Agenda of Finance Audit & Risk Sub-committee

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

02 March 2022

Subject: Six Monthly Enterprise Risk Report

Reason for Report

1. This item and the accompanying enterprise risk report provide the Finance Audit and Risk Sub-committee (FARS) with the six-monthly update of Council’s enterprise risk profile. The update in the report includes the review of:

1.1. The enterprise risks and risk descriptions

1.2. The inherent and residual risk ratings for each enterprise risk

1.3. The overall control assessment and control corrective actions for each enterprise risk

1.4. Supporting risk information that may impact Council’s risk profile, including a regulatory/legal update, business incidents, internal audits, material internal change projects, and emerging issues or uncertainties.

Officers’ Recommendations

2. Council Officers recommend that the Sub-committee notes the revised enterprise risks, control corrective actions, and supporting risk information.

Background/Discussion

3. At the Regional Council meeting held on 30 September 2020 the Risk Management Framework was approved by Council. The Framework requires that the FARS receives and reviews the enterprise risk report at least six monthly. Therefore, this paper presents to the FARS the Council’s enterprise risk report as of February 2022.

4. In assessing the overall residual risk ratings, the external emerging issues considered were:

4.1. Magnitude, broadness and complexity of regulatory change that is likely to impact Council, including: climate change national adaption plan, emissions reduction plan, resource management reform, national standards for management of human drinking water resources, national standards for freshwater amendments, and national standards for air quality amendments

4.2. Covid-19 variant mutations including New Zealand’s current Omicron outbreak and the impact of the government lead response through the phased traffic light system, including isolation and testing requirements, and the impact on supply chains

4.3. Economic outlook and forecasts for interest and inflation rates

4.4. The competitive New Zealand labour market and the labour market post border restrictions

4.5. Heightened geo-political tensions with far reaching impacts on global financial markets e.g. Ukraine/Russia

4.6. Climate change and global climate action delays as the world responds to the immediate risks of: Covid-19 pandemic, economic instability (including asset bubbles), and geopolitical tensions and the impact these global and national distractions may have on Council’s strategy for climate change.

5. The following material changes are noted in the February 2022 Enterprise Risk Report when compared to the enterprise risk report presented to the FARS at the July 2021 meeting.

Risk 2 – Financial

5.1. The emerging issues noted under bullet point four above are creating global and domestic uncertainties within the financial markets. While Council’s financial controls are effective at managing its financial position. The high levels of uncertainties and current levels of volatility within the financial markets has increased the residual likelihood assessment to ‘Likely’ and the overall financial impact to ‘Moderate’. With the overall residual risk rating increasing to ‘Medium’. This risk is being closely monitored by the Finance Team and constantly reviewed by the Leadership team.

Risk 8 – Business Interruption

5.2. In response to the recent Omicron Covid-19 outbreak and associated isolation mandates, Council’s pandemic plan was updated to include:

5.2.1. mandating of vaccinations for Council employees

5.2.2. work bubbles for all critical roles

5.2.3. surgical masks for all staff

5.2.4. Covid-19 passport verification and sign in for Dalton Street and Station Street ‘private’ areas

5.2.5. Covid-19 sign-in and physical distancing for meetings in the Council Chamber

5.2.6. access to rapid antigen tests (RATS). It is noted the pandemic plan remains fluid and is continually reviewed and updated by management to ensure that it remains relevant to the evolving situation.

5.3. However, due to the Omicron outbreak and associated isolation rules the business interruption likelihood assess has been elevated to ‘almost certain’. While additional measures in the pandemic plan limit the extent of isolation requirements for Council staff. Council needs to engage with strategic partners such as landowners and others in the community to deliver on strategic activities. Therefore, it is almost certain execution of some strategic objectives for FY2022 will be impacted, however, the extent of that impact remains unchanged as ‘moderate. The overall residual risk rating for this risk has therefore increased from ‘medium’ to ‘high’.

5.4. It is noted that the tight labour market and risks associated work pressures on staff to cover vacant positions, is being monitored under risk nine ‘People Capability’. The convergence of the tight labour market coupled with alternate working arrangements due to the Omicron outbreak could potentially elevate this business interruption risk impact. Therefore, staff vacancies are being closely monitored through the Omicron outbreak.

5.5. It is also noted that, late 2021 in response to the growing Covid threat from emerging mutations and border containment breaches, a review of Council’s resilience to supply chain disruption was undertaken. Council’s suppliers of business-critical goods/services were proactively contacted and where necessary additional stocks were procured to ensure that the Hawke’s Bay Regional Council (HBRC) could operate independently and uninterrupted for a period of at least three months. The review also considered the level of critical stock and spares required should HBRC be required to respond to a regional crisis in addition to Covid-19. New processes have also been established so that if key supply chains become disrupted a review of supplies will be undertaken two months before supplies are depleted.

Risk 9 – People Capability

5.6. Three aspects where consider when assessing the overall residual rating of this risk covering short-, medium- and longer-term uncertainties. The short-term uncertainties (immediate risks) are driving the overall residual risk rating of ‘high’.

Medium Term

5.7. The overall residual risk rating for this risk was reported in the last risk report as ‘medium’ which was an elevated assessment. The elevated assessment reflected the internal audit of Council’s talent management framework/system which determined a low level of maturity. And, while the talent management (P&C) strategy is drafted implementation of the elements required to mature the framework will take time. Maturity of Council’s talent management framework will help to manage Council’s people capability risk, both day to day and in more challenging times. However, it is recognised that maturity of the talent management framework alone will not necessarily be enough to ensure a positive staff experience. The corporate plan is designed to look more holistically at Council’s culture, processes, frameworks and systems to ensure these are effective in design to enable staff to work ‘smarter’ and execute on strategy (see the longer-term update below).

Longer Term

5.8. A Corporate Plan has been developed and is continually being refined and improved. The plan is currently being reviewed to ensure that as the organisation grows and matures its key management frameworks/systems the subsequent maturity activities are prioritised to ensure foundational elements that help the operational business work ‘smarter’ are addressed first. Also, that as these maturity activities are rolled out and embedded into the business-related changes to the way the business operates are effectively managed and sustained within Council’s operating rhythm. The management of change also ensures that potential disruption and impacts to staff due to the maturity of key management frameworks are anticipated and minimised.

Short Term (immediate risk)

5.9. An outcome of NZ’s response to Covid-19 and the prolonged closures of borders has meant unemployment has fallen and the employment market is highly competitive. Without a mature talent management framework there is real pressure on responding to the immediate people risk and minimise the convergence this risk has on Council’s business interruption risk. Therefore, due to the immediate employment market pressures the likelihood of this risk has now been elevated to ‘almost certain’ while the impact assessment has remained unchanged as ‘moderate’. The overall residual risk rating has increased to ‘high’. The People and Capability (P&C) team, together with management, are working through short term mitigations for this risk which includes reviewing all strategic and smaller team projects them applying a risk-based lens to determine which of these projects or project milestones maybe paused without significantly disrupting delivery of key strategic objectives. Where practical ‘people’ resources assigned these projects can then be redeployed to areas with an immediate need.

6. Lastly, given Council’s mandate for visibility and aesthetics consideration was given to including climate change as a separate risk on the enterprise risk report. Climate change is currently weaved through all relevant enterprise risks and documented in those risks as either a risk cause or impact and therefore explicitly considered in each of those risk assessments. Consequently, climate change has not been added as a standalone risk. However, the Climate Change Ambassador recently started at Council. A formal review of climate change will be undertaken with the Ambassador’s to leverage off her technical expertise. Therefore, inclusion of a separate enterprise climate changes will be reconsidered then.

Strategic Fit

7. The six-monthly risk report facilitates discussions to ensure that any emerging matters within the Council’s internal and external environment are being managed. And, therefore unlikely to impact on the Council’s ability to deliver on its strategy. In addition, the maturity of the Council’s risk management system contributes towards achieving excellence in execution of strategy. A mature risk system provides consistent risk intelligent decision making enabling the efficient prioritisation of finite organisational resources to deliver on strategy.

Financial and Resource Implications

8. There are no additional or significant budgetary requirements resulting from control corrective actions noted within the risk report that have not already been accounted for through the LTP or BAU activities.

Decision Making Process

9. Council and its committees are required to make every decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements in relation to this item and have concluded:

9.1. The decision of the Sub-committee is in accordance with the Terms of Reference and decision-making delegations adopted by Hawke’s Bay Regional Council on 25 March 2020, specifically the Finance, Audit and Risk Sub-committee shall have responsibility and authority to:

9.1.1. Review whether Council management has a current and comprehensive risk management framework and associated procedures for effective identification and management of the council’s significant risks in place

9.1.2. Undertake periodic monitoring of corporate risk assessment, and the internal controls instituted in response to such risks

9.1.3. report on the robustness of risk management systems, processes and practices to the Corporate and Strategic Committee to fulfil its responsibilities.

Recommendations

That the Finance, Audit and Risk Sub-committee:

1. Receives and considers the “Six Monthly Enterprise Risk” staff report.

2. Reports to the Corporate and Strategic Committee, the Sub-committee’s satisfaction that the Six-Monthly Enterprise Risk Report provides adequate evidence of the robustness of Council’s risk management policy and framework and progress to implement the maturing risk management system.

Authored by:

Helen Marsden

Risk & Corporate Compliance Manager

Approved by:

Jessica Ellerm

Group Manager Corporate Services

Attachmen

1 ⇩

February 2022 Enterprise Risk Report

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

02 March 2022

Subject: Risk Maturity Update

Reason for Report

1. This item provides the Finance, Audit and Risk Sub-committee (FARS) with an update on Council’s Risk Management Maturity.

Background

2. At the Corporate and Strategic (C&S) Committee meeting on 10 June 2020 Council’s risk maturity roadmap was endorsed. At that meeting it was agreed that the FARS would take responsibility for overseeing the implementation of the risk maturity roadmap. Therefore, this item provides a summary of risk maturity actions completed since last reported to FARS on 13 October 2021 and risk maturity actions scheduled for the next FARS reporting period.

Discussion

3. The last update to the Sub-committee was in October 2021. Since October 2021 the following risk maturity actions have been completed:

3.1. Appointment of a Risk Champion within each Group – the Risk Champion will coordinate the development of risk profiles for each Group and influence risk attitudes to ensure alignment across the business

3.2. Inclusion of Risk Champions in a ‘light touch’ risk aggregation session to provide bottom-up challenge to the current enterprise risk profile

3.3. Completion of risk bowties for each enterprise risk

3.4. A session with the Strategy and Governance Team to identify risk processes to formalise within strategy and governance e.g., inclusion of a formal risk sign-off in concept documents (business cases), decision papers, and project scope variations.

4. For the next FARS reporting period the risk maturity plan had intended to target formal training of the Risk Champions and the development of a risk profiles for each Group. Developing a risk profile for each Group would help to upskill Managers and key subject matter experts in risk-based thinking and systematically embed risk methodologies into the business. However, currently the business is facing significant disruption with responding to immediate high impact risks of Covid19 and a tight employment market. Therefore, phase IV of the roadmap (see image below) has been re-evaluated to identify a less resource intensive approach to embedding risk.

5. It is agreed that the focus for the next reporting period will be on partnering with staff across functions to develop Key Risk Indicators (KRI’s) and utilise the draft risk appetite to drive consistent messaging and risk tolerances for identified indicators. The Strategy and Performance team have already developed financial and non-financial performance reporting via the Quarterly Organisational Performance Report that includes several KRI metrics. Therefore, the intention is to work collaboratively with the Strategy and Performance team and KRI metric owners to determine tolerance levels bringing risk monitoring and corrective actions closer to performance outcomes. In addition, strengthening the risk bowties and identified critical controls for each enterprise risk may enable new KRI metrics to be identified that could further strengthen the non-financial performance part of the report.

6. Therefore, the following actions are now scheduled to be delivered as part of the risk maturity roadmap over the next FARS reporting period:

6.1. External validation on the completeness and accuracy of the enterprise bowties including identifying opportunities to enhance critical controls.

6.2. Using validated bowties to identify new KRI metrics to enhance the Organisational Performance Report.

6.3. Working collaboratively with the Strategy and Performance team to identify key KRI’s in the current Organisational Performance Report, upskill metric owners in risk based thinking to improve qualitative reporting (i.e. commentary provided) and establish risk tolerance levels (triggers) as guided by Council’s risk appetite statement.

6.4. Continue with informal risk aggregation sessions (light touch meetings) with Risk Champions.

6.5. Progress the formulation of Council’s risk appetite statement including reviewing the Risk Management Framework and Policy with particular attention on the quantitative scale in the risk matrix.

Strategic Fit

7. Maturity of the Council’s risk management system contributes towards achieving all strategic goals/vision by protecting the organisation. A mature risk system provides consistent risk intelligent decision making enabling the efficient prioritisation of finite organisational resources to deliver on strategy.

Financial and Resource Implications

8. Maturity of the risk management system is phased to minimise budgetary implications. Some facilitated risk training workshops maybe need to be provided to targeted staff. The 0.1 Risk Champion FTE from each Group will be managed through current resourcing.

Next Steps

9. Refer to section six of this report for the next steps for maturity of the Council’s risk management system.

Decision Making Process

10. Council and its committees are required to make every decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements in relation to this item and have concluded:

10.1. The decision of the sub-committee is in accordance with the Terms of Reference and decision-making delegations adopted by Hawke’s Bay Regional Council 25 March 2020, specifically the Finance, Audit and Risk Sub-committee shall have responsibility and authority to:

10.1.1. Review whether Council management has a current and comprehensive risk management framework and associated procedures for effective identification and management of the council’s significant risks in place.

10.1.2. Undertake periodic monitoring of corporate risk assessment, and the internal controls instituted in response to such risks.

10.1.3. Report on the robustness of risk management systems, processes and practices to the Corporate and Strategic Committee to fulfil its responsibilities.

10.2. As this report is for information only, the decision-making provisions do not apply.

Recommendations

1. That the Finance, Audit and Risk Sub-committee receives and considers the “Risk Maturity Update” staff report.

2. The Finance, Audit and Risk Sub-committee reports to the Corporate and Strategic Committee that:

2.1. Delivery of phase IV of the roadmap was re-evaluated to identify a less resource intensive approach for embedding risk-based thinking into the business due to the level of business disruption from Covid19 and the tight labour market, and

2.2. The revised delivery plan for phase IV of the roadmap still aligns to Council’s overall risk maturity strategy of embedding risk-based thinking into the business.

Authored by:

Helen Marsden

Risk & Corporate Compliance Manager

Desiree Cull

Strategy & Governance Manager

Approved by:

Jessica Ellerm

Group Manager Corporate Services

Attachment/s

There are no attachments for this report.

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

02 March 2022

Subject: 2020-2021 Annual Report Audit Update

Reason for Report

1. This item provides an update on the audit of Council’s 2020-2021 Annual Report and timing for Council adoption.

Background

2. Staff presented the Hawke’s Bay Regional Council Annual Report for the 2020-2021 financial year to the Finance, Audit and Risk Sub-committee on 15 December 2021, noting the final audit report was yet to be received and adjustments might be required.

3. The sub-committee recommended that Hawke’s Bay Regional Council adopt the 2020-2021 Annual Report, pending receipt of Audit New Zealand’s final audit report and subject to any minor adjustments.

Audit update

4. Council staff had anticipated bringing the Annual Report to Council for adoption in January 2022, however due to delays with Audit NZ completing their audit, expect to now bring it to Council at its meeting in March.

5. The delay is due to Audit NZ’s technical team working through the best treatment for the Accident Compensation Corporation adjustment.

Feedback incorporated since last FARS meeting

6. At the December sub-committee meeting, a member raised an issue with how leave entitlements and liabilities were presented. Finance staff responded directly to the member to explain that it was to do with the difference between how information is presented by HBRC and the Port (which is consolidated into HBRIC and the HBRC Group accounts). No change was required. .

7. A number of small adjustments to the Annual Report and Summary have been made. These were either as a result of audit feedback or improvement/corrections made by staff.

8. As stated in December, staff would bring revised financial statements back to the sub-committee for further review only if they were considered significant in nature.

Implication of Late Adoption

9. Under the Local Government Act 2020 (the Act), the Annual Report and Summary are statutory requirements and required to be audited by an independent auditor.

10. Legislation^{^[1]} was passed in July 2021 to extend the statutory deadline for adoption of both the 2020-2021 and 2021-2022 Annual Reports (with 30 June balance dates) by two months due to a severe shortage of auditors. That means that those annual reports must be adopted no later than 31 December in their respective year.

11. As we will be adopting after that date, we are required to include a self-disclosure note in our financial statements. The Regional Council will be included in the audit statistics reported to central government.

12. A late adoption does not affect our Level of Service Measure in our Long Term Plan 2021-2031 related to a clear audited opinion.

13. Interim non-financial and financial results, prior to being audited, have been in the public arena multiple times via committee agendas.

Audit NZ

14. Karen Young, Director of Audit NZ, will be joining this meeting as per the FARS terms of reference, to discuss any matters that the auditors wish to bring to the Sub-committee’s attention. This can be a members-only session if required.

15. Should the sub-committee wish to discuss matters with the Auditor in private, with the public excluded, the following resolution must be passed.

15.1. That the Finance, Audit and Risk Sub-committee excludes the public from this section of the meeting being Discussion with Director of Audit NZ with the general subject of the item to be considered while the public is excluded; the reasons for passing the resolution and the specific grounds under Section 48 (1) of the Local Government Official Information and Meetings Act 1987 for the passing of this resolution being:

General Subject of the Item to be Considered	Reason for Passing This Resolution	Grounds Under Section 48(1) for the Passing of the Resolution
2020-2021 HBRC Annual Report Audit	7(2)(c)(i) The exclusion of the public from this discussion is necessary to protect information which is subject to an obligation of confidence and to ensure the supply of similar information from the same source is not prejudiced; it is in the public interest that such information should continue to be supplied	The Council is specified, in the First Schedule to this Act, as a body to which the Act applies.
2020-2021 HBRC Annual Report Audit	7(2)(f)(ii) The exclusion of the public from this discussion is necessary to maintain the effective conduct of public affairs through the protection of such members, officers, employees, and persons from improper pressure or harassment	The Council is specified, in the First Schedule to this Act, as a body to which the Act applies.

Decision Making Process

16. The Regional Council and its committees are required to make every decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements in relation to this item and have concluded:

16.1. The decisions are in accordance with the Finance, Audit and Risk Sub-committee Terms of Reference, specifically to:

16.1.1. Satisfy itself that the financial statements and statements of service performance are supported by adequate management signoff and adequate internal controls and recommend adoption of the Annual Report by Council

16.1.2. Enquire of internal and external auditors for any information that affects the quality and clarity of the Council’s financial statements and statements of service performance, and assess whether appropriate action has been taken by management in response to this

16.1.3. Conduct a sub-committee members-only session with Audit NZ to discuss any matters that the auditors wish to bring to the Sub-committee’s attention and/or any issues of independence

16.2. as this report is for information only, the decision-making provisions do not apply.

Recommendations

1. That the Finance, Audit and Risk Sub-committee receives and notes the “2020-21 Annual Report Audit Update” staff report.

And if required

2. That the Finance, Audit and Risk Sub-committee excludes the public from this section of the meeting being Discussion with Director of Audit NZ with the general subject of the item to be considered while the public is excluded; the reasons for passing the resolution and the specific grounds under Section 48 (1) of the Local Government Official Information and Meetings Act 1987 for the passing of this resolution being:

General Subject of the Item to be Considered	Reason for Passing This Resolution	Grounds Under Section 48(1) for the Passing of the Resolution
2020-2021 HBRC Annual Report Audit	7(2)(c)(i) The exclusion of the public from this discussion is necessary to protect information which is subject to an obligation of confidence and to ensure the supply of similar information from the same source is not prejudiced; it is in the public interest that such information should continue to be supplied	The Council is specified, in the First Schedule to this Act, as a body to which the Act applies.
2020-2021 HBRC Annual Report Audit	7(2)(f)(ii) The exclusion of the public from this discussion is necessary to maintain the effective conduct of public affairs through the protection of such members, officers, employees, and persons from improper pressure or harassment	The Council is specified, in the First Schedule to this Act, as a body to which the Act applies.

Authored by:

Tim Chaplin

Senior Group Accountant

Mandy Sharpe

Project Manager

Desiree Cull

Strategy & Governance Manager

Christopher Comber

Chief Financial Officer

Approved by:

Jessica Ellerm

Group Manager Corporate Services

Attachment/s

There are no attachments for this report.

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

2 March 2022

Subject: Quarterly Treasury Report for 1 October – 31 December 2021

Reason for Report

1. This item provides compliance monitoring of Hawke’s Bay Regional Council (HBRC) treasury activity and reports the performance of Council’s investment portfolio for the quarter ended 31 December 2021.

Overview of the Quarter – ending 31 December 2021

2. At the end of the quarter to 31 December 2021, HBRC was compliant with all measures in its Treasury policy except for the Mercer SIPO investment allocation, which has since been corrected.

3. Investment returns for the first 6 months met budget expectations, however, due to market volatility and a significant financial market adjustment in January 2022, it is too early to predict the returns for the full financial year. The fluctuation in January erased most of the gains of the first 6 months so a recovery in the markets is required to deliver target returns for the year.

4. Financial markets, particularly international markets, continue to move around considerably and a bounce back to forecast returns within the financial year is not out of the question. Staff advice is to watch and wait at this point in time, corrective action is not required, and the portfolio is well balanced for the long term.

5. Cash balances are good and borrowing requirements low for the first 6 months. As Council progresses further into the financial year additional borrowing will be required.

Financial Impact of Covid-19 / Omicron on Current and Future Financial Year

6. The sub-committee requested that a financial assessment, including commentary regarding any corrective actions required, of the financial impact of the current Omicron outbreak on FY21-22 be incorporated within this Treasury report. However, given the 6-month financials to 31 December 2021 will be presented to the Corporate and Strategic Committee alongside the organisation performance reporting on 16 March 2022, the financial impact commentary is best placed to accompany that reporting.

7. Financial impacts of Covid/Omicron are both direct and indirect and include adjustments or impacts to budget assumptions for inflation, interest costs. Additional expenses may be incurred in relation to business continuity/resilience planning, (working from home equipment/cleaning/masks etc), direct staff costs where there is a requirement to add resourcing for critical stand-alone roles. There may, however, be costs savings or deferral of spend where capital work programmes are not being delivered within planned timeframes because of the disruption/distraction. The most significant financial impact will likely be to investment income, where impact to financial markets can be immediate and high impact.

8. All of the above will be incorporated into the financial reporting for the 16 March 2022 Corporate and Strategic Committee meeting.

Background

9. Council’s Treasury Policy requires a quarterly Treasury Report to be presented to the Finance Audit and Risk Sub-committee. The policy states that the Treasury Report is to include:

9.1. Treasury Exceptions report

9.2. Policy compliance

9.3. Borrowing Limit report

9.4. Funding and liquidity report

9.5. Debt maturity profile Interest rate report

9.6. Investment management report**

9.7. Treasury investments

9.8. Cost of funds report Cash flow and debt forecast report

9.9. Debt and interest rate strategy and commentary

9.10. Counterparty credit report

9.11. Loan advances.

10. The Investment Management report** has specific requirements outlined in the Treasury Policy. This requires quarterly reporting on all treasury investments plus annual reporting on all equities and property investments.

11. In addition to the Treasury Policy, Council has a Statement of Investment Policy and Objectives (SIPO) document setting out the parameters required for funds under management for the HBRC Long Term Investment Fund.

12. Treasury Investments to be reported on consist of:

12.1. Liquidity

12.1.1. Cash and Cash Equivalents

12.1.2. Debt Management

12.2. Externally Managed Investment Funds

12.2.1. Long-Term Investment Fund (LTIF)

12.2.2. Future Investment Fund (FIF)

12.3. Investment properties

12.4. HBRIC Ltd

12.5. 2021-22 Performance Summary.

13. Since 2018, HBRC has procured treasury advice and services from PriceWaterhouseCoopers (PwC) and their quarterly compliance report is attached.

Discussion

14. A separate treasury report is prepared by Council’s advisors, PwC to report on compliance with the policy parameters and investment performance. The PwC report is attached. This report gives a high-level summary of the data in the PwC report.

Liquidity

15. To ensure HBRC has the ability to adequately fund its operations, current policy requires HBRC to maintain a liquid balance of $3.0m.

16. The following table reports the cash and cash equivalents on 31 December 2021.

31 December 2021	$000
Cash on Call	15,915
Short-term bank deposits	2,000
Total Cash & and Deposits	17,916

17. Council’s balance of cash and deposits compares favourably with the December 2020 balance of $13.5m.

18. To manage HBRC liquidity risk, HBRC also retains a Standby Facility with BNZ. This facility provides HBRC with a same day draw down option, to any amount between $0.3-$5.0m, and with a 7-day minimum draw period.

Debt Management

19. On 31 December 2021 the current external debt for the Council group was $40.3m ($56.96m including the loan from HBRIC).

20. Following the $11m raised in the September quarter no further funds were borrowed in the December quarter. This was as anticipated given Council’s cash position is at its best in the December quarter (due to rates being due in September).

21. Further borrowing will be required in the second half of the financial year (first half of calendar year 2022) as the requirements of the proposed 2021-2022 borrowing programme of $27.5m ramps up.

22. The following summarises the Year-to-date movements in Council’s debt position.

Summary of HBRC Debt

	HBRC only	HBRC Group
Opening Debt – 1 July 2021 – excl HBRIC Loan	30,875,014	30,875,014
New Loans raised	11,000,000	11,000,000
Less amounts repaid	(1,574,998)	(1,574,998)
Closing Debt 31 December 2021 (excluding HBRIC loan)	40,300,016	40,300,016
Plus opening balance - loan from HBRIC	16,663,036	-
Total Borrowing as at 31 December	56,963,052	40,300,016

Managed Funds

23. The LTP budgets an annual return of 5.16% from managed funds. Of this 3.16% is used to fund activities with 2.0% retained to grow the capital base to enable the future earnings to protect the capital base for future generations.

24. Council budgets separately for revenue from directly held managed funds and those held by HBRIC. HBRIC is required to deliver an overall portfolio return by way of an agreed annual dividend agreed through an annual Statement of Intent. The composition (between revenues from managed funds and other sources such as port dividends is up to the HBRIC board). Council has budgeted to receive $10.1 in dividends from HBRIC within the FY21-22.

25. The FY21-22 budget expectation for managed funds to be withdrawn to support Council operations is $3.7m. Based on the December funds result and the value above the protected amount the funds held sufficient returns to meet Council’s requirements. Unfortunately, since 31 December the markets dropped eroding in excess of $2m of these gains. A recovery of the market is now required to deliver on budget expectations.

26. The Fund performances for the first 6 months have been lower than we have experienced recently. Financial markets have not performed as strongly as prior year with the YTP results for the two providers being 0.9% and 1% so far. This follows on from annualized returns of 12.5% and 14.5% for the 2020-21 financial year.

27. Given the nature of the investments some volatility is to be expected. It is too early to predict likely returns for the full year, however, if the remaining quarters deliver similar results the annualised return would be approximately 4% which is below the LTP budget of 5.16% p.a.

28. However, the performance of the managed funds since placement demonstrate market recovery can occur within relatively short timeframes, and a watch and wait approach is prudent. The portfolio construct is intentionally conservatively balanced for the long-term.

29. The presentation of table below has been changed from previous reports to show the combined view of funds and the value available above the capital protected sum. As at June 2021 Council had an additional $3.36m available due to the stronger investment returns in FY20-21. Some of this could be used to supplement any shortfall if the current lower returns continue to the end of the financial year.

30. The following table summarises the fund balances at the end of each quarter.

31. The view for the June, September and December 2021 quarters has been expanded to show the total group balance of managed funds (including HBRIC) and the amount by which the current funds balance exceeds the capital protected amount.

	31 Dec 2020	31 Mar 2021	30 Jun 2021	30 Sep 2021	31 Dec 2021
	$000	$000	$000	$000	$000
Total funds before withdrawals	121,404	114,625	118,563	115,745	118,221
Funds withdrawn	(6,500)		(4,200)
Fund Balance HBRC	114,904	114,625	114,363	115,745	118,221
Capital Protected Amount HBRC (2% compounded)			111,983	112,543	113,105
Current HBRC value above protected amount			2,380	3,202	5,116

Funds Balances (Group – HBRC + HBRIC)
Long-Term Investment Fund	49,925 *	50,206	49,883**	50,484	51,712
Future Investment Fund	64,300 *	64,418	64,370**	65,261	66,508
Total HBRC	114,904	114,625	114,363**	115,745	118,220
Plus HBRIC			48,503	48,771	48,907***
Total Group Managed Funds			162,866	164,516	167,127
Capital Protected Amount (2% compound inflation)			159,506	160,303	161,104
Current group value above protected amount			3,360	4,213	6,023

31.1. * December 2020 saw $6.5m (LTIF $4.5m & FIF $2.0m) Funds being divested for the first time, which explains the reduced fund balance

31.2. ** Additional funds totalling $4.2m (LTIF $2.0m & FIF $2.2m) were withdrawn from the funds during the June 2021 quarter

31.3. *** HBRIC withdrew $1.3m during the December quarter. The Capital Protected amount of HBRIC on 31December is $47.999m. ($0.907m available).

Investment Property – Napier Leasehold Portfolio

32. Napier Leasehold properties represent the balance of ex Harbour Board residential leasehold properties. The HBRC returns from this portfolio are limited as following the sale of future revenues in 2013 to ACC, HBRC retains one third of any excess rentals and one third of any surplus when a property is freeholded.

33. For the first 6 months $546,466 in rent was collected and Council’s share of excess rents for the period was $54,000.

34. In the first 6 months, six Napier Endowment Leasehold Properties were freeholded totalling $0.6m. $0.43m of this has been subsequently paid to ACC as settlement for the remaining 42 years rent for these properties. The HBRC share of $213,641 for the first 6 months has been paid into the sale of land reserve.

35. During the first 6 months one property (3 units) has had its 21year rent review applied and a further 5 properties (13 units) have been notified of their proposed new rental. Only one (5 units) has the new rental commencing prior to 30 June. With the 21-year renewal cycle, and the movement in the market values in recent years, lessees are seeing substantial increases in the annual rental. Those rentals currently under review are increasing by between 5.6 and 7.3 times what the existing rent is.

36. The size of the rent increases proposed is generating an increased number of enquiries about Council’s rent deferral scheme.

Investment Property – Wellington Leasehold Portfolio

37. The Wellington leasehold portfolio comprises 12 properties in central Wellington. The lessees are a mix of Commercial and residential entities.

38. Most of the properties (11) have the rental reviewed every 14 years and one has a 7-year review period. No rent reviews were conducted over the first 6 months and one property is due for a review in June 2022.

39. The portfolio value has grown considerably for the initial cost of $6.5m in 2002 to $20.8m at 30 June 2021. Valuation advise is that we can expect another significant increase in the portfolio value when it is revalued as at 30 June 2022.

40. Council budgets to utilise the annual rentals of $841k to offset rates each year.

HBRIC Ltd

41. In accordance with Council Policy, HBRIC provides separate quarterly updates to the Corporate and Strategic Committee.

Decision Making Process

42. Council and its committees are required to make every decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements in relation to this item and have concluded:

42.1. This agenda item is in accordance with the Finance, Audit and Risk Sub-committee Terms of Reference, specifically “The Finance, Audit and Risk Sub-committee shall have responsibility and authority to (2.4) monitor the performance of Council’s investment portfolio”.

42.2. As this report is for information only, the decision making provisions do not apply.

Recommendations

That the Finance, Audit and Risk Sub-committee:

1. Receives and notes the “Quarterly Treasury Report for 1 October – 31 December 2021”.

2. Confirms that the performance of Council’s investment portfolio has been reported to the Sub-committee’s satisfaction.

Authored by:

Ross Franklin

Finance Consultant

Christopher Comber

Chief Financial Officer

Approved by:

Jessica Ellerm

Group Manager Corporate Services

Attachment/s

1 ⇩

PwC Treasury report for period ended 31 December 2021

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

02 March 2022

Subject: HBRC Forestry Update

Reason for Report

1. This paper provides a summary of Hawke’s Bay Regional Council’s (HBRC) forestry assets as requested by Finance, Audit and Risk Sub-committee (FARS) on 15 December 2021.

2. The last comprehensive update on HBRC’s forest assets was presented to Corporate and Strategic Committee, 23 September 2015 after request by the Committee for a paper “…establishing values other than commercial that demonstrate the justification for Council maintaining this investment and projecting the ongoing forest management programme beyond 10 years to cover the rotation period of the range of species.”

Executive Summary

3. Local authorities own or manage 53,282 hectares (ha) of forest land in New Zealand (Attached).

4. HBRC manages the 550ha Crown-owned Tangoio Soil Conservation Reserve as required by section 16 of the Soil Conservation and Rivers Control Act (1941). 58% (320ha) of the Reserve is currently in commercial forestry and the remainder in native forest at varying stages of regeneration. Commercial forest in the Reserve has a 30 June 2021 valuation of $6,214,000 (Attached).

5. In addition, there are 529ha of commercial forestry across five HBRC-owned properties of a combined area of 1029ha. These properties have a range of objectives as will be described in this item and which include wastewater irrigation, carbon sequestration, recreation, and trialling and demonstrating alternative timber species. Commercial forest in the HBRC properties has a 30 June 2021 valuation of $7,754,800.

6. Around 24ha of commercial forest has been established on river land controlled by HBRC. This is currently unvalued.

7. HBRC is a minor partner in 190ha of erosion-control forests across the region. These are expected to return in the realm of $500,000 to HBRC over the coming 10 years.

8. HBRC has a significant carbon portfolio of 146,400 post 89 NZU and 14,907 pre 1990 NZU, currently worth $13 million at the current price of $82.

9. Detailed management plans are in place for the Tangoio Soil Conservation Reserve and the HBRC Forest Estate and have been approved by two trained foresters, one a member of the New Zealand Institute of Forestry. The Maungaharuru Tangitū Trust has approved the management plan for the Tangoio Soil Conservation Reserve as is required by the Mana Enhancing Agreement signed with HBRC in 2016. Objectives and policies from the plans have been provided in this item and full plans will be provided to Councillors on request.

Strategic Fit

Water quality safety and certainty

10. All of the forests provide erosion control and sediment reduction benefits to some extent, but in the Waipukurau and Waipawa Forests this is negligible as the land is very stable anyway. In the erosion-prone soils of Tūtira, Waihapua and Tangoio, the benefits are significant. Having replaced the network of aging septic tanks with a more sustainable option, the Mahia Forest plays an important role in improving water quality and safety in that area.

Smart sustainable landuse

11. The HBRC Forests are all multi-use properties. As well as the financial returns they generate via carbon sequestration and log sales, they play important roles in the communities in which they are situated.

Healthy and functioning biodiversity

12. The Tangoio Soil Conservation Reserve and Mahia Forest contain areas classified by HBRC’s ecologists as ecosystem prioritisation sites. Significant areas of native are being planted and regenerated in the Tūtira and Waipukurau Forests, and the Tangoio Soil Conservation Reserve over the coming years.

Sustainable services and infrastructure.

13. The Mahia Forest provides an important wastewater treatment function to the Mahia Community, and the Waipukurau Forest (also known as Gum Trees Mountain Bike Park) is a popular recreational venue and attraction to the town. Management of the Tangoio Soil Conservation Reserve is very important in ensuring the ongoing integrity of the section of State Highway 2 that runs through it. Due to access limitations, the Waihapua Forest Park has not yet been developed, but there is strong support for this in the surrounding Tūtira Community as represented by the now disbanded ‘Tūtira Visionary Group’.

Background

Tangoio Soil Conservation Reserve

14. The Tangoio Soil Conservation Reserve comprises 550ha adjacent to State Highway 2 between Tangoio and Tūtira, acquired by the Crown in 1946 for the protection of the Highway, following ongoing closures due to slips, most notably the ‘Anzac Storm’ of 1938 which caused the Highway to be closed for a period of months.

15. The Reserve was managed in turn by a series of Government departments, before this responsibility passed to the Hawke’s Bay Catchment Board and then its successor HBRC in 1989 as required by Section 16 of the Act:

15.1. “Every soil conservation reserve shall be under the control and management of the Board within whose district it is situated, and the Board shall manage and control the reserve in such manner as in its opinion will best conserve the soil of the reserve and prevent injury to other land.”

16. Currently, 58% of the Reserve’s area (320ha) is in commercial forestry and the remainder in varying stages of reversion to native forest. Returns from the commercial forestry are held in a Reserve Fund, which is used to entirely fund the management of the Reserve - no ratepayer funds are used in the management of the Reserve.

17. Budgets are reviewed every 3 years and cashflows modelled over 40 years to ensure the ongoing sustainability of the Reserve Fund. As required by Sections 21-23 of the Maungaharuru Tangitū Hapū Claims Settlement Act (2014), surplus funds not required for Reserve management are transferred to a ‘Catchments Fund’ where they available for carrying out soil conservation projects in the surrounding catchments in partnership with the Maungaharuru Tangitū Trust (MTT).

18. To date, $320,000 of Reserve Funds have helped leverage some $6 million in funding for the MTT-led projects Tūtira Mai Ngā Iwi, Te Waiū o Tūtira, and Kia eke Te Ngārue, Kia eke Arapawanui.

19. A Mana Enhancing Agreement signed with MTT in 2016 requires HBRC to maximise training and employment opportunities for MTT in the Reserve, and for HBRC and MTT to agree the Reserve’s three-yearly management plans.

20. As the forests on the Reserve were established prior to 1990, they are not eligible for entry in the Emissions Trading Scheme and earning NZU.

Forests owned by HBRC

River Berms

21. Around 24ha of forest is planted on river berms around the region. Generally, soils are very stony and conditions for tree growth are poor in these sites. River berms are also invariably weed hot spots and control of these in newly established plantings can be challenging.

22. Despite these challenges, forests are a good use for the many unused hectares of river berm land controlled by HBRC. As well as the revenue from carbon and logs, tree canopies assist in shading out the various weeds over time and negate the need for grazing and the associated risks of nutrient loss in the free-draining gravel soils. The flat terrain ensures low logging costs with no tracking and subsequently low risk of sediment loss.

23. 6ha of the river berm forests are radiata pine established in the mid to late 1990’s. The other 18ha is a 2021 planting of radiata pine (14ha) and eucalyptus bosistoana (4ha) on the left bank of the Waipawa River off Walker Road.

24. While the Walker Road planting is too newly established for registration in the emissions trading scheme, HBRC’s extensive willow plantings received a one-off allocation of 14,907 pre-1990 NZU in 2008.

Joint Venture Forests

25. Between 1994 and 2000, HBRC entered into 10 joint ventures with landowners across the region to establish radiata pine plantations on some 190 hectares of erosion-prone land. The joint venture contracts expire on harvest of the trees or expiry of the 35-year term.

Owner	YOE	Logging Date (at 30yrs)	Ha	Estimated Ha Harvestable	HBRC share	Estimated HBRC revenue
Netherton Station	1995	2025	29	14	14%	$35,000
McRae Trust	1995	2025	9.5	9.5	13%	$30,875
Roy Stoddart	1995	2025	40	4	15%	$ -
Parsons Estate	1996	2026	22.6	22.6	22.6%	$127,690
Beamish	1996	-	5.4	0	18%	$ -
Waipari Station (Kairākau)	1997	2027	20	20	16.6%	$83,000
Lloyd and Virginia Cave	1997	2027	30	30	13%	$97,500
Bruce Goldstone	2000	2030	4.5	4.5	13%	$14,625
Waipari Station (Glengarry)	2000	2030	20	20	14%	$70,000
Haupouri Station	2000	_	8.4	0	18%	$ -
Totals			189.4	124.6		$535,385

Table 1: HBRC Joint Venture Erosion Control Forests

26. Though erosion control was HBRC’s primary objective, the agreements anticipated the forests would eventually be harvested and generate a financial return. The objective of the joint venture contracts is stated in Clause 1.1 of each:

26.1. “The goal of the parties hereto is the establishment and management of the Erosion Control Plantation, which is to be planted with rapidly growing exotic timber species, for a rotation period to ensure that the land within the Erosion Control Plantation is managed and harvested in a manner which will minimise the erosion impacts”.

27. More recently, staff have agreed with landowners that approximately 64ha of the joint ventures will not be harvested as the environmental impacts would be too great. Staff are looking into ways to use some of the revenue from harvesting the better joint venture forests to help revert the unharvested forests to native over time.

28. Management objectives for the joint venture forests are listed in the HBRC Forest Estate
2021-2031 Management Plan as:

28.1. To ensure where harvest is environmentally and economically feasible, it is carried out with minimal soil conservation or environmental impacts

28.2. To assist landowners in transitioning harvested sites to a sustainable post-harvest landuse

28.3. To assist landowners to transition to permanent native forest where harvest is not environmentally or economically feasible

28.4. To maximise financial returns from the forests without compromising the above objectives.

Tūtira Regional Park

29. 78ha of pine forest was established on the Tūtira Regional Park between 1991-1993, prior to HBRC purchasing the property, and a further 36ha immediately after. All were established primarily for soil conservation following the devastation wreaked by Cyclone Bola (Attached), with eventual financial returns from harvest being an important secondary objective.

30. The forest is currently in the process of being harvested and afterwards approximately 50% will be converted to native forest for permanent retirement. Council papers relating to the harvest procurement process were presented to EICC on 19 June 2019 and regarding the replanting on 3 February 2021.

31. The Tūtira mānuka plantation is not considered in this item and is described fully as a separate item in this agenda.

32. Management objectives for the Tūtira Forest are listed in the 2021-2031 HBRC Forest Estate Management Plan as:

32.1. To manage the forest and plantation in a way that best supports the soil conservation, biodiversity, recreational, cultural and aesthetic values of the Regional Park

32.2. To maximise soil conservation and minimise sediment loss to waterways and Lakes Tūtira and Waikōpiro

32.3. To facilitate reversion to native forest over time

32.4. To enhance biodiversity values on the property and create connections to other habitat in the District.

32.5. To maximise financial returns from the Forest while not compromising any of the above.

Waihapua Forest Park

33. The Waihapua property had been of interest to HBRC for many years before the opportunity to purchase it arose in 2009. The reasons were summarised by a sub-committee of Council charged with forming a strategy statement for the property in the same year:

33.1. “It’s significant open space and strategic value given its location adjacent to key amenity areas and Tangoio Soil Conservation Reserve; its potential to demonstrate land use options relating to soil conservation and waterways; its severely eroded nature (Attached); and its commercial advantages associated with timber and carbon trading.”

34. Following purchase, Council developed the following Goal for the property:

34.1. “A profitable working example of integrated and multi-functional land use centred on sequestration and soil conservation forestry consistent with wider social, amenity, environmental and economic values and opportunities within the Tutira area.”

35. Council also identified key functions for the property as:

35.1. ‘social engagement, amenity values, recreation, the improvement of water quality, soil conservation, biodiversity and indigenous ecological values, research, and demonstration.”

36. Council was advised at the time an internal rate of return of 6-7% was likely.

37. The name ‘Waihapua Forest Park’ was formally adopted by Council on 27 April 2011 after advice from Maungaharuru Tangitū Trust, endorsed by the Tūtira Visionary Group- a group formed around that time to encourage the development of tourism and other opportunities for the Tūtira District. The name is derived from a deep spring with special qualities found on the property.

38. Planting was planned in conjunction with the Hawke’s Bay Branch of the New Zealand Farm Forestry Association and carried out between 2009 and 2013. More than twenty-five timber species on a range of management regimes were established (Attached). There are two dedicated trial sites on the property, one of eucalyptus fastigata, and the other of mixed ground durable eucalyptus species. The site-specific planting resulted in many small compartments, useful for trial and demonstration purposes, but significantly increasing the difficulty of logging economically using conventional methods.

39. Approximately 30ha of the property was deemed to be too steep and erosion-prone to establish in production forestry or was already in the early stages of reversion to native forest and not planted with production species on that basis.

40. As well as being envisaged as a future recreational and educational venue in its own right, Waihapua was seen as a key addition to a potential walkway over the corridor of public lands stretching almost uninterrupted for some 16km from the bottom of the Tangoio Soil Conservation Reserve In the south to the top of the Tūtira Regional Park in the north (figure 1 below).

Map

Description automatically generated

Figure 1: Concept Plan, Tūtira Trails

41. Due to a lack of safe access to the property, it has not yet been developed and opened to the public. The main access is through private property, but the easement only provides for HBRC and its contractors. Other options are possible, but difficult to form tracks in given the steep and eroding nature of the land. Access from State Highway 2 is hazardous and would require investment before opening to the public.

42. Management objectives are listed in the HBRC Forest Estate 2021-2031 Management Plan as:

42.1. To maintain soil conservation on the property and minimise sediment loss to the Waikoau River and erosion impacts on State Highway 2

42.2. To establish and maintain secure access to the property for recreational use

42.3. To establish and maintain links from the property to Guthrie-Smith Arboretum and Education Trust and Tūtira Regional Park

42.4. To enhance biodiversity values on the property, creating connections to other habitat in the District

42.5. To demonstrate alternative commercial forest species and support the development of their genetics and markets

42.6. To maximise financial returns from the Forest while not compromising any of the above.

Mahia Forest

43. The Mahia Forest property was purchased in 2009 primarily as a receiving environment for Mahia township’s treated wastewater, but also as a carbon and timber investment property.

44. Unlike the Central Hawke’s Bay Wastewater Forests, Wairoa District Council (WDC) did proceed with irrigating treated wastewater into the Mahia Forest.

45. After being pumped over the hill from the township, the wastewater passes through a series of three settlement ponds, before being screened and pumped to irrigation fields in the forest. Irrigation in the different fields is alternated to allow them to fully dry out between applications and maintain the treatment capacity of the soils. Of the total 50ha land area, and 35ha forested area, approximately 11ha are used to treat wastewater.

46. A key risk in wastewater-irrigated forests is exceeding the treatment capacity of the soil. This was a major reason for the dissolution of Rotorua’s Whakarewarewa Forest wastewater irrigation scheme after 28 years of operation. This risk is managed in the Mahia Forest through ongoing monitoring of tree health, application volumes and soil moisture levels. The risk to the environment is managed by monitoring water quality parameters in the stream leaving the forest.

Figure 2: Nitrogen removed from Wastewater in the Whakarewarewa Land Treatment System Over Time^{^[2]}

47. Management objectives are listed in the HBRC Forest Estate 2021-2031 Management Plan as:

47.1. To maintain the ability of the Land to receive and effectively treat wastewater from the Mahia Township for the foreseeable future

47.2. To protect cultural values within the Forest, and in particular the registered archaeological sites

47.3. To enhance biodiversity values in the Forest, building on the work of the Predator Free Mahia Project

47.4. To maximise financial returns from the Forest while not compromising any of the above.

Central Hawke’s Bay Forests: Waipukurau and Waipawa

48. The two Central Hawke’s Bay properties were purchased between 2009 – 2010 and, as with the Mahia Forest, were established in forest for the purpose of safely disposing of treated wastewater from the townships while earning revenue from carbon sequestration and ‘high value hardwood timber’.

49. Central Hawke’s Bay District Council opted for another option to deal with their wastewater, and the forests have never been used for this purpose.

50. In 2009 HBRC signed an MOU with the Rotary Rivers Pathway Trust, allowing the Trust use of the Waipukurau Forest for mountain biking for a term of 30 years. Since that time, the Trust has established approximately 15km of mountain bike tracks in the forest, with a further 5km scheduled for completion in the coming months. The Park is ridden an estimated 10,000 times annually.

51. Currently, the Waipawa Forest has only a commercial purpose, though two requests from the community have been made for its use. The Central Hawkes Bay District Council has requested the use of the forest for disposing of sludge remaining after their sewerage treatment, and the Hawkes Bay Riders’ Club has requested its use for horse rides and potentially grazing.

52. Management objectives for the Central Hawkes Bay Forests are listed in the HBRC Forest Estate 2021-2031 Management Plan as:

52.1. To maintain the ability of the Land to receive and effectively treat Central Hawkes Bay wastewater if required

52.2. To maintain the recreational value of the Waipukurau Forest to the Central Hawkes Bay Community

52.3. To enhance biodiversity values in the Waipukurau, creating connections to habitat along the Tukituki River

52.4. To maximise financial returns from the Forests while not compromising any of the above.

Management

53. Currently, management of the Tangoio Soil Conservation Reserve and HBRC Forests is carried out by a Forests and Reserves Officer, in the Open Spaces Team of the Asset Management Group of HBRC.

54. Forest management decisions are made according to HBRC’s standard financial delegations and significance criteria. Detailed management plans for the Tangoio Soil Conservation Reserve and HBRC Forests align with the LTP period and set out forest objectives and policies. The plans have been reviewed and approved by two reputable Hawke ‘s Bay foresters as well as the Team Leader Open Spaces and Group Manager, Asset Management.

55. Due to the high complexity of HBRC’s carbon portfolio and the significant costs of calculation errors (both in terms of fines and impacts on decisions), carbon accounting is still contracted to an external consultant. Similarly, harvest in sensitive environments is contracted to harvest managers.

56. A position of both forestry regulator and manager puts HBRC in an unusual situation and entails risks of the regulator being held to account for its own practices, a risk that is greater than that of many other local authorities given the erosion prone and environmentally sensitive nature of a large area of its forests. However, this is not an unreasonable expectation and helps HBRC to keep skin in the game of forestry, form solid working relationships with industry, and sustain expertise within the organisation in making decisions and advising on matters relating to forestry.

Discussion

Key Issues

Alternative species

57. HBRC forests contain a wide range of species as shown in Figure 3 below. Though generally alternative species don’t provide the certainty or level of harvest returns of radiata pine, in some situations, other priorities such as aesthetic value and carbon sequestration have taken precedence. Past replanting decisions, particularly at Waihapua, also reflect Council’s desire to support species diversification within the New Zealand Forest Industry.


Figure 3: Species mix in TSCR (left) and HBRC Forests (right)

58. The current HBRC Forest Estate Management Plan species selection policy attempts to balance these objectives with managing risk in the returns on investment of ratepayer funds (particularly given the increasing area returning to native) by maintaining radiata pine at around 50% of the commercial area of the estate with the remainder allocated to alternative species. Given the importance of maintaining the sustainability of the TSCR reserve fund and Catchments Fund and the progressively decreasing area of commercial forest, the species selection policy there is 75% radiata pine, once again applied to the commercial area only. This ratio will be revised at the next management plan period (3-yearly to coincide with the LTP period), particularly given the recent high prices for some cypress species.

59. The development of alternative timber species has historically been limited in large part by limited resources spread widely over a variety of species. Recently, leadership in projects such as the Specialty Wood Products Partnership (SWPP), New Zealand Drylands Forest Initiative (NZDFI), and the Cypress Interest Group of the New Zealand Farm Forestry Association has focused effort and resources more effectively behind the most promising species.

60. Small volumes of alternative species have become available for milling recently- eucalyptus fastigata were situated amongst radiata pine logged at Tangoio, and large eucalyptus regnans and juglans nigra (black walnut) will be felled soon in a land clearance exercise, also at Tangoio. In general though, the alternative species are all young and, particularly as alternative species have longer rotation ages than radiata pine, no significant volumes will become available for harvest for at least another 15 years. It is difficult to model financial returns from alternative species given the small volumes traded and subsequent lack of market data.

61. Under current market conditions, the large areas of eucalyptus fastigata and regnans on the HBRC estate are uneconomic to harvest and are a carbon crop only. Although the timber able to be effectively processed is of reasonable quality, markets for the logs are very limited and prices very low. This is mostly due to very poor recovery of sawn timber from logs (~50%) due to issues with warping, cell collapse and splitting during and after milling, and the time and handling in trying to minimise these issues. It is possible markets for these species may develop in the future as technology in wood biofuels, LVL (laminated veneer lumber), and CLT (cross laminated timber) develops.

62. Species selection objectives and policies are listed in the HBRC Forest Estate Management Plan as:

Objectives

4.9.1 To grow species appropriate for site and best meeting the Council’s financial and non- financial forest management objectives.

4.9.2 To support well founded species diversification of the New Zealand Forest Estate.

Policy

4.9.3 Select native species in preference to exotic where they are equally able to achieve the given management objectives.

4.9.4 Confirm replanting species selection choices prior to harvest based on the most current advice and information available and on the criteria of:

4.9.4.1 Alignment with primary management objective of the land, ie either erosion control or wastewater treatment, and secondarily recreational access.

4.9.4.2 Site suitability.

4.9.4.3 Financial returns on investment.

4.9.4.4 Contribution to regional economy (regional processing opportunities).

4.9.4.5 Aesthetics (in high public use areas).

4.9.4.6 Strategic alignment with industry initiatives and HBRC goals

Carbon forests and carbon trading

63. Carbon farming was a significant factor in the purchase of the Waihapua, Mahia, Waipukurau and Waipawa Forests and the decision to plant large areas of fast-growing eucalyptus species in them. Apart from the highest erosion susceptibility land at Waihapua, they weren’t envisaged as being permanent forests, and timber production was listed as a complementary objective, though as described previously this will be difficult to achieve.

64. The NZU balance earned in the forests to date and modelled into the future is shown in figure 4 below. The dotted line indicates the decreasing accuracy in predicting NZU balances at extended timelines. At the current historic high of $82 per NZU, the balance of 146,400 post 89 NZU and 14,907 pre 1990 NZU is currently worth $13 million.

Chart, line chart

Description automatically generated

Figure 4: Forecast HBRC NZU balance to 2083

65. While HBRC will trade NZU for the first time in the near future to address climate change related issues (to fund a Climate Change Ambassador role and address forest health issues in HBRC’s Central Hawke’s Bay forests), HBRC does not currently have a carbon trading policy.

Central Hawke’s Bay eucalyptus regnans

66. Large areas of eucalyptus regnans (approximately 75ha) were planted in the establishment of the Central Hawke’s Bay forests. As a rapidly growing species, e. regnans takes in large volumes of water and nutrients and is well-suited to wastewater irrigation. In addition, stands of healthy e. regnans hold more carbon than any other forest type in the world making them well suited to carbon forestry.

67. However, without irrigation e. regnans isn’t a suitable species for the CHB climate. The rainfall band in it’s natural range in Tasmania and southern Victoria is 900-1100mm^{^[3]}, whereas the five year average for Waipukurau is 690mm, with recent lows of 550mm in 2019 and 530mm in 2020.

68. Approximately 3.5ha (8%) of the e. regnans in the Waipukurau Forest and 2ha (5%) of the e. regnans in the Waipawa Forest died in the 2019-2020 and 2020 -2021 summer droughts. Tree mortality was worst in areas with northern aspects and the poorest soils. These areas have been cleared for replanting in more suitable species, but particularly given the predicted impacts of climate change, more deaths are likely in the future.

69. There are no markets for the trees at this age. Due to their size, a lot of manual handling is involved in processing and carting them for firewood. Firewood merchants these days prefer large diameter logs processed using automated machinery, allowing many m³of wood to be carted and processed efficiently and with little manual labour.

70. A minimum age of 40 years is generally recommended before e. regnans can be sold and milled for timber, in order to better deal with the growth stresses, splitting and warping the species is prone to. Even then, markets for the trees are very limited and if they can be found at all they pay poorly, as described previously.

71. In addition, fire risk in the properties is significant. The e. regnans and other eucalyptus species in the forest are all of high flammability, and even the radiata pine is classed as moderate in this regard. Land on the western boundary of the Waipukurau Forest, in the direction of greatest risk due to the prevailing wind, has been subdivided and is being sold in lifestyle blocks, and the risk of fires being started from human actvity and migrating into the property from these properties will increase.

72. The replanting plan for the Waipawa Forest is on hold pending a decision on whether HBRC is going to retain the property or not. If the property is to be sold, staff recommend leaving the cleared areas unplanted given purchasers may not want those areas back in forest. If the property is retained and Council agrees to CHBDC’s request to dispose of biosolids on it, the replanting plan will need to be made with that in mind.

73. Members of the NZ Farm Forestry Association and the Rotary Rivers Pathway Trust (the organisation that has established the mountain bike tracks in the forest) were involved in planning the replanting of the Waipukurau Forest cleared areas. The plan is still being confirmed, but key principles at this point are:

73.1. Radiata pine isn’t the best fit with the recreational values of the forest. Aesthetically, there are better options, and the harvest regime for radiata pine would require largely destroying the approximately $300,000 investment in mountain bike tracks every thirty (30) years. Planting species able to be logged selectively and milled in small local or portable mills for niche markets would minimise this damage and disruption to the recreational use of the property. As the forest is generally easy rolling contour, this method of harvest will be easily achievable.

73.2. Deciduous trees and broad-leaved natives are far less flammable than exotic conifers due to the volumes of water they hold in their leaves and stems over summer periods, and in the Waipukurau Forest this is an important factor given the issues described previously. Poplars in particular have proven to slow wildfires in Australia when planted in dense belts. Oaks are the deciduous species with the most coordinated support behind their genetic and market development.

73.3. While HBRC already has a demonstration forest and trials in the higher rainfall environment of Waihapua (1,267mm 10-year average rainfall), the Waipukurau Forest provides an opportunity to replicate this in a dryland environment, including the use of lower flammability species. This is particularly relevant given the predicted impacts of climate change.

73.4. It is important that native vegetation is planted in the forest. Many of the eucalyptus trees will never provide a saleable log and at present are purely a carbon crop. For the longevity of the forest, there must be adequate native vegetation to take over before the eucalypts become too large and unmanageable. Native is beginning to regenerate underneath, but this process is slow due to the low rainfall and scarcity of native seed sources and needs to be supported. Native plants and trees would be difficult to establish on the hard bony sites that need replanting and will be planted more strategically in high amenity areas and in the wetter valley bottoms.

Access

74. HBRC is dependent on access across private land for entry to the Mahia and Waihapua Forests, and for log truck access to the Tūtira Forest, and for access to three areas of the Tangoio Soil Conservation Reserve. Only one of these access points is not protected by easement.

75. To log the trees in the Tangoio Soil Conservation Reserve above the Devil’s Elbow, access will need to be gained across a further three properties. One of these access points will be a one-off requirement only as the area will not be replanted in commercial forestry, but easements will be sought for the other two given they will be replanted in commercial trees.

Waipawa Forest

76. The only property in the HBRC portfolio without a clear objective at this point is the Waipawa Forest. It is currently an underutilised and (given the eucalyptus regnans issues) a low productivity asset. Given CHBDC’s interest in disposing of biosolids derived from waste water treatment on the property, a conversation has been initiated with them regarding the long term future of the site.

Next Steps

77. Review of Waipawa Forest to be undertaken to determine optimal use of this asset.

78. Develop an approach for a HBRC carbon trading policy.

Decision Making Process

79. Council and its committees are required to make every decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements in relation to this item and have concluded:

79.1. This agenda item is in accordance with the Finance, Audit and Risk Sub-committee Terms of Reference, specifically “The Finance, Audit and Risk Sub-committee shall have responsibility and authority to (2.4) monitor the performance of Council’s investment portfolio”.

79.2. As this report is for information only, the decision making provisions do not apply.

Recommendation

That the Finance Audit and Risk Sub-committee receives and notes the “HBRC Forestry Update” staff report.

Authored by:

Ben Douglas

Forests and Reserves Officer

Russell Engelke

Team Leader Open Spaces

Approved by:

Chris Dolley

Group Manager Asset Management

Jessica Ellerm

Group Manager Corporate Services

Attachment/s

1 ⇩	Forest assets of New Zealand Territorial Authorities
2 ⇩	HBRC Forests and Tangoio Soil Conservation Reserve Key Financial Figures
3 ⇩	Tutira photo points post-Cyclone Bola
4 ⇩	Waihapua Forest Map
5 ⇩	Waihapua photo point 1988 and 2021

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

02 March 2022

Subject: Tūtira Mānuka Plantation Update

Reason for Report

1. This report is provided to update Council on the status including financial returns of the Tūtira mānuka plantation as requested in Finance, Audit and Risk Sub-committee (FARS) on 15 December 2021 and following the newspaper article “Hawke's Bay Regional Council's mānuka honey venture makes dismal returns” published in ‘Stuff’ on 12 November 2021.

Executive Summary

2. 136ha of Tūtira Regional Park was planted in mānuka over the period 2011 to 2013, approximately 104ha of which has successfully established and matured to form a mānuka plantation.

3. The objectives of the plantation were to trial and demonstrate the viability of high UMF mānuka as an economic soil conservation crop alternative to plantation forestry on erosion-prone land and to facilitate the eventual reversion of the steep lands above the Lake to native forest.

4. These objectives have now been met. Native reversion is well underway, and the plantation has demonstrated that mānuka plantations can be effectively established in steep hill country and earn a positive return on investment while increasing erosion control and reducing sediment loss.

5. Honey production from the plantation to date is well below forecasts used in the feasibility planning for the plantation. The primary reasons for the poor performance are difficulties in timing hive placement and honey harvest to align with honey flow, weather conditions affecting honey collection during the critical window of honey flow, and a reduction in the volume of honey able to achieve MPI’s recently introduced definition of ‘mānuka’ and therefore being downgraded to bush blends.

6. The lower than forecast honey returns have been partly compensated for by higher than forecast carbon returns. Currently, the plantation has not provided a positive return on investment, but this is not unusual as all of the costs have been incurred in the establishment stage and revenue has only recently begun to come in. This will improve over time and the 50-year projection is for an IRR of 8%.

7. The above is, however, predicated on HBRC trading carbon. No carbon from HBRC’s carbon portfolio has been traded to date. If carbon is not traded, the return from the plantation would be in the realm of -$800,000 over a 50-year period.

Strategic Fit

8. The Tūtira mānuka plantation contributes to HBRC’s strategic plan goals in the following ways:

Smart sustainable landuse

8.1. Tūtira Regional Park was purchased by Hawke’s Bay Regional Council under the Soil Conservation and Rivers Control Act (1941) with the primary objective of managing the land to maintain and improve the water quality in the two lakes, Tūtira and Waikopiro, and secondly to develop a quality outdoor recreation environment for the people of Hawke’s Bay. Native forest cover has been widely agreed in various consultation processes with the community, tāngata whenua, and subject matter experts to be the landuse most conducive to those objectives.

8.2. The plantation is enabling a transition to native forest at 8% IRR over 50 years. This is not as high a return as exotic plantation forestry could achieve, but as above, is a much more suitable use for the land given the overriding objectives. It is also more than was achieved through grazing the land.

8.3. The plantation has made a significant contribution to the development of sustainable landuse options nationally. As the only plantation of 100ha or more at that time, it was an important case study and research site in the High Performance Mānuka Plantations PGP Programme, which ran from 2011 – 2018 and which HBRC was a key investor in. It was also one of two key sites used by Landcare Research scientists in assessing the erosion control potential of the landuse^{^[4]}. Comvita Ltd continues to undertake its own research in the plantation to determine the factors influencing honey production.

Water quality safety and certainty

8.4. The mānuka plantation has effectively revegetated 100ha (12% of the catchment draining to Lake Tūtira) of erosion-prone soils in one of the most sensitive catchments (in terms of environmental, cultural and recreational values) in Hawke’s Bay.

Healthy and functioning biodiversity

8.5. The mānuka plantation has significantly increased the area of indigenous vegetation in the Lake Tūtira catchment. Mānuka is a primary colonising species and creates the conditions for other secondary species to establish and emerge through it over time, leading eventually to mature native forest.

Sustainable services and infrastructure

8.6. In increasing soil protection in the event of significant rainfall events, the mānuka plantation contributes to the protection of the landscape, infrastructure and services of the Regional Park (Attached).

9. The Tūtira mānuka plantation aligns with other significant work to conserve soils and water quality in the Tūtira catchment, including the Maungaharuru Tangitū-led Tūtira Mai i Ngā Iwi and Te Waiū o Tūtira projects, and provides valuable lessons for the Right Tree, Right Place Project and HBRC’s objectives in promoting regional afforestation.

Background

10. Successive management plans for the Park since its purchase, provided for the reversion of the steep land above the Lake to native forest through managed light grazing. This was seen to be the most appropriate landcover given the objectives described previously and the cultural and biodiversity values of the property.

11. 4ha of mānuka was established in 2011 to assess the viability of converting the wider 136ha steepland area to a mānuka plantation. The objectives were to speed the reversion to native occurring naturally, trial what was then a nascent but promising sustainable landuse alternative to grazing and plantation forestry and use the results to inform landowners and a planned HBRC ‘Trees on Farms’ regional afforestation programme, all while making a greater than 7% return on investment.

12. Though honey had been harvested from wild trees for some time, establishing plantations by planting, using cultivars bred for high UMF honey production, had not been attempted at any scale before. UMF stands for ‘Unique Manuka Factor’ and is a measure of the unique type of antibiotic activity naturally present in Manuka honey.

13. Consultants advising on the venture considered HBRC’s threshold ROI of 7% would be easily achieved and that the IRR was likely to be around 19.5%. This advice was given with the caveat …”it should be pointed out that no large-scale areas of known high UMF variety mānuka have been established. Thus costs and returns to date are best estimates^{^[5]}”.

14. The 4ha trial planting established successfully and Corporate and Strategic Committee 14 September 2011 approved the planting of a further 45ha as unbudgeted expenditure from Council reserves, with the remainder of the 136ha to be approved via the long-term plan process pending further successful establishment.

15. Ultimately, some 104ha of mānuka were successfully established. The seedlings were supplied by Comvita Ltd and had been bred for high UMF levels and for the timing of their flowering.

16. A contract signed by HBRC and Comvita in 2012 gave Comvita exclusive rights to beekeeping on the property. The contract is reviewed every 7 years, with the last review having been carried out in 2019. Given the high percentage of high UMF honey in the previous year, in the 2019 review HBRC negotiated a change from a fixed 18.5% percent share of honey revenue to the use of a ‘sliding scale’, with percentage share of revenue based on the UMF value of the honey (Table 1 below).

Table 1: Sliding Scale, HBRC revenue share

UMF

HBRC Share of Net Revenue

UMF <5

UMF 5-8

UMF 8-11

UMF 11-15

UMF 15+

10%

20%

30%

35%

17. The first commercial harvest from the plantation occurred in 2018 and has continued annually since. Key metrics are shown in Table 2 below. The 2020-2021 season harvest was badly affected by poor weather and triggered the floor payment of $50 per hive.

18. Preliminary results from the 2022 harvest indicate an improved return this year. Hive placement and removal was aligned more strictly to the main nectar flow, resulting in a higher percentage (estimated ~80%) of monofloral honey. UMF levels are sitting in the range 4-6, with estimated final levels of 7-9 after the 10-month presale storage period. Mānuka honey is stored for a period of time prior to sale to allow greater levels of UMF to be converted from its chemical precursor (DHA).

19. The improved timing was made possible by using a helicopter to place hives in locations where previously track limitations had restricted vehicle access in wet ground conditions. It remains to be seen whether the helicopter cost is justified by the increased honey returns. Once the season’s final harvest report is received, staff will assess the costs and benefits of improving track access for greater returns. Given the overriding soil conservation and aesthetic considerations, doing so would only be considered if the impacts on these were minimal.

Table 2: Key Metrics of Harvest to Date, Tūtira Plantation

	Hive numbers	Kg Honey (total)	Kg Honey (per hive)	% UMF 10 or higher (after x months storage)	HBRC Return (exc GST)	Initial forecast in business case
2018	72	1,977	27	13%	$6,334	$19,384
2019	72	2,187	30	0	$6,561	$24,829
2020	96	5,598	58	0	$5,835	$28,314
2021	112	542	5	0	$5,600	$28,314
2022 (Preliminary results)	100	1,813	18	To be confirmed	To be confirmed	$28,314

20. As shown in the table, notwithstanding the potential improvements in the current season, honey returns have been short of those predicted in the initial business proposition presented to council in each year to date. This was reported by staff in ‘significant activities’ recently, where it was picked up and reported on by media. This paper aims to update Councillors on the status of the mānuka plantation accordingly.

Key Issues

Honey volumes

21. The initial business case estimated 40kg of honey production per hive once the plantation was established. Though the first three harvests following a promising trend to achieving this, the extremely poor 2021 harvest achieved only 5kg per hive, and the 2022 is also well-short at 18kg per hive.

22. While the poor 2021 harvest volume has been attributed to poor weather conditions for nectar production and collection, the 2022 volume was due to a decision to time hive placement and removal more strictly around mānuka nectar flow and therefore sacrifice some quantity for quality. This has led to an increase in honey quality as described previously, but the ultimate effect of this trade-off on revenue (including helicopter costs) won’t be known until the harvest report is available in early March 2022.

23. The main factors limiting honey volumes can be summarised as:

23.1. Climate and terrain – Bees fly less, and therefore gather less nectar, in high winds and wet conditions. Much of the plantation is very exposed and faces directly into the prevailing north-west wind.

23.2. Establishment – As described earlier, only around 104ha of the total 136ha of mānuka planted have established successfully, an establishment rate of 76%. Though some failure has been due to competition with grasses and weeds or browsing by stock or hares, the general pattern is of successful establishment on more stable slopes and poor establishment in the skeletal soils of the many landslide scars (Attached).

23.3. Attempts have been made to infill these failed areas with further mānuka, but these have failed, as obviously the same ground conditions remain. It’s possible, in a spring-summer like 2021-2022 to date, establishment would be more successful, but these aren’t possible to predict and plan for, and staff have opted to instead leave the bare areas to revert naturally, sometimes via seed from the surrounding mānuka, but more often from that of the dominant kanuka.

23.4. Flowering timing – Another factor influencing honey volumes in the Tūtira plantation is the spread in flowering timing of the cultivars. The thinking when the plantation was established was that the approximately 4-week mānuka nectar flow period could be increased by up to double, by using early, medium and late flowering cultivars, instead of the same cultivar across the whole plantation. In practice, it seems that weather conditions and temperatures when the first cultivars flower are restricting nectar flow, and they constitute an underutilised part of the plantation.

Honey value

24. While demand and therefore prices for multifloral mānuka and non-mānuka honey has declined over recent years, it has remained strong for monofloral mānuka honey. The significant range in mānuka honey values shown in Table 3 below reflects the variance in value between multifloral and monofloral mānuka honeys and different UMF values.

25. The initial business case for the plantation used an average honey value of $30 per kg. At a forecast average of $22, the 2021-2022 season looks like being the closest to this the plantation has achieved to date. Average honey values in previous seasons ranged from $11.15 to $17.66.

Table 3: Prices and Returns for Apiculture Products, 2014-2020^{^[6]}

26. As described previously, the ‘sliding scale’ method of payment share is more favourable to HBRC at high UMF levels. Unfortunately, UMF levels of honey harvested since the contract was renegotiated have shown a general trend of decline, and no honey since that time has achieved a UMF of 10 or higher.

27. The main factors influencing the UMF level of honey can be summarised as:

27.1. Genetics – The UMF value of honey is determined in most part by the amount of the antibacterial compound methylglyoxal it contains. Methylglyoxal content in mānuka honey is in turn determined in most part by the level of dihydroxyacetone (DHA) in mānuka nectar. This is because DHA transforms naturally into methylglyoxal over time as the nectar is stored by bees and turns into honey. Selection for high UMF mānuka cultivars is therefore based on DHA levels measured in nectar.

27.2. DHA levels sampled from the Tūtira plantation in 2014 were around twice as high as those in nearby wild mānuka, indicating the cultivars planted were likely to produce relatively high UMF rated honey.

Figure 1: Scatterplots of nectar dihydroxyacetone (DHA) content and normalised nectar DHA content in Plantation and Wild Mānuka at Tūtira.^{^[7]}

27.3. Alternate floral sources – Mānuka nectar is not particularly desirable to bees, and if there are other options available, they will gather nectar preferentially from these. Depending on the extent of nectar collected from alternate sources, this results in lower UMF values, multi rather than monofloral honey, or at worst non-mānuka honey.

27.4. Alternate floral sources at Tūtira are predominantly blackberry, gorse, clover, and thistles. Blackberry and gorse have grown within the plantation as it has established over time. Control by ground is impractical and cost-prohibitive on that scale. Trials of various rates and types of herbicides have been carried out and a combination that will control blackberry (gorse was not considered as it is less of an issue) without killing mānuka has been identified, however, the cost of implementing this on a wider scale is not seen as justified by the benefits at this point.

27.5. Reducing clover flowering via hard grazing has been attempted but with limited success. This has been due to the difficulty of managing the relatively low number of cattle on the property in large paddocks on that scale, the need for the grazier to prioritise animal health and the economics of his operation, and also the pugging and other damage done to walking tracks through the plantation in the process. Grazing will continue in most paddocks going forward, and clover cover will continue to decrease over time as increasing mānuka canopy cover continues to shade it out. Grazing will need to be excluded from 27ha of the plantation from the end of this month, due to the need to keep stock from accessing newly planted pine trees and the impracticality of fencing to exclude them.

27.6. Timing – Honey boxes in place before or after the mānuka nectar flow will begin to be filled with honey from other floral sources, devaluing it as described previously. Timing placement and removal requires a trade-off between achieving maximum volumes of mānuka honey with minimal dilution from other floral sources.

27.7. Tracks in the plantation are unmetalled, narrow and dry weather access only, and wet conditions have in the past delayed hive placement. Some improvements for beekeeper access have been carried out, but the level of improvement required to create all-weather access is yet unjustified by the level of harvest returns.

27.8. Regulatory changes – In 2008, MPI brought into force a new science-based definition of mānuka honey. The new definition was established to give our trading partners greater confidence in the mānuka honey industry, following cases of mislabelling, artificial manipulation of UMF levels, and sales of more mānuka honey than was being produced.

27.9. To meet the definition of mānuka honey, samples must contain a set of four chemical markers (3-Phenyllactic acid, 2’-Methoxyacetophenone, 2-Methoxybenzoic acid, and 4-Hydroxyphenyllactic acid) and 1 genetic marker (DNA from mānuka pollen). To qualify as monofloral, the levels of 3-Phenyllactic acid and 2’-Methoxyacetophenone must be present at greater prescribed levels than in multifloral honey.

27.10. The new definition is generally agreed to have increased the proportion of honey classified as multifloral or non-mānuka, leading to a glut in supply and a fall in prices for these grades as described previously. This has negatively affected the Tūtira plantation.

27.11. Soil conditions – Mānuka produces higher UMF honey in low pH and low fertility soils. No fertiliser is applied to the plantation, and at this point the feasibility or benefits of lowering the pH of the soils has not been investigated.

Carbon trading policy

28. The mānuka plantation will only meet HBRC’s investment requirements if a number of the NZU it has earned are sold. This is similar to cashflows for the Tūtira Forest replanting plan - the cashflows presented for the option approved by Council are only applicable if the NZU revenue is received as modelled in the cashflow analysis.

29. No NZU from the HBRC emissions register have been sold to date, but this is set to change soon as Council has approved the sale of NZU to finance a Climate Change Ambassador role and work required in HBRC’s Central Hawke’s Bay Forests.

30. Table 4 below shows the IRR that would be achieved from the plantation under 3 scenarios and demonstrates the significant impact NZU sales have on the profitability of the plantation.

31. HBRC is yet to confirm a carbon trading policy, but to date has had a conservative approach. Table 5 shows the minimum number of NZU HBRC needs to sell at the current price of $82 per NZU to break even and to meet the 4% cash return targets specified in the HBRC Investment Strategy. If the price of NZU continues to climb, these numbers will obviously fall.

Table 4: IRR at different NZU Sale Scenarios

Years earned	NZU Price at that time	Scenario 1: First NZU sales in 2022	Scenario 2: NZU sold as earned	Scenario 3: No NZU sales
2018	$23	-	$19,458	-
2019	$25	-	$10,650	-
2022	$82	$169,084	$64,780	-
Total		$169,084	$91,560	-
IRR over 50 years		8%	8%	NA $830,000 loss

Table 5: Minimum NZU sale requirements to break even on investment and achieve minimum HBRC cash return requirement of 4% IRR (at $83 per NZU)

	*NZU necessary to sell*	*Years of sequestration*
Break even scenario	10,002	2011-2031
4% cash return scenario	13,890	2011-2034

Impact on the Community or Council

32. Staff consider that despite the lower-than-expected returns from the mānuka plantation, it has been a successful investment for Council and has created a positive impact on the Community. The other landuse options for the land were continued grazing, afforestation in a production forestry species, or afforestation in mixed native species, and given the special nature of the site and the prohibitive cost of the latter option on such a massive scale, the plantation is a good example of the right tree in the right place.

33. The plantation has significantly increased biodiversity, aesthetic, and soil conservation values on the Park (Attached), and has played an important role as a research site in the wider sustainable land management scene.

Other Council’s experiences

34. Though other Regional Councils have contributed to research into mānuka plantations as a landuse, the Tūtira plantation is the only known Council-owned mānuka plantation in the country.

Next Steps

35. Staff will continue to work with Comvita to trial different beekeeping and plantation management approaches in order to find out more about the variables affecting mānuka honey production and improve the performance of the plantation.

36. Staff will also continue to work with Comvita to establish the productive capacity of the plantation and the level of investment in tracks and other management justified by honey revenue.

37. Bird feed species will begin to be established throughout the plantation over time to encourage seed dispersal from frugivore bird species and subsequently speed the regeneration of secondary native forest species.

38. Staff will continue to refine plant pest control and grazing programmes to better minimise alternate floral sources.

39. Staff will report back to Council when the 2022 harvest report is available.

Decision Making Process

40. Council and its committees are required to make every decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements in relation to this item and have concluded:

40.1. This agenda item is in accordance with the Finance, Audit and Risk Sub-committee Terms of Reference, specifically “The Finance, Audit and Risk Sub-committee shall have responsibility and authority to (2.4) monitor the performance of Council’s investment portfolio”.

40.2. As this report is for information only, the decision making provisions do not apply.

Recommendation

That the Finance, Audit and Risk Sub-committee receives and notes the “Tūtira Mānuka Plantation Update” staff report.

Authored by:

Ben Douglas

Forests and Reserves Officer

Russell Engelke

Team Leader Open Spaces

Nicole Simpson

Management Accountant

Approved by:

Chris Dolley

Group Manager Asset Management

Jessica Ellerm

Group Manager Corporate Services

Attachment/s

1 ⇩	Tutira Camping Ground Post-Cyclone Bola
2 ⇩	Variation in establishment on different slopes and soils
3 ⇩	Photo point - 2014 and 2022

HAWKE’S BAY REGIONAL COUNCIL

Finance Audit & Risk Sub-committee

02 March 2022

Subject: Talent Management Internal Audit Update

Reason for Report

1. This item provides the Finance Audit and Risk Sub-committee (FARS) with an update on the talent management internal audit corrective actions.

Background

2. Crowe undertook an Audit in April 2021 to assess the Council’s talent management strategies and processes against the NZ Public Service Commission’s Talent Management Maturity Model, developed in 2017. To do this, they reviewed the following People and Capability activities and assessed those activities against the categories included in the Maturity Model:

2.1. Status of the People and Capability strategy with regard to talent management

2.2. Recruitment and Selection

2.3. Reward and Performance

2.4. Training and Development

2.5. Employee and Leadership Engagement.

3. The findings of the audit were transferred into the Internal Assurance Dashboard as Corrective Actions. Dates of milestones were inserted and these now show that the following are now “behind”:

3.1. The People and Capability Strategy, (People Plan) – a draft delivered by October 2021 to Executive Leadership Team (ELT). Since delivered in October, further amendments have been made and the document is now sitting with ELT to consider on14 Feb 2022)

3.2. People and Capability (P&C) Objectives which form part of the draft People Plan have been developed and delivered to ELT (14 Feb 2022)

3.3. Cultural values for inclusion in P&C Strategy – these were identified at the Leaders’ Forum and have now been inserted into the draft People Plan

3.4. Succession Planning workshop with Group Managers and section managers/leaders is also part of the draft People Plan and will now be part of the Talent Mapping process indicated in the plan to commence in March 2022.

4. In hindsight the dates set for completing the corrective actions were overly optimistic with what has subsequently transpired for the P&C Team. However, good progress has continued to be made on managing the critical risks facing the organisation as we build off a low base of historic service maturity. The Crowe Audit identified that the P&C services to the organisation, in terms of maturity, are largely at the ‘just starting’ point. The organisation has grown rapidly over the past 3-5 years and the capacity to focus on anything much, other than recruitment, the yearly Performance Development Plan process, Staff Survey and annual remuneration processes, has certainly resulted in a slower response to the organisation than the P&C team would like. The People Plan will provide the team with clear direction and the ability to now plan ahead and schedule their work.

5. It is important to note that the team, whilst not working to a People Plan previously, have continued to support managers with performance management, disciplinary and restructuring processes, whilst simultaneously being involved in the implementation of the new TechOne system - inputting employee data and now learning how to extract that data in order to inform our approach.

6. Improvements have also been made to the various processes utilised across the organisation. For example, recruitment processes – P&C now provide an end-to-end service to managers from assisting to update job descriptions, size and price the jobs, write job ads, shortlisting, pre-screening interviews, interviewing shortlisted candidates, reference checking and the provision of contractual documentation, which has improved the service to managers, applicants and new employees. As well, the team have moved from running individual inductions to developing and running group inductions for new employees, thereby creating efficiencies and developing cohort relationships between new employees.

7. Managers/leaders have attended briefing sessions run by the P&C team on how to benefit from the Performance Development Plan annual process. The team have also developed an on-line Exit Survey, an on-line On-boarding survey and continue to make improvements to the annual Staff Survey and how the organisation responds to what staff are telling us. The team has also been working closely with the Civil Defence and Emergency Management Team and have taken on the coordination of civil defence training, and during the last lockdown were tasked with managing the CDEM roster. Over the past month, the development of the Covid Vaccination and Business Continuity Policy was a major focus.

8. On top of the above, the team itself has had two team members on parental leave who have since left to undertake HR Management roles locally, and the team’s coordinator moved to a role in another team and the new coordinator entered the team as TechOne was being implemented. Payroll also joined the P&C team last year (from Finance) and has required the team to adjust to learning a new system. With support, the payroll issues are being worked through, but at times this has been stressful and time-consuming for all those involved.

9. The P&C team was involved in the development of the People Plan and are looking forward to undertaking the work in the plan. They see this work as the ‘more exciting’ aspects of their HR roles, where they themselves can learn and grow.

10. The proposed People Plan has three key focus areas: Leadership, People Experience and Sustainable Workforce.

10.1. The main focus under ‘Leadership’ is development of people leaders and working with and through them to foster and promote the behaviours and cultural values they have agreed to as a leadership group

10.2. ‘People Experience’ is about endeavouring to improve the experience our people have throughout their time with the Hawke’s Bay Regional Council (HBRC). We will be gathering data, analysing it and making improvements to the services we provide staff. Included in the plan is the development of centrally coordinated generic training which will be made available to staff throughout the year. The intention is to strengthen staff training and development to improve performance and confidence, as well as job satisfaction.

10.3. ‘Sustainable Workforce’ focuses on the development of a competency framework, undertaking a talent mapping exercise and ensuring we employ the ‘right’ people. There is also work to be done to align the competencies already defined in any existing tools with any new solutions developed to ensure that all these competencies are captured within the Competency Framework (yet to be developed).

10.4. We will also be gathering data and information so that we can better understand our current and future workforce needs and build further targeted initiatives and interventions around critical skill dependencies, such as we have undertaken for river engineers. We will also be focusing on students as a potential permanent workforce and developing a Corporate Alumni to keep in touch with our ex-employees who, along with current staff are our ambassadors. Ex-employees may wish to return to HBRC and bring back with them the skills and experiences they have gained elsewhere.

11. The People Plan is both a strategy and a plan to shift the HBRC’s Talent Management practices as assessed by Crowe along the maturity model. The P&C Manager proposes to report to the Sub-committee on progress against the plan annually.

Decision Making Process

12. Council and its committees are required to make every decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements in relation to this item and have concluded:

12.1. Any decision of the sub-committee is in accordance with the Terms of Reference and decision-making delegations adopted by Hawke’s Bay Regional Council 25 March 2020, specifically the Finance, Audit and Risk Sub-committee shall have responsibility and authority to:

12.1.1. Receive the internal and external audit report(s) and review actions to be taken by management on significant issues and recommendations raised within the reports.

12.1.2. Ensure that recommendations in audit management reports are considered and, if appropriate, actioned by management.

12.1.3. As this report is for information only, the decision-making provisions do not apply.

Recommendations

That the Finance, Audit and Risk Sub-committee:

1. Receives and notes the ‘Talent Management Internal Audit Update’ staff report.

2. Confirms that management actions undertaken or planned for the future adequately respond to the findings and recommendations of the 2021 internal audit.

3. Reports to the Corporate and Strategic Committee, the Sub-committee’s satisfaction that the Talent Management Internal Audit Update provides adequate evidence of the adequacy of the management actions undertaken or planned to respond to the findings and recommendations from the Crowe Audit of the Council’s talent management strategies and processes undertaken in April 2021.

Authored by:

Liana Monteith

Manager People and Capability

Approved by:

James Palmer

Chief Executive

Attachment/s

There are no attachments for this report.

[1] Annual Reporting and Audit Time Frames Extensions Legislation Act 2021

[2] Rotorua Lakes Council. (2014). Rotorua Wastewater Treatment Plant Applications for Resource Consents and Assessment of Environmental Effects Support Document, No. 1. Retrieved from: https://atlas.boprc.govt.nz/api/v1/edms/document/A3028753/content

[3] Williams, B & Besednjak, T. (2007). EM112 Gumeracha Eucalypt Climate Change Trials 2007 Interim Report. Retrieved from:

https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.733.3033&rep=rep1&type=pdf

[4] Marden, M; Lambie, S; Phillips, C. (2020). Potential effectiveness of low-density plantings of manuka (Leptospermum scoparium) as an erosion mitigation strategy in steeplands, northern Hawke’s Bay, New Zealand. New Zealand Journal of Forestry Science. 50:10. Retrieved from: https://nzjforestryscience.nz/index.php/nzjfs/article/view/82/33

[6] Ministry for Primary Industries (2021). Ministry for Primary Industries 2020 Apiculture Monitoring Programme. https://www.mpi.govt.nz/dmsdocument/44068

[7] Millner, J; Hamilton, G; Ritchie, C; Stephens, J. (2016). New Zealand High UMF® honey production from manuka plantations. (2016). Hill Country – Grassland Research and Practice Series 16: 113-118. Retrieved from: https://www.grassland.org.nz/publications/nzgrassland_publication_2772.pdf

Approved Audit FY2021-22	Provider	Quarter Due	Date Commenced	Management Comments	Reported to FARS
Fraud Management	Crowe	Q3	February 2022
Data Analytics	Crowe	Q4		Due to commence in May 2022
Retained Audit Capacity – 40 hrs