30 NOVEMBER
NEW ZEALAND GAZETTE
4337

expenditure on the operation and maintenance of the
schemes, and the costs and revenue from their sales have been
recorded in the Crown accounts.

The full balance sheets for the Crown Accounts were
established on 1 July 1991. The values of the assets and
liabilities were based on the estimated amounts due to be
received by and paid by the Crown after 1 July 1991 under the
terms of the Sale and Purchase Agreements.

Settlement Payments to or by the Purchasers

The financial settlements with the Purchasers were carried out
by MAF. The final outcomes of the settlements were reviewed
by Deloitte Ross Tohmatsu. The sources of the information
were not audited, nor were they reviewed in terms of the New
Zealand Society of Accountants Statement of Review
Engagement Standards. The financial information has,
however, been accepted by the Irrigation Companies
concerned as full and final settlement of their Agreements for
purchase of the assets.

Prior to making payment, the settlements were referred to
Treasury to confirm that they reflected the intentions of the
Sale and Purchase Agreements.

GST Liability

These financial statements do not include GST although the
settlement payments by the Crown covered the Purchasers
liability for GST. The Purchasers paid GST on work carried
out by the Crown after the effective date, but were not required
to pay GST on the price paid for the assets.

List of Crown-funded Irrigation Schemes Sold

Purchased as
Amuri Plains
Arrow
Ashburton-Lyndhurst
Bannockburn
Blackstone
Burn Cottage
Earnscleugh
Eiffelton
Galloway
Glenbrook
Glenmark
Greensreet
Hawea
Hawkdun Idaburn
Ida Valley
Kerikeri
Last Chance
Levels Plain
Loburn
Lower Waitaki
Luggate Creek
Maerewhenua
Maniototo
Manuherikia
Maungatapere
Mayfield-Hinds
Morven Glenavy Ikawai
Omakau
Pisa
Pukerimu
Rangitata Diversion
Race
Ripponvale
Tablelands

Crown Scheme
Waiau Plains, Waiareka
Downs, Balmoral
Arrow River
Ashburton-Lyndhurst
Bannockburn
part of Ardgor
Burn Cottage
Earnscleugh/Blackmans
Eiffelton
Galloway
Glenbrook
Glenmark
Greensreet
Hawea Flat
Hawkdun and Idaburn
Ida Valley
Kerikeri, Puketotara, and
Kapiro Pungaere
Last Chance
Levels Plain
Loburn
Lower Waitaki
(mining rights previously
leased)
Maerewhenua Settlement
Maniototo
Manuherikia
Maungatapere
Mayfield-Hinds
Morven Glenavy and
Redcliffs
Omakau
Pisa
Pukerimu
Rangitata Diversion Race
Ripponvale
Tablelands

Tarras-Ardgour
Te Kauwhata
Tebbutts Road
Teviot
Upper Waitaki
Valetta
Waiaua
Waimea East
Wolds

Ardgour and Tarras
Te Kauwhata
Tebbutts Road
Teviot
Upper Waitaki and Upper
Waitaki Extension
Valetta Farm Settlement
Waiaua
Waimea East
Wolds

41 Schemes sold
2 Schemes not yet sold (Beggs, Pukerimu)

Total number of irrigation
schemes constructed 50

VALUING THE IRRIGATION SCHEMES

A valuation model was developed jointly by the Ministry of
Agriculture and Fisheries and the Treasury. This model formed
the basis for the Crown’s negotiation with irrigators. In effect,
values determined by using this model became upper bounds
on the sale process.

The model first calculated the price that the irrigators could
pay for water, based on the production differential between dry
land and irrigated land. The expected operating and
maintenance costs were then added into the model and pre-tax
and post-tax cash flows were calculated. The post-tax cash
flow was discounted at a 7.5% real, post-tax rate of return
(approximately equivalent to 11% pre-tax) to produce an
economic value for the scheme. The discount rate was based
on expected rates of return for other rural investments.

The above value was then adjusted downwards in recognition
that as a normal commercial product, water can be used as an
input for a wide range of products on farm. Therefore, it
cannot be sold to individuals at different prices reflecting
different land uses. As the predominant land use was for
pastoral irrigation for sheep farming, the valuation was
recalculated assuming that the gross margins for sheep applied
to the total area currently irrigated. In essence, the value
calculated was the marginal value for sheep farming.

The values calculated by the model were dependent on a
number of key assumptions. The most important of these was
that all past costs incurred by both the Crown and irrigators
were sunk, that a uniform water charge is applied across all
the users of each scheme, and that the charge must be
affordable to a substantial majority of those users.

It was also recognised that a scheme’s value derives from past
investment by both the Crown and the Irrigators. The Crown
in the form of capital costs and accumulated liabilities; the
Irrigators in the form of on-farm development costs and, in
some cases, a share of the off-farm costs. It was also
recognised that the two sets of investments are equivalent to
shares in a partnership, with one partner having the
opportunity to buy out the other.

A number of other factors could not be included in the
valuation model but nonetheless played a role in determining
sale prices. Through the negotiation process, these factors, for
example the level of risk and historical debt, generally acted to
reduce the estimated value of the schemes.

The sale process was also constrained by the absence of
competitive bidders because the Government directed that
schemes would be offered first to irrigators. While this
undoubtedly had the effect of reducing sale prices, it also
minimised monopoly and regulatory questions that would have
arisen if schemes had been sold to a party other than the
irrigators. The offers that were finally accepted from irrigators
were below the Treasury’s estimate of the irrigators’ share of the
commercial value of the scheme derived by the above