Impact investing case study: Ruapehu Alpine Lifts infrastructure bond

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The following Case Study by Aaron Drew contributes to Financing the Future, our dynamic content project exploring the market opportunities for impact investment in Aotearoa New Zealand.

Summary

Ruapehu Alpine Lifts (RAL) is a not-for-profit organisation that runs the two main ski fields on Mt. Ruapehu, being Whakapapa and Tūroa. Increasing demand for accessing the maunga has been putting increasing strain on lift facilities. Around $25 million of funding for a gondola was sought from local and central government and local Maori Trusts in the region. The new gondola will enable more visitors throughout the year, including physically impaired visitors who can’t currently access higher levels of the maunga. A sufficient level of funding was secured in September 2018, and the gondola will be installed over this Summer. It is expected to open in June in time for the 2019 ski season. Investors in the bond will receive a minimum 3% coupon, with considerable upside depending on visitor take-up. Positive economic, environmental, employment and cultural benefits are expected once the gondola is operational.

What was the goal of the project?

The primary goal of the project is to provide improved access to the Whakapapa ski area through the year. Currently visitor numbers are curtailed both because of capacity issues and because they are vulnerable to closure in the icy conditions sometimes experienced in the key Winter months.

What impact will be achieved?

Modelling based on similar offshore projects suggests that visitor number will increase by up to around 500,000 people per annum. With these numbers an additional 140 new full-time jobs are expected, with $50m in new spending in the Ruapehu region alone. This is potentially transformative for a region which is suffering from de-population and poor performances against a wide range of social and economic indicators. Wider positive spill-overs to the Taupō region are also expected. 

The design process for the gondola involved working closely with Ngati Tūwharetoa and DOC. The gondola will see a significant net reduction in infrastructure on Mt. Ruapehu – 34 lift towers will be reduced to 14 by removing two chair lifts and replacing it with one gondola. The construction methodology and management plan focuses on environmental best practice, including waste management. The gondola itself uses an electric direct drive, which features regenerative braking technology that generates power for the ski area when it slows down (similar to the way electric vehicles re-generate power).

As part of the project RAL will partner with Tangata Whenua and Hapu to tell their story of the Tongariro National Park and the maunga, keeping this korero alive for future generations. This will be done by way of cultural inductions for RAL staff and opportunities to expand the guiding programme together with Ngati Hikairo guides.

How was the investment structured?

The investment was structured as a bond with a minimum quarterly coupon of 3%, and uncapped upside depending on passenger tickets sold once it is operational. On expected visitor numbers and ticket prices the expected return is around 16% per annum. 

The investment was de-risked in significant ways before seeking funding from investors. In particular, resource consent and contracting for installation on a fixed-price basis were secured before seeking funding; insurances were put in place in case the gondola is affected by volcanic activity; and non-Crown and local government bond investors have recourse to the gondola assets should there be a breach of the bond terms by RAL. On these considerations analysis conducted by independent parties suggested that the bond offered a very high expected return to investors given the risk involved.

Who were the investors?

Investors included Ruapehu and Taupō District Councils, various Tūwharetoa Trusts, central government (via the Provincial Growth Fund) and private sector participants.

What challenges were faced in securing the deal?

The main challenges faced in securing funding for the deal were:

  1. The fact that it is not a ‘typical’ infrastructure or property investment.
  2. Developing confidence in the economic and investment return potential.
  3. Environmental concerns around increased visitor numbers.
  4. Engagement of local hapu and getting their buy in. 
  5. Co-ordinating interest from the numerous parties, particularly local Tūwharetoa investors who had to work through how such an investment could be accommodated by their existing strategies and Trust deeds.

How were these challenges overcome?

The challenges were overcome through multiple hui with stakeholders and potential investors, and the commissioning of independent analyses to test key investment parameters and assumptions.

What would be done differently next time?

This project is unique and somewhat of a test case for co-ordinating investor participation from multiple types of investors. A general learning from the process is the importance of engagement with local communities. Another is to provide investors with information packs that contain the full range of analyses and due diligence materials that are required to make a well-informed decision. Tūwharetoa investors have recognised from the process the importance of being investment ready, and improvements in their internal investment procedures and processes so that they can respond more quickly to such opportunities when they arise in the future. 

About the author

Aaron Drew
Aaron Drew

Aaron Drew, AIFA® is a principal of MyFiduciary, who provide investment governance training and support to various organisations across New Zealand, Australia and the Pacific. Impact investing is becoming of increasing interest because it can better align an organisations investment activity with their vision and purpose. Aaron helps organisations ensure that their shift to impact investing is guided by clear strategy and investment processes, so that best-practice fiduciary standards are met.

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