Report prepared for Te Maru o Ngati Rangiwewehi (June 2009)
Keywords: Environment & Resources; Maori;
Introduction
My name is Brian Henry Easton. I am an independent scholar with particular expertise in economics, social statistics and public policy analysis. I hold a D.Sc. from the University of Canterbury and am an adjunct professor at the Institute of Public Policy in the Auckland University of Technology.
Over the last 40 odd years I have worked in a number of areas pertinent to this evidence, including project evaluation, regional planning, and resource economics; I have also provided evidence and advice in a number of Waitangi Tribunal and similar claims.
I agree to standards set down in the code of conduct for expert witnesses at Courts. I am also a Fellow of the Royal Statistical Society, a Member of the Royal Society of New Zealand and a member of the Professional Historians Association of New Zealand, all of which have their own codes of conduct, consistent with the Courts’ code, and by which I also abide.
I have been asked by Te Maru o Ngati Rangiwewehi to assess the commercial loss to them from the restrictions on their use of Te Puna o Pukehau Springs (also known as Taniwha Springs).
The reports analysis can be summarised as follows:
– This report shows is that the decision of the Environment Court in August 2008 to delay the return of Te Puna o Pukehau Springs (Taniwha Springs) meant a potential loss of revenue to Te Maru o Ngati Rangiwewehi because there will be a 10 year (at least) delay in the development of the premium tourist attraction of which the site is capable.
– Based on the Hamurana Spring Recreation Reserve leasing arrangements, the Net Present Value of this lost revenue is estimated to be $550,000 (at a 7 percent p.a. discount rate, and assuming no substantial growth in revenue after the development is fully operational) .
– This estimate covers the commercial loss only and is based on conservative economic projections and assumptions. Additionally It does not make any allowance for losses due to damage to the spiritual values of Te Maru o Ngati Rangiwewehi, nor for compensation for justified grievances.
The Issues To be Considered
Economic Issues
Since 1966 the Iwi has not has total access to its property at Taniwha Springs because the Rotorua District Council has been using it as a source of water for distribution to the households and businesses of the western supply area of Rotorua. The Environmental Court, ruled that the Council may continue its draw-off (subject to various restrictions) until 2018 (Decision 095/2008). The effect of this sourcing is that it markedly reduces the use of the Springs for other purposes.
Spiritual Values
My evidence is concerned only with the values of the restriction on commercial use by the Iwi. It is clear that they are of considerable spiritual value. These were taken into account by the Environmental Court, and were of sufficient value to result in a ruling that the Council should use alternative sources of water as soon as was practical, even though the alternatives (ground water bores) were more expensive.
My figures do not include any estimate for the spiritual values. to the Iwi.
Grievance Issues
The Waitangi Tribunal concluded that some of the events which had happened in regard to the taking of Taniwha Springs were inconsistent with the principles of the Treaty of Waitangi, leading to serious prejudice to Ngati Rangiwewehi. (Central North Island Waitangi Tribunal report, Volume III , p.506-507, 510).
My figures do not include any estimates for compensation to the Iwi for grievance.
Commercial Uses of Taniwha Springs
When the water draw-off from Taniwha Springs ceases the property has the potential to be a premium tourist attraction. I draw this conclusion from the evidence to the Environment Court of such experts as Dr Marian Mare, Tai Eru and Trevor Maxwell. The evidence from various materials published by the Ministry of Tourism on the prospects for cultural tourism in the Rotorua District, and the Destination Rotorua’s Ten Year Plan supports the view that there will be an increasing demand for further premium tourist attractions such as Taniwha Springs in the future .
To assess the commercial value of the Springs’ potential as a premium tourist attraction I use the evidence to the Environment Court of Mr Wetini Mitai-Ngatai. It relates how in 2005 Mr Wetini Mitai-Ngatai seized the opportunity to turn a run-down site known as Fairy Springs into a thriving business. His affidavit does not provide the complete story, but there is one salient figure which indicates the potential value of cold water springs of high environmental quality as a tourist attraction.
In the short period of his stewardship, Mr Mitai-Ngatai has built his Mitai (previously Fairy) Springs business up to an annual turnover of $3,000,000 (in 2008 prices, or $3.3m in 2013 prices, which will be used for the projection). He says he expects to increase the turnover further, but this figure is used as a conservative estimate of the potential of Taniwha Springs.
The assessment does not assume that such a turnover would have been realised in the past, Rather, at some stage in the future, the existing developments will reach their full capacity and further developments will be needed. .
The Ministry of Tourism projects that total visitor nights in Rotorua will increase from 3.43m in 2006 to 4.02m in the seven years to 2013, an increase of 1600 tourists on an average night. (http://www.tourismresearch.govt.nz/RegionalData/North+Island/Rotorua+RTO/) In addition there will be day trippers.
That means the region has to create over the next seven years sufficient activities to keep an additional 1600 tourists. and more. interested and entertained each day, over and above what it currently provides. If it fails to do this the official projections of tourist numbers will be too optimistic. If it does better, tourist numbers will grow faster.
Mitai Springs demonstrates that Taniwha Springs has the potential to contribute to those additional activities. While its possible turnover (of around $3m) would be small in comparison to the official estimates of total tourist spending, it will play a vital role in the regions’s tourist industry, because the main spending – on accommodation, food transport and sundry purchases, depend on the existence of premier attractions such as Taniwha Springs could be.
I observe that Mr Mitai-Ngatai ‘s project demonstrates that there need be no clash between the spiritual values of the Springs to the Iwi and the commercial values. The Iwi may even conclude that an appropriate commercial development would enhance its spiritual values.
The Agreement Between the Minister of Conservation and the Rangiwewehi Charitable Trust
The analysis derives a commercial value of the Springs to the Iwi using the terms in the agreement between the Minister of Conservation and the Rangiwewehi Charitable Trust in which the Trust leased to the Department of Conservation the Hamurana Spring Recreation Reserve, (Concession number BP-17887-SSE).
This Spring is to the north of Lake Rotorua (perhaps four or so kilometres from Taniwha Springs). The concession activities mentioned in Schedule 1 of the lease are as follows:
– to establish a cultural and commercial venture at the Hamurana Springs Recreation Reserve based at Hamurana Lodge and the Amenity Area;
– Lodge Area: to develop a cultural and commercial venture that will provide services and refreshments and a range of products and services that will add positively to the visitor experience at the Hamurana Springs Recreation Reserve ;
– Amenity Area: to enhance visitor experience by offering the use and enjoyment of the amenity area for recreation, relaxation and enjoyment at the Hamurana Springs Recreation Reserve.
These activities are not necessarily those that will develop immediately at the better located Taniwha Springs. However the terms of the lease are such that they would apply, were the Hamurana Springs Recreation Reserve to pursue the sort of development that might be envisaged for Taniwha Springs. They therefore may be applied for a potential lease for Taniwha Springs.
.
The terms of the Hamurana Springs Recreation Reserve lease are for 30 years (expiring in June 2037) with a concession fee as follows:
Years 1 to 3: $500 (+GST) per annum.
Years 4 and 5: $1000 (+GST) per annum.
Years 6 to 30: 2.5% of gross revenue per annum.
There is also a $1100 (+GST) per annum Environmental Monitoring Fee. This may be ignored as it reflects costs incurred by the monitoring. .
There is a provision in the lease (Section 7) for a Concessions Fee Review Data after three years from the commencement date and three years thereafter. The following calculations assume that there will be no substantive change when the reviews occur, and so the reviews may be disregarded.
The general form of the agreement may be interpreted as follows: The intention is to give the lessor a five year period to develop the commercial possibilities of the Reserve, during which a nominal fee is charged. After five years a commercial rate (of 2.5% p.a.) is applied.
The Commercial Value of Taniwha Springs as a Premier Tourist Attraction
It is assumed that had the Environment Court ruled against further water draw-offs by the Council from August 2008 the Iwi would have arranged the a lease similar to that it did (a year earlier) with the Department of Conservation in regard to Hamurana Springs Recreation Reserve, with on the assumption that the lessor would have developed a premium tourist attraction (like Mitai Springs) over the following five years.
As previously indicated it is assumed that in the sixth year the turnover is $3.3m (i.e Mitai’s turnover plus inflation) and that continues indefinitely with a nominal growth of 2 percent p.a. for inflation. This is a similar pattern to that reported by Mr Mitai-Ngatia – perhaps the build up is a little slower but he was taking over a existing concern. In his evidence to the Environment Court, Mr Mitai-Ngatia, said he expected that the turnover would increase in future years. This report takes a more conservative assumption of no increase except for inflation (although the assumptions robustness is tested below).
These assumptions determine a stream of income through time. This stream of revenue is consolidated into a .lump sum representing its value at the beginning of the period, The lump sum is called the Net Present Value. It represents the value to the Concessionaire, in this instance, if instead of taking a revenue flow over time, it had taken a lump sum at a point in time.
A nominal discount rate is required in order to calculate the Net Present Value. The figure used here is 7 percent p.a. (that is 5 percent p.a. real – assuming a 2 percent p.a. inflation rate).
Discounting the stream of income on the basis of the lease arrangements, Net Present Value of the lease was $1.18m.
However this assumes that the alternative is water draw-off for ever. But the Environment Court only gave consent for draw-offs until 2018. The relevant detriment to Iwi is the consequence of the delay of 10 years, rather than a permanent inability to develop the site. The Net Present Value had the scheme from delaying the development by 10 years is $0.73m in 2008.
Thus as a consequence of the Environment Court decision, the Iwi suffered a loss in its commercial interest in Taniwha Springs of $450,000 ($1.18m – $0.73m).
In summary
Net Present Value
of having immediate access to Taniwha Springs for commercial development $1.18m
of having access delayed ten years to 2018 $0.73m
Difference attributable to Environment Court delay $0.45m
Note that this figure is NPV in 2008. It should be increased by the interest rate (equal to the discount rate – 7 percent p.a.) for compensation after this date. Thus if the settlement is in 2010 the relevant amount is $520,000 (i.e. $450,000*1.07*1.07).
Variations on the Base Assumptions
This section considers the sensitivity of the outcome to the assumptions made .in the calculations in the previous section.
Phasing of the Development
It could be argued that 2008 was the wrong year to commence the development. However, after allowing for the business cycle (the current recession) the operation business would want to be fully operating by 2013. On the other hand, there is probably not enough demand for such a premier tourist attraction before then.
Perhaps a more serious phasing issue is that the delaying of the development as a result of the Environment Court decision, might be longer than 10 years if it allowed some alternative venues to develop and absorb the growing demand. A delay of the the development of one year after to 20119, would add a further $48,000 to the difference.
Thus the estimate provided here is conservative as far as the phasing of the development is concerned.
Inflation
The estimate is neutral in regard to different levels of inflation, providing the same real discount rate is used.
Discount Rate
The following table gives an indication of the effect of the choice of (nominal) discount rate
| Discount Rate
(% p.a.) |
Commences 2008 | Commences 2018 | Difference | Difference Return p.a. |
|
5.0 |
$2.09m |
$1.54m |
$0.55m |
$273,000 |
|
6.0 |
$1.53m |
$1.05m |
$0.49m |
$297,000 |
|
7.0 |
$1.18m |
$0.73m |
$0.45m |
$315,000 |
|
8.0 |
$0.94m |
$0.53m |
$0.41m |
$328,000 |
|
9.0 |
$0.77m |
$0.40m |
$0.37m |
$337,000 |
As is usual for such calculations, the Net Present Value of a revenue stream is sensitive to the choice of discount rate, with a higher NPV for a lower discount rate.
However, if instead the return on the NPV if it is invested at the discount rate is compared, the difference is much smaller, and a better annual return is obtained from the higher discount rate. (e.g. $0.55m * .05 = $273,000 etc.) This return is shown in the final column of the table, and indicates that there is less variation of return than there is of the NPV. (Indeed the ranking is in the opposite direction with the larger discount rate giving as better return.)
Growth of Revenue
It was assumed that a premier tourist attraction based on Taniwha Springs would have generated a revenue of $3.3m (in 2013 prices) in 2013, and after that there would be no subsequent growth other than from inflation. This is conservative assumption, but it is hard to identify a plausible alternative.
In order to illustrate the sensitivity of this assumption, the NPV is calculated assuming an additional 1 percent real (annual) growth after the first year of full operation.
This changes the base table as follows:
Net Present Value
of having immediate access to Taniwha Springs for commercial development $1.46m
of having access delayed ten years to 2018 $0.90m
Difference attributable to Environment Court delay $0.56m
Most of the difference between the bottom line ($450,000 vs $560,000) comes from the fact that delay means that the revenue level of the 2018 development is lower than the 2008 development in the long run.
A higher growth rate of revenue would, of course, increase the difference.
Summary
The assumptions made in the previous section are generally conservative. The result is most sensitive to the future revenue stream of the development.
Conclusion
What this report shows is that the decision of the Environment Court in August 2008 to delay the return of Te Puna o Pukehau Springs (Taniwha Springs) meant a potential loss of revenue to Te Maru o Ngati Rangiwewehi because there will be a 10 year (at least) delay in the development of the premium tourist attraction of which the site is capable.
Based on the Hamurana Spring Recreation Reserve leasing arrangements, the Net Present Value of this lost revenue is estimated to be $550,000 (at a 7 percent p.a. discount rate, and assuming no substantial growth in revenue after the development is fully operational) .
This estimate covers the commercial loss only and is based on conservative economic projections and assumptions. Additionally It does not make any allowance for losses due to damage to the spiritual values of Te Maru o Ngati Rangiwewehi, nor for compensation for justified grievances.