Agenda of Corporate and Strategic Committee

Hawke’s Bay Regional Council

Corporate and Strategic Committee

15 May 2024

Subject: Future of Severely Affected Land (FOSAL) delivery

Reason for report

1. This item presents the approach to the delivery of the North Island Weather Event (NIWE) programme to enable the Corporate and Strategic Committee (C&S) to effectively provide oversight of this strategic programme of work. Included in this item are:

1.1. an overview of the proposed programme and delivery mechanisms

1.2. financials and a request for a change of the CE’s financial delegations

1.3. risk and assurance activities.

Officers’ recommendations

2. Council staff recommend that financial delegations to the Chief Executive are increased to $15m (from $10m currently) specifically within the NIWE Resilience Programme to enable contract execution and loading of purchase orders and payments as they pertain to the NIWE programme.

3. Staff also recommend that specific approval by exception is delegated to the Chief Executive for contracts within the NIWE Resilience Programme, beyond the Chief Executive’s delegation of $15m, to enable contract execution and loading of purchase orders and payments as they pertain to the NIWE programme.

Executive summary

4. The NIWE programme is making good progress with establishment of core project assurance and programme frameworks for delivery. These include primary documents such as the Programme Assurance Management Plan and NIWE Programme Management Plan. Accompanying plans are covering communications and engagement, health and safety, procurement, risk management, assurance, quality assurance and controls. All programme and plan documentation integrates with HBRC policies.

5. The first Programme Assurance Board meeting was held with the purpose of establishing protocol and gathering attendees for initial discussions. The PAG includes representation from Crown Infrastructure Partners (CIP) and an independent Programme Assurance Advisor from RCP as recommended by CIP. CIP has been appointed by the DPMC Cyclone Recovery Unit to manage the Cyclone Recovery Programme of work.

6. Progress has been made on understanding risks and controls at both a programme and project level to ensure that appropriate management and mitigation occurs for these, and controls can be relied upon to manage key risks.

7. To date, the programme has incurred $2.75m in costs (1% of total costs). While considered low, this was for the establishment of the above frameworks and smaller amounts of design work for optioning. Considerable work is going into engagement with our communities on options, which doesn’t incur large financial cost to undertake.

8. It is anticipated that monthly reimbursements will be made back to HBRC for cashflow purposes. Therefore HBRC will only likely carry 1 month working capital risk as an organisation and limit our interest exposure on short term debt.

9. It is evident there is natural tension on the programme to deliver to government timeframes (see risk and assurance para 28). This will be an ongoing challenge to manage the expectations of CIP to progress at pace, with the required community and mana whenua engagement, design, cultural assessments and build weather conditions.

10. It is anticipated that the C&S will review financial spend and analysis through the quarterly financial reports as an activity within Asset Management, and receive any change escalations where they may pertain to cost or resourcing requests over and above any programme allocations set.

Background

11. Under the NIWE Agreement, the Crown reserved aggregate amounts of funding under the National Resilience Plan (NRP) to assist with funding Category 2 Risk Mitigation projects, Regional Transport Projects and Category 3 Voluntary Buyouts to be delivered in the Hawke’s Bay region.

12. The total value of the Category 2 programme amounts to $232m, of which HBRC’s contribution is $44m, which represents a significant investment on behalf of the Hawke’s Bay community.

13. The packages of work funded through this agreement are highlighted below:

Severely Affected Land Areas	Co- Funding	HBRC Funding	Total
Wairoa	$70,000,000		$70,000,000
Pākōwhai	$70,676,470*	$23,373,530*	$94,050,000*
Whirinaki
Ohiti
Waiohiki
Pōrangahau
Sub Total			$164,050,000
Pumpstation Upgrades	$22,544,329	$7,455,671	$30,000,000
Rapid Repair – stopbank height increases	$22,544,329	$7,455,671	$30,000,000
Telemetry	$3,757,388	$1,242,612	$ 5,000,000
Scheme Reviews	$2,254,433	$745,567	$ 3,000,000
Total			$232,050,000

*For the purposed of this table the value for Tangoio (now Cat 3) and Joll Road (to be delivered by HDC) have been excluded from these values.

Current Status of the Programme

14. As reported to the recent Programme Assurance Board the programme is tracking as GREEN status and progressing well with the following key milestones being achieved:

14.1. CIP engagement through various in-person and online meetings, including an independent review of the programme via CIP and Aurecon consultant Matt Flannery and Altacon consultant Jamie Ferguson. The review was requested due to concerns expressed at a Ministerial level that there wasn’t the desired level of visibility of progress on the approved projects.

14.2. The programme team is progressing through business case submissions for each project via project development plans. We have submitted 3 drafts for comment to date and subsequently been asked by CIP to bundle our projects together.

14.3. HBRC is currently in discussions with Hastings District Council (HDC) regarding the Havelock North Streams project as they own this asset and are responsible for maintaining this scheme. It would be efficient and appropriate that HDC rates pay for the local share. A formal Council decision on the progress and funding for this will be presented at a future meeting. In the meantime, work is progressing so the mitigation works are not being held up.

Delivering the programme

15. A programme the size of which HBRC faces will have a significant impact on roles both within the traditional function of the Project Delivery team and across the organisation.

16. As well as a significant increase in demands on project management resources, the programme will require significant input from communications, community engagement, risk, health and safety, procurement and financial resources.

17. To better empower the successful delivery of this programme of work to meet the above objectives, an integrated approach to resourcing was proposed. With total programme escalation costs sitting at around $2m per month, to not resource the programme with resources of sufficient capacity and capability presents a significant financial risk to the organisation and the programme as a whole.

18. On this basis, the independent consultants recommended HBRC move to a Programme Management Office (PMO) approach to deliver the identified programme of infrastructure related projects.

19. The approved structure for the PMO represents an integrated team of 30+ professionals. Resources from the original Regional Projects team have transferred into the new PMO which, together with recent recruiting success, has filled 5 roles to date. A further 11 roles are in active recruiting processes.

Programme Assurance and Delivery

20. The proposed Governance and Assurance Framework has been documented and a high-level approach to how this operates is described in the following diagram.

21. The key feature of this governance framework is the Programme Assurance Board (PAG), which includes members of the Executive Leadership team to represent Asset Management, Finance and Supervisory Control and Data Acquisition (SCADA), Crown Infrastructure Partners (CIP) and an independent assurance member providing programme-specific oversight expertise.

22. The proposed inclusion of CIP within the Programme Governance Board fulfils a requirement of our funding agreement with the Crown.

23. In addition to Programme Governance Board meetings, the PMO Programme Director, Land Category Programme Manager, and Programme Finance and Controls Manager meet with CIP on a weekly basis at an operational level to provide regular updates on various aspects of the programme and individual projects. This also fulfils a requirement of our funding agreement with the Crown.

24. HBRC will use the Project Lifecycle Management Framework and related processes to form the basis of what is now the PMO process and control systems. The framework is based on international best practice for project management.

25. The structure of the PLM framework is illustrated below. Gateways requiring Manager/Sponsor approval exist between each phase to ensure that projects are adequately progressed before embarking on the next phase of work.

26. Delivery of the programme is tracking at an operational level (contractual delivery) including an overlay from a political delivery timeline (refer to the diagram below). As noted, the delivery of a large number of projects is targeted for delivery, in some cases up to 12 months earlier than expected. In order to achieve delivery, risks will be elevated such that engagement and design timelines will be compressed, consenting fast tracked, and building will be required through winter periods.

27. In order to mitigate probable bottlenecks, Council staff are proposing to increase financial delegations for engagement and processing to speed up processing (see para 36).

Programme assurance, risk and controls

28. The Assurance Management Plan outlines that the programme will operate the following principles, such as amongst others:

28.1. Independence – RCP has been appointed to the role of Programme Assurance Advisor for the Crown-funded NIWE Resilience Programme. This will provide a level of independence, so that assurance activities are able to be carried out by someone who has no direct control over the project outputs or programme outcomes, etc. The Crown Infrastructure Partners (CIP) could also undertake assurance activities for Crown-funded programmes of work, while an external third party could understand assurance activities for business-as-usual projects and programmes of work.

28.2. Risk based – The assurance activity should be focused on the high to very high-risk areas, such as commercial, funding, consenting and land acquisitions. This activity should be based on an independent risk assessment.

29. Specific Assurance Activities will include:

29.1. Health Checks – Form an effective assurance control by assessing how well the programme or project is performing at a specific point in time, i.e., whether it remains on track to deliver the expected benefits within the agreed key parameters. It tests adherence to the principles of programme and project delivery and provides value by highlighting what is working well, as well as any areas that could be improved or require escalation.

29.2. Phase gate reviews – An effective way to apply assurance controls, as a project can’t progress to its next phase unless it has undergone a gated review.

29.3. Technical assurance reviews – Form an effective assurance control for compliance with Council’s design and asset standards, relevant regulatory codes, as well as the overall suitability of a project’s design (i.e. alignment with project objectives and overarching programme outcomes and benefits).

29.4. Risk reviews – Regular review of key risks to the projects and programmes of work (e.g. funding, or consenting requirements).

30. The programme has undertaken a risk assessment for the overarching delivery, including having individual risk registers per project. At this early stage of the project, inevitably a number of risks exist that require actions to be taken. Specific highlights include:

30.1. Pump Stations – this is noted as Red. This is due to design confirmation still being determined and potential lead times of fish-friendly passage pumps being required which currently pose a risk to both cost and timing.

30.2. We expect once embedded programme documentation and forums are operating as intended that key risks such as design, procurement, and costs will be mitigated.

30.3. The timeline for delivery remains on watch and is reflected in the attached NIWE Resilience Programme – Performance and Risk dashboard.

Change Management

31. The change control process provides the NIWE Resilience Programme with the ability to make informed decisions on how to respond to events that could have an impact to the programme and its constituent projects. By knowing about an event early, it allows time to influence the change with the relevant stakeholders, avoiding unnecessary time, cost or reputational implications for things that do not help achieve the programme’s objectives.

32. Managing change at the programme-level is significantly more complicated compared to managing change on the project-level. Managing change at the programme-level includes understanding how a project-level change may impact the overall programme of works, including interfacing projects. A change event that may be considered a normal change for a project, will require greater attention at the programme level. The Programme Board and Programme Assurance Group have been established and empowered to make the best for programme decisions on the NIWE Resilience Programme and its two sub-programmes.

33. Escalation pathways and limits are still being confirmed and we will report back on this in our next update.

34. Programme Change Notices (PgCNs) will be reviewed, approved and/or rejected at the PAG, unless the change impact exceeds the delegated limit for the Programme Sponsor, in which case the change decision will be escalated to the Environment and Integrated Catchments Committee and/or Risk and Audit Committee.

35. Programme change requests will be funded either from the existing general risk and contingency allowance held at programme-level or via the provision of additional budget from the general risk and contingency allowance held at portfolio-level.

Delegations

36. The NIWE programme as a total package has been approved by Council through the Three Year Plan and adoption of the FOSAL agreement in August 2023. The Three Year Plan has the full commitment for spend across the coming 4 years.

37. For operational effectiveness and budget management, Council officers would like to propose an increase in some high-level financial delegations to expedite decision making and speed up potential bottle necks in payments and engagement.

38. It is anticipated that in some instances the value of contracts required for design and build may exceed $15m, given the value of works required in larger projects over 2 years. In instances where a contract value exceeds that of the CE, urgent approval to proceed will be sought from Council.

39. As currently allowed within the Financial Delegation Manual, Sub delegations are allowed from the Chief Executive to sub delegate powers, duties or functions and 3.1 Make changes to delegation levels within his or her operational control. In addition, 3.2. General Managers may sub-delegate their authority where it is permitted in the appendices to this policy.

.
	Delegated Authority Level	Financial Delegation
	CEO	$15,000,000.00
	Group Manager - Asset Management (NIWE)	$5,000,000.00
	Group Managers (including Programme Manager NIWE)	$1,000,000.00
	Functional Managers (including NIWE Direct Reports)	$150,000.00
	Operation Managers	$75,000.00
	Senior Financial Accountant	$50,000.00
	Level 1	$10,000.00
	Level 2	$7,500.00
	Level 3	$5,000.00
	Level 4	$3,000.00
	Level 5	$2,000.00
	Level 6	$1,000.00
	Level 7	$500.00
	Level 8	$250.00

40. Further to the above and to ensure Council does not expose further risks to the wider organisation by a blanket increase in financial delegations, Council staff propose to provide delegation by exception to the Chief Executive for NIWE Resilience Programme contracts beyond the financial delegation of $15m but within the scope and limits of the FOSAL agreement of $250m.

41. These contracts will be provided for within documented procurement management plans according to Council policies, and the phasing on these costs have been forecast within the Three Year Plan process.

Strategic fit

42. Delivery of the NIWE programme is a key priority for Hawke’s Bay Regional Council due to the commitments given to the Crown through the FOSAL Agreement and in the Three Year Plan proposed for FY25-FY28.

43. Success for HBRC will be completion of these works within financial boundaries such that communities are able to move back into homes and on land impacted by Cyclone Gabrielle and have resilient prosperous communities.

Financial and resource implications

44. There will be no resource or budget implications as the agreed budget exists for this work. It is anticipated that this will be accommodated within existing budgets only.

Decision-making process

45. 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:

45.1. The decision does not significantly alter the service provision or affect a strategic asset, nor is it inconsistent with an existing policy or plan.

45.2. The use of the special consultative procedure is not prescribed by legislation.

45.3. The decision is not significant under the criteria contained in Council’s adopted Significance and Engagement Policy.

45.4. The persons affected by this decision are the ratepayers of the region and anyone interested in local government decision-making.

45.5. Given the nature and significance of the issue to be considered and decided, and also the persons likely to be affected by, or have an interest in the decisions made, Council can exercise its discretion and make a decision without consulting directly with the community.

Recommendations

That the Corporate and Strategic Committee:

1. Receives and considers the Future of Severely Affected Land (FOSAL) delivery staff report.

2. Recommends that Hawke’s Bay Regional Council:

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

2.2. Increases the financial delegations to the Chief Executive to $15m (from $10m currently) to enable contract execution and loading of purchase orders and payments as they pertain to the North Island Weather Events Resilience Programme (NIWE).

2.3. Agrees that for contracts beyond the Chief Executive delegation of $15m, specifically within the North Island Weather Events (NIWE) Resilience Programme per the Future of Severely Affected Land agreement of $250m and as documented in the Hawke’s Bay Regional Council Three Year Plan 2024-2027, specific approval by exception is delegated to the Chief Executive to enable contract execution and loading of purchase orders and payments as they pertain to the NIWE programme.

Authored by:

Jess Bennett

Senior Manager Finance Recovery

Jon Kingsford

Manager Regional Projects

Approved by:

Chris Dolley

Group Manager Asset Management

Susie Young

Group Manager Corporate Services

Attachment/s

1 ⇩

NIWE Risk Dashboard - April 2024

Hawke’s Bay Regional Council

Corporate and Strategic Committee

15 May 2024

Subject: Financial report for FY23-24 to 31 March 2024

Reason for report

1. This report presents the financial results of the Council for the nine months to 31 March 2024 including a full year forecast of the Group of Activity expenditure and funding.

2. In addition, this item provides updates on treasury activities and HBRC’s credit rating application, as well as information about Green Loans.

Background

3. Financial performance is reported to the Corporate and Strategic committee quarterly. The report presented today is for the third quarter of the 2023-24 financial year.

4. The financial performance statements included are:

4.1. HBRC Statement of Comprehensive Revenue and Expense for the nine months to 31 March 2024

4.2. HBRC Statement of Financial Position as at 31 March 2024

4.3. Comprehensive Revenue and Expense by Group of Activities.

Key Points

5. Total operating revenue for the period is $170.3m, $51.3m above budget, principally due to funding for sediment and debris activity which was not included in the Annual Plan.

6. Comparably, total operating expenses for the period are $37m above budget at $171.6m, again largely impacted by expenditure on sediment and debris.

7. Borrowings continue to be higher than expected due to additional funding required since the cyclone to fund response and recovery activities while we work through the National Emergency Management Agency (NEMA) and insurance claims.

8. The full year forecast indicates a potential $6.7m shortfall in funding driven by investment income. This impacts our working capital position and cash management.

9. To help counter increased borrowing, officers are working on green loans and a credit rating application to reduce the cost of borrowing.

10. Good progress has been made by HBRC and HBRIC on setting up to deliver the Statement of Expectations for the next three years as approved by this Council earlier this year.

Statement of Comprehensive Revenue and Expense

Commentary on Statement of Comprehensive Revenue and Expense

11. The actual result to 31 March 2024 is a loss of $1.3m while HBRC budgeted a deficit of $15.5m for the first nine months of the year.

12. Sediment and Debris (HBRRA) and the Silt Taskforce (HBRC) continue to be significant activities for the organisation, making up $104.6m of the revenue and $103.6m of the expenditure reflected above (all sediment and debris revenue and most of the silt taskforce are currently offset by expenditure). This activity was not budgeted in the Annual Plan 2023-2024 and, therefore, is the main contributor to the significant variances in revenue and expenditure.

13. After taking out the Hawke’s Bay Regional Recovery Agency (HBRRA) and silt taskforce funding, subsidies and grants are $10m, $14.8m behind budget. This is mainly due to the time taken to work through the NEMA claims. We are likely to see payments for the initial claims before the end of the financial year.

14. The shortfall in other revenue reflects the associated delay in receiving insurance claim money and the lower than budgeted investment returns, particularly from Napier Port. These are somewhat offset by fair value gains on investments as they recover, however, these are not available to fund activities as they are not cash returns.

15. Total expenses for the period were $171.6m of which $42.7m is for the HBRRA (sediment and debris) and $60.9m for the silt taskforce, leaving $68m against a budget of $134.6m.

16. The operating underspend of $66.6m is across a number of areas which are detailed in the Organisational Performance Report.

Statement of Financial Position

Commentary on Statement of Financial Position

17. Infrastructure Assets has increased by $17.2m due to the significant amount of capital work being undertaken to repair assets damaged by Cyclone Gabrielle. The budget for the full year shows an expected value of $244m which will be a combination of capital works and the revaluation of these assets by external valuers as part of our Annual Reporting process.

18. Intangible assets value has fallen this quarter, predominantly due to the carbon credits movement. The unit rate for last quarter was $69.15 and that has fallen to $58.53 at the end of Q3. This resulted in a $1.7m write down of the value of our carbon credits. However, the current value is still above the $41.00 per unit at the end of the last financial year.

19. There has also been some volatility on the Napier Port shares which were down to $2.36 as at 31 March (was $2.51 as at 31 December 2023 and $2.50 at the end of last year). This is reflected in the Investment in Council-controlled organisations.

20. Cash and Cash equivalents is showing at $85m as at 31 March 2024. We received $46m (GST Inclusive) for further Sediment and Debris work. See the Treasury commentary for further details on overall cash position.

21. Trade payables are sitting at $103.1m with $49.6m held as income in advance (HBRRA) and Accrued Expenditure totaling $24m, a large portion of which is the sediment and debris work.

Financial summary by Group of Activities (GOA)

22. The following table provides a breakdown of the statement of comprehensive revenue and expense by Group of Activities (GOA). The Organisational Performance Report includes further financial and non-financial commentary for each GOA.

23. GOA expenditure includes each activity’s external expenditure, internal staff time, finance costs (interest), depreciation/amortization and a share of corporate overheads.

Full year forecast of GOA expenditure and funding

24. The full year forecast operating and capital activity expenditure and corresponding forecast funding is outlined in the tables below. The operating budget included in the tables is the Annual Plan budget revised for approved carryforwards and new funding agreements since finalisation of the Annual Plan budget.

25. Operating expenditure is currently forecast to be $80.6m under budget, which is predominately due to the budget assumptions made for the cyclone infrastructure repair works. An operating expenditure budget of $92.5m was included in the 2023-24 Annual Plan budget based on the total anticipated cost of repair works. Some of those costs were then incurred in the 2022-23 FY ($29m). A further $19.9m is anticipated to be spent this financial year with another $21m still required, for a total forecast of $69.9m (down from the original $92.5m and spread over three years). A carryforward request will be presented to Council early in the new financial year to confirm the final budget requirements for remaining repair works in the 2024-25 FY.

26. Excluding the cyclone infrastructure repairs, BAU activity expenditure is forecast to be $19.3m underspent for the year, with $12.2m in capital, and $7.1m in operating expenditure. The main drivers of the forecast underspends are delayed forestry harvest, postponed open spaces development projects, delays to the regional water security programme, and delays in BAU flood protection works (mostly in the IRG Levels of Service upgrade programme). Some of this work may require a carryforward of unspent budgets where commitments continue past 30 June 2024.

27. Cyclone recovery management activity is currently drawing more of the corporate overhead than budgeted, which contributes to some of the BAU expenditure underspends. This will be reviewed and refined for the final overhead allocations at year end.

28. The full year funding forecast indicates a potential $6.7m shortfall in covering our activity expenditure. This is mainly driven by investment income being significantly down on budget assumptions ($2.5m on managed funds and $5m related to the reduced Napier Port dividends). While BAU activity is forecast to be underspent, the majority of the reduced spend is offset by reduced borrowing required, reduced external income or reduced reserves requirements. The funding shortfall impacts our working capital position and cash management.

29. Rates funding is in line with budget. Fees and charges income is tracking to be $2.6m behind budget, mostly related to consent and compliance activity where there has been a lower proportion of directly recoverable activity (e.g. increased time spend on advice, especially around cyclone recovery). External income is forecast to be $63.7m down on budget, mostly related to the timing of cyclone infrastructure repair claims (insurance and NEMA). Loan funding and reserves will be used to manage the timing difference. The net funding forecast for reserves is in debit, as we are anticipating significant pay back to reserves from insurance proceeds this financial year for the costs incurred in 2022-23.

Commentary - Treasury

30. Short-term borrowings continue to be higher than anticipated as cyclone related NEMA and insurance proceeds have yet to be received. With Council currently undertaking a credit rating assessment with credit rating agents Fitch, management has held off rolling short-term debt to long term and will do so when the credit rating is received before year end. It is also anticipated an additional $20m long-term debt will be drawn in June, bringing total external debt to $120m.

31. Cyclone insurance claims and NEMA infrastructure reimbursements are progressing well. The NEMA management team processing claims were on site at HBRC in April 2023. Prior to end of 2023 HBRC had discussed with NEMA how submissions were needed to be outlined, described and presented such that HBRC have produced six versions of the claims to date due to various data integrity and presentational issues. HBRC had been working hard to fulfil the data requirements. NEMA have reviewed our first claim (seven stop banks totaling $14.2m of eligible costs) and have advised that they expect to make a reimbursement of 60% before the end of May 2024.

32. This will allow HBRC to progress further claims at pace now data and formatting is confirmed, including making insurance claims for the 40% not covered by NEMA. This is positive for HBRC and will reimburse short term debt taken for cyclone purposes.

33. Movement on the investment property portfolios up to the end of Q3 saw 4 Napier (Endowment) properties complete freeholding. A further 2 were completed in April, together with 1 Wellington leasehold property. No further freeholding of Wellington properties will be undertaken without consultation with HBRIC as new managers of the Investment Portfolio.

34. HBRC continues to work with the Crown on recovery projects and at the end of Q3 held $55.8m on behalf of the Crown (note this is spread across funds held in advance and income in advance on the face of the Statement of Financial Position). It is anticipated the Sediment and Debris programme will be completed by end of financial year apart from $5m to close down sites, together with operational funds for the HB Recovery Agency for the FY25 still held on behalf.

LGFA Green Loans

35. HBRC officers are currently investigating the options of Green Loans with LGFA (Local Government Funding Agency) as an alternative to standard bonds. These are available to fund sustainability projects that promote environmental and social wellbeing, or act on climate change and reduce greenhouse gas emissions. Projects that fit the criteria attract lower interest rate charges than standard LGFA bonds.

36. We have submitted two applications, with a third pending and another two identified as possible if required.

36.1. Climate Action Loan for General funding – The criterion for this loan is linked the reduction in scope 1 and 2 emissions and engagement with our vendors on reducing their emissions (i.e. our scope 3 emissions) for the organisation against our baseline (2019-2020 year). We are working with our external measurement vendor to align our reduction targets to meet the LGFA criteria. Currently the ask is for a 42% reduction by 2030 (from baseline) which aligns with SBTi (Science Based Targets).

36.2. Erosion Control Scheme – Although this is an existing programme, we can move any of our future loan funding requirements for the programme to a GSS climate action linked loan. Our initial submission was not seen as been ‘additive’ to the current programme to justify the climate loan. We are working with our Catchment managers on incentives and additional offerings that can be done through the programme to meet the LGFA criteria. The focus for this is encouraging native species planting.

36.3. NIWE Loan funding – for the $44 million of funding required for the NIWE work, this should meet the criteria required for the climate adaption loans, we are finalising the submission for a 23 May LGFA committee review.

36.4. Once the IRG scheme review has been completed, providing this has post cyclone additive work to be done above and beyond the programme baseline that we adopt, this is a candidate for a GSS climate action linked funding loan.

36.5. Post consultation for the LTP and subsequent finalisation and adoption, the sustainable homes and Land for Life programmes if they require further loan funding, we believe would also be candidates for this programme.

36.6. We continue to look for other programmes of work internally that we could work with the LGFA on.

37. Under the scheme HBRC will benefit from a materially lower interest rate on borrowings that qualify for the green climate adaptation loans. We currently report annually on our greenhouse gas (GHG) emissions. We will have some additional cost to include the scope 3 emissions (currently waiting on a quote from our provider for this). As part of the criteria laid out by the LGFA our Emissions Reduction Plan (ERP) needs to contain projects with their specific reduction impact. We are pending a workshop (quote to come) with our provider to identify and finalise the actions available to us to meet our target. This will also allow us to understand the cost of compliance vs. the savings to be realised from the lower offered interest rates. Once this is fully understood we can evaluate if we want to proceed.

38. If HBRC were to commit to, but then be unable to meet or track our committed reduction target, we would have a period of review and restitution that would typically cover 3 years with the LGFA. If we were unable to get back on track, we would risk being de-classified, meaning that we would no longer qualify for new green loans (either new borrowing or rolling existing loans). Any existing loans would be unaffected.

Credit Rating process update

39. In December 2023 HBRC issued an RFP to credit rating agencies to provide a credit rating for the Council. After a review, Fitch Ratings was appointed to undertake the assessment of HBRC and provide a provisional rating in recognition of their strong local government presence, including providing rating for Environment Canterbury. A review of the Council’s financial status is currently ongoing, both looking forward and back, and expected to be completed in May.

40. Fitch will then issue a provisional rating which remains private giving the council two weeks to consider. If agreed, the rating is then made public along with agreed financial analysis to support the rating. This rating will be shared with LGFA to enable HBRC to borrow funds at a reduced rate at their next tender round in June.

Investment Strategy update

41. HBRIC is now focused on delivering the Statement of Expectations for the next three years as approved by this Council earlier this year. With the new SOE and SIPO agreed HBRIC has turned its attention to the managed funds, progressed through the RFP process and appointed Jarden/First Cape as sole investment managers for all managed funds.

42. A transition plan is currently being prepared and independent tax advice sought on the best outcome for HBRIC and HBRC for management of assets. Transition is hoped to be completed by 30 June 2024. During transition returns may be affected as the managed fund portfolio is positioned to deliver HBRC’s requirements for the 2024-27 Three Year Plan and beyond.

43. HBRIC then intends to investigate HBRC’s other investment assets to ensure optimal returns and will continue to monitor the Napier Port through oversight, noting this is a strategic asset and ownership is not currently under review.

44. HBRIC will undertake full analysis and advice will be sought on the investment property portfolios and their liabilities. It is anticipated HBRIC will then assess the forestry operations noting their dual objectives for erosion control and financial returns.

Decision-making process

45. Staff have assessed the requirements of the Local Government Act 2002 in relation to this item and have concluded that, as this report is for information only, the decision-making provisions do not apply.

Recommendation

That the Corporate and Strategic Committee receives and notes the Financial report for FY23-24 to 31 March 2024.

Authored by:

Amy Allan

Senior Business Partner

Pam Bicknell

Senior Group Accountant

Chris Comber

Chief Financial Officer

Tracey O'Shaughnessy

Treasury & Investments Accountant

James Park

Management Accountant

Approved by:

Susie Young

Group Manager Corporate Services

Attachment/s There are no attachments for this report.

Hawke’s Bay Regional Council

Corporate and Strategic Committee

15 May 2024

Subject: HBRIC Ltd quarterly update

Reason for Report

1. This item presents the HBRIC quarterly update for Q3 January – 31 March 2024.

Financial Reporting

2. HBRIC’s YTD Financial Statements as at 31 March 2024 are attached to this report.

3. Key Items to note:

3.1. Statement of Financial Performance

3.1.1. YTD surplus of $223k (excluding fair value movements through other comprehensive income).

3.1.2. YTD $462k interest income (excluding managed funds)

3.1.3. YTD $253k net return from managed funds (excluding unrealised gains).

3.2. Statement of Financial Position

3.2.1. Decrease in net assets of $2.2 million as at 31 March 2024

3.2.2. NPHL share price has decreased 2% YTD from $2.50 to $2.45 – total decrease is $5.5million

3.2.3. Increase in managed fund value of $3.1million.

Managed Funds

4. These funds were formed using proceeds raised from the Napier Port IPO and are considered a strategic asset. They remain under management in compliance with Council’s SIPO.

5. The value of managed funds for HBRIC as at 31 March 2024 amounted to $48.8 million, a movement of approximately $3.1m (6.95%) year to date.

6. This is below the capital protected value of the asset of $50.2m (2% compounded inflation since inception). No divestments have been made YTD.

Port Dividend

7. Each year HBRIC receives dividends from Napier Port Holdings Ltd. HBRIC received $3.905m in December, against budget YTD of $3.840m. 100% of this dividend was passed through to the HBRC.

FoodEast

8. The third-quarter financial report for Foodeast Limited Partnership ending 31 March 2024 reported significant developments, including the nearing completion of Building A with a planned handover by the end of April. Although there was no operating revenue reported, the operating costs were notably lower than projected. The financial period saw the drawdown of the final tranches of the $12 million grant from the Kānoa Provincial Development Unit, directed towards construction and pre-construction expenses. Contributions from the three Limited Partners to date amounted to $4.8 million. Notable financial entries included a lower-than-expected operating cost of $336,515 against a forecast of $506,288.

9. Strategically, Foodeast-Haumako is enhancing its commercial strategy to develop revenue streams beyond tenancies, with several industry-related events and tenant bookings in planning. The board is also actively engaging with local iwi to explore collaborative opportunities and has started recruitment for key operational roles to strengthen its management team. Looking forward, Foodeast-Haumako is preparing for the operational phase, focusing on internal fit-outs and setting up for tenant occupancy and events.

Napier Port

10. Napier Port half-year 2024 trade volume report for Half Year Ended 31 March 2024

10.1. Total Container Volumes: Decreased by 17.3% compared to the same period last year

10.1.1. Second Quarter 2024: Total container volumes decreased by 6.3% to 56k TEU

10.1.2. Half Year 2024: Total container volumes decreased by 17.3% to 98k TEU

10.1.3. Reefer Export Cargo: Increased by 25.9% driven by favourable growing conditions in Hawke’s Bay

10.1.4. Dry Export Cargo: Decreased by 34.8%, influenced by Cyclone Gabrielle's impact on production facilities.

10.2. Total Bulk Cargo Volumes Increased by 21.6% compared to the same period last year

10.2.1. Second Quarter 2024: Bulk cargo volume increased by 53.1% to 0.87 million tonnes

10.2.2. Half Year 2024: Bulk cargo volume increased by 21.6% to 1.88 million tonnes

10.2.3. Log Exports: Increased significantly, driven by windthrown forests and additional unprocessed log volumes.

11. With market conditions remaining affected by Cyclone Gabrielle and the subsequent recovery in some sectors, Napier Port anticipates a recovery in some trade sectors and will provide a financial update on 22 May 2024.

New Investment Strategy implementation

12. The major focus this quarter has been the commission and completion of a Request for Proposal for Council’s Managed Funds Portfolio. Council’s portfolio totalling $166m is currently split between Jarden and Mercer. Six candidates were short-listed and interviewed by a HBRIC panel with its recommendation being supported by the full HBRIC Board.

13. Accordingly, the decision has been made to appoint Harbour Asset Management as the HBRC Group’s sole fund manager. This is a leading NZ funds management firm with extensive experience managing investment portfolios for charitable trusts, community trusts, iwi, crown financial institutions and superannuation scheme. We will also continue to retain the services of Jarden locally to provide in-depth banking and investment advice, and aligns closely with HBRIC’s goals to boost Council’s investment performance and returns.

14. While remaining separate entitles, alongside the National Australia Bank both Harbour Asset Management and Jarden are now a part of the newly-formed FirstCape group with $44 billion worth of funds under management or administration and advice.

15. We are in the final stages of initiating the transition of funds from the incumbent managers to Harbour Asset Management, including legal and tax due diligence matters and we propose to have FirstCape representatives present at the next C&S meeting.

16. With the priority Managed funds RFP now mostly competed, at its meeting on 9 May HBRIC will confirm a proposal for a comprehensive assessment of the Group’s remaining investment assets (excluding Napier Port) to ensure alignment with the Council’s overall risk/return investment objectives set out in the Statement of Expectations. An update will be provided to this meeting.

Decision-making process

17. Staff have assessed the requirements of the Local Government Act 2002 in relation to this item and have concluded that, ass this report is for information only, the decision-making provisions do not apply.

Recommendations

That the Corporate and Strategic Committee receives and notes the HBRIC Ltd quarterly update report.

Authored by:

Tom Skerman

HBRIC Commercial Manager

Approved by:

Susie Young

Group Manager Corporate Services

Attachment/s

1 ⇩

HBRIC Financials

1 ⇩	HB CDEM CEG report on Bush review findings and implementation
2	HB CDEM Group response to Cyclone Gabrielle - Bush report		Under Separate Cover