the levels of service.

5.5 How the in principle decision fits within Council’s Significance and Engagement Policy.

Given the issues I have identified above, I would strongly recommend that the Council obtain legal advice as to whether an LTP amendment is required.”

6. In consideration of the matters raised in paragraph 5 above the following comments are made:

6.1. In the financial strategy included in the LTP, the targeted returns on proposed investments were stated to be 6% for projects including the RWSS. There will need to be a change made to the financial strategy to clarify that some portion of this return will be used by HBRC for the purchase of water for environmental flows.

6.2. Amendment to revenue and financing policy. A review of this policy indicates that there is no amendment that is required due to the provision of environmental flows.

6.3. The provision of water for environmental flows is not provided for as an activity of HBRC in the current Long-Term Plan. It was originally envisaged that Council would undertake consultation on a year-by-year basis from Year 4 as to whether it had projects requiring water and funding for that water in any given year.

6.4. If HBRC is going to receive water at no charge from Years 4-10 the LTP should indicate the development of a work programme to identify and prioritise projects for which the use of the water would be beneficial in advance of Year 4.

6.5. Probable size of financial cost reflects significant change to level of service.

6.5.1. HBRIC Ltd has estimated the cost of the provision of financial flows from year 10 to year 35 to be approximately $43.1 million. The size of this financial cost does reflect a significant change to the LTP which supports the need to refer to a change in level of service.

6.5.2. An opinion has been requested from PricewaterhouseCoopers (PWC) to determine whether Council’s financials for the 10 years of the LTP will be required to be amended. A preliminary view is that some amendment will be required in both Council’s operating account and balance sheet from the year of accessing the water which will be from the year 2019-20. These accounting entries are currently being worked on by PWC and it is anticipated that the effect of the financial adjustments on Council’s accounts will be available for this Council meeting.

6.6. Fit with “Significance and Engagement Policy” – within the policy, Significant means that the issue, proposal, decision or other matter is judged by Council to have a high degree of importance. This is typically when the impact is on the regional community, or a large portion of the community or where the financial consequences of a decision are substantial.

6.7. The criteria for significance means that when looking at the significance of a matter, issue, decision or proposal, elected members will assess:

6.7.1. The likely level of community interest

6.7.2. The likely impact or consequences for affected individuals and groups in the region

6.7.3. How much a decision or action promotes community outcomes or other Council priorities

6.7.4. The impact on levels of service identified in the current Long Term Plan

6.7.5. The impact on rates or debt levels

6.7.6. The cost and financial implications of the decision to ratepayers

6.7.7. The involvement of a strategic asset.

6.8. In committing to the HBRIC Ltd proposal, HBRC should include the changes to levels of service in the current Long Term Plan as this will take effect from Year 4 of the RWSS project. These changes would be consulted on, together with the amendments to the Financial Strategy as outlined above.

6.9. Further, on 26 June 2013 Council approved the draft concession deed which included access to further water for environmental flows. The proposal in this paper is consistent with the intention of the concession deed by ensuring that environmental flows can be available to HBRC at the lowest possible price. To make a commitment to purchase now will ensure that Council is not left open to risk of purchasing water on the spot market from 2025-26 and subsequent years. It is reasonable to assume that the spot price for water will be higher than the prices outlined in this proposal.

Decision Making Process

7. Given the advice from the Audit Office it is recommended that Council publicly consults on its ‘in principle’ decision through the Draft Annual Plan process. This paper recommends that Council acknowledges the significance of the change to the levels of service and carries out public consultation as an amendment to the Long Term Plan 2015-2025.

8. The proposal will be included in the Consultation Document with any supporting documentation available on the HBRC website.

9. This amendment to the LTP 2015-2025 will, under the provisions of the Local Government Act, be required to be audited.

Recommendations

That Council:

1. Agrees that the decision in principal to enter into a 35 year water user contract with Ruataniwaha Water Ltd partnership, as proposed in the letter dated 18 February 2016 from HBRIC Ltd, be open to a special consultative process through an amendment to Council’s Long Term Plan 2015-2025.

2. Agrees that this amendment to the Long Term Plan 2015-2025 be included in the Consultation Document issued on the Annual Plan 2016-17, and that such an amendment be subject to an audit as required by the Local Government Act 2002.

Paul Drury

Group Manager
Corporate Services

Liz Lambert

Chief Executive

Attachment/s

There are no attachments for this report.