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In 2011, the Government had signalled plans to invest up to $400 million in regional-scale schemes to encourage third-party capital investment.
The Cabinet has now directed that $80 million for the initial stages of the company's operation be set aside in this year's Budget.
The development of a well-designed storage and irrigation infrastructure had the potential to deliver significant economic growth for the country's primary industries and support new jobs, outgoing Primary Industries Minister David Carter said.
As the opportunity to take a stake in developing regional-scale water infrastructure was new for private investors, it was appropriate for the Government to take a bridging investment role to ensure the right projects could start, Mr Carter said.
The company would be a minority investor in any development project and it would also plan to be a relatively short-term investor.
''A number of groups are developing proposals for these larger, regional-level schemes, and the Government expects to consider at least one proposal in the next 12 months,'' he said.
Irrigation NZ chairman John Donkers said farmers had for many years personally covered the cost of setting up water infrastructure, which could ''run into the millions of dollars'', yet these schemes benefited regional economies ''enormously''.
Having a Government-owned company invest in the initial stages would take the pressure off small communities to find that kind of capital, he said.
Mr Donkers believed water projects in Hawkes Bay, Tasman, Canterbury and Otago were likely to be considered this year.
Fonterra's managing director, co-operative affairs, Todd Muller, said the investment announcement, coupled with the establishment of a Crown vehicle to co-invest with water schemes, was an important step towards boosting agricultural productivity and exports.
''Water is fundamental to dairying and agricultural productivity. Enabling a mix of public and private funding will give investors the necessary confidence to push ahead with schemes at the regional level.
''We will see benefits flow through in increased production and export earnings and we will also see the environmental benefits which will come from improved water flows,'' Mr Muller said.