Otago ratepayers may soon get a say on whether they are happy to see their Otago Regional Council general rates bills rise as much as 5.4% so the council can support the proposed Tarras irrigation scheme.
Tomorrow, the regional council will consider putting out for public consultation an amendment to its long-term plan allowing it to invest in the scheme.
The council has been asked by Tarras Water Ltd to contribute $3.5 million, up from the original $3.3 million, to fund shares not taken up by landowners within the scheme and five years of fixed costs estimated to be between $2 million and $3.2 million.
To take part in the scheme, the council would need to use investment income normally used to subsidise general rates.
Based on assumptions the council could sell the shares and receive 6% interest on them and the fixed charges over 10 years, the council could receive extra investment income of about $619,000, the proposed amendment said.
"But in the first few years of investing, general rates would need to increase by the amount of the shortfall in investment income."
When the rate increase for the scheme was added to the long-term plan estimated rate increase of 3%, a 5.4% increase in the general rate could be expected in 2013-14, with a 1% increase in 2014-15 instead of a nil increase.
The council would, where possible, "smooth" the rates to avoid major fluctuations, the amendment said.
Investment in the scheme was seen as "high risk" compared with the council's other investments, especially as there would be no return on the investment until the shares were redeemed.
It was proposed the council's share purchase price be capped at $3.528 million.
If no shares were sold or redeemed, the council would receive no investment income and might have to write off its initial investment.
Other risks included the council's investment having to increase if the scheme's guaranteed maximum price was higher than estimated and if the interest rates on the scheme's loan or the electricity charges were higher than estimated, the council's fixed charges could increase.
The proposed amendment included a condition that in 2020-21 Tarras Water would redeem either the total remaining shares held by the council, or 20% of the initial purchase amount, whichever was less.
"The greatest risk scenario is that no shares are redeemed until 2020-21."
In that case, the fixed charges would increase to $3.2 million, share sale or redemption proceeds would reduce to $1.9 million and general rates over the 10 years would increase by $1.4 million, based on some assumptions, the amendment said.
"ORC would be left with 1496 shares with a book value of $3.5 million. There would clearly be no market for the shares to be sold."
If the scheme failed and Tarras Water was put into liquidation, the council would rank behind all secured and unsecured creditors, although it would rank ahead of ordinary shareholders.
If the council approved the amendment, it would go out for public consultation on November 10, with submissions closing on December 7. Hearings would be held in late January.
Tarras irrigation scheme
• Tarras Water Ltd is a co-operative company formed to build the scheme
• It will supply water from the Clutha River to about 40 families
• Covers about 6232haHas resource consent to extract 73.6 million cu m of water a year
• Water can only be taken from between September 1 to April 30
• Construction cost estimated at $37.7 million
• Central Otago District Council conditionally to guarantee $7.12 million bank loan
• Scheme construction to start 2013 and be completed by September 2014
