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Summary The State’s Resource Management and Planning Appeal Tribunal overturned the construction permit for the dam on environmental grounds. The Tasmanian Government has now signalled the intention to introduce legislation that will allow construction of the dam despite the ruling by the Tribunal. As part COAG’s Water Reform Framework, States have agreed undertake certain obligations. With reference to the proposed Meander Dam, the State’s obligation is to undertake construction of the dam ‘…only when appraisal indicates it is economically viable and ecologically sustainable’. In addition, States are obligated to price water so that all costs are recovered. The intention of this paper is to determine whether the proposed Meander Dam will meet its COAG obligations. WWF Australia will focus on determining whether the Project meets COAG’s economic requirements. This is not to diminish the importance of the ecological impact of the project but rather to not duplicate the analysis prepared by other organisations such as The Tasmanian Conservation Trust on the environmental impacts of the dam. Proponents for the construction of the Meander Dam have commissioned consultants to prepare two documents providing the economic justification for the dam. Information contained in these documents and the supporting surveys were used by WWF to assess whether the proposed dam will meet the COAG economic commitments. On the evidence provided, WWF concludes that the project is not commercially viable and therefore will not meet COAG requirements specified in clause 3(d) (iii):
WWF considers that full costs will not be recovered at the proposed price of $55/ML. There does not appear to be scope for increasing the price, since any price above this level has been demonstrated to reduce demand and total project revenue. Therefore the project will not meet COAG obligations defined in clause 3(d)(i.). Introduction The intention of this paper is to determine whether the Proposed Meander Dam will meet its COAG obligations based on the information provided by the proponents. Background The dam has been designated a controlled action under the Commonwealth Environmental Protection and Biodiversity Conservation Act 1999. Under the statutory process of Tasmania’s Water Management Act and Environmental Management and Pollution Control Act, a permit was issued in October 2002 for construction of the dam. In January 2003, issue of the permit was overturned following an appeal to the Resource Management and Planning Appeal Tribunal. The Tasmanian Government currently plans to introduce legislation that will allow construction of the dam despite the ruling by the Tribunal (Green (2003)). COAG
Obligations States have agreed under clause 3(d)(iii) of the COAG framework that in relation to rural water supply (NCC (2001b)): ‘that future investment in new schemes or extensions to existing schemes be undertaken only after appraisal indicates it is economically viable and ecologically sustainable’ In addition, clause 3(a) (i.) of the COAG framework specifies commitments in regard to full cost recovery pricing being the: ‘.. adoption of pricing regimes based on the principles of consumption- based pricing, full-cost recovery and desirability of the removal of cross subsidies.." This report will focus on determining whether the Project demonstrates economic viability. This is not to diminish the importance of the ecological impact of the project but rather to not duplicate the analysis of other organisations such as The Tasmanian Conservation Trust on the environmental impacts of the dam. The Council considers that economic viability should be demonstrated in the project’s ability to recover its direct costs and provide an adequate return to its investors. New schemes should demonstrate the ability recover (NCC (2001a)):
Externalities were defined by the Council to include environmental and resource management costs attributable to and incurred by the water business. The Experts Group (COAG (1995)) has further defined environmental costs as: a.
River Management costs including: b. The allocation of natural flows to meet environmental requirements. Broader costs and benefits to society also need to be considered on larger projects, such as dams. Costs include for example, broader environmental impacts and downstream effects, while benefits could include the impact of increased economic activity. The Council suggests that governments should only consider providing assistance for construction of new water storages ‘… once the stand alone viability of the project has been demonstrated’ (NCC (2001a)) Economic Assessment-Meander Dam Proponents for the construction of the Meander Dam have commissioned consultants to prepare two documents providing the economic justification for the dam:
These reports are supported by two surveys of approximately 100 farmers interested in receiving additional water intended to determine the potential demand. The first survey was conducted in September 2001. It identified demand for an additional 24,700 ML of water, 11,300 ML by irrigators with Meander River frontage. Prospective users were re-surveyed in February 2002. This survey included consideration of the price to be charged for water. At a price of $55/ML demand for water was 22,000 ML, with 15,500 on the Meander River. Demand was greatly reduced at higher prices. Information contained in these documents and the supporting surveys were used by WWF Australia (WWF) to assess whether the proposed dam will meet the COAG economic commitments. Feasibility
Study- March 2002 Statements made in the Study are vague and contradictory, but in general indicate that the project is not financially viable:
Based on information provided in the study document WWF prepared a most-likely case scenario for the project. Details of the assumptions underlying this scenario are shown in exhibit 1a. The key assumptions underpinning the projects value are the likely volume of water to be demanded by irrigators and the price that can be charged for that water. Volume assumption: The estimated likely demand for irrigation water was based on the results of water demand surveys conducted in September 2001 and later in February 2002. The latest survey included price considerations and concluded that demand for additional water was as follows: (p.16) Meander river frontage 15,500 ML @ $55/ML price 10,600 ML @ $75/ML price 5,225 ML @ $110/ML price Off-river demand 6,585 ML @ $55/ML price 960 ML @ $75/ML price 530 ML @ $110/ML price Report considered off-river demand "unlikely to be realised" due to delivery costs of close to $100 ML (p.14). In addition it was estimated that there would be a 25% loss factor, as water was transferred to these secondary streams (P.31). The effective cost to off-river users would then be:
Water Cost $55 ML Transfer Loss $14 ML Delivery $100 ML $169 ML At this price there is likely to be negligible demand by off-river users. It is therefore concluded that a reasonable estimate of water demand would be only that of those users with river frontage: 15,500ML/yr at a price of $55. Consistent with timing assumptions included in the analysis (p.40), it was assumed that volumes would reach a level of 15,500 ML/year by year 7, with 20% of the demand taken up in year 3, 40% in year 4, 60% in year 5, 80% in year 6. Price Assumption: The February survey showed the incremental demand water for by Meander irrigators with river access at various price levels. The revenue produced at each price is shown as follows: Price ML Volume ML Revenue ($000) $55 15,500 $852.5 $75 10,600 $795.0 $110 5,225 $574.8
$55/ ML was selected as a reasonable price for water given that it produces highest level of revenue. Increases in price above this level will reduce the value of the project. The information can be shown graphically as follows: Based on the Discounted Cash Flow analysis presented in exhibit 1b, WWF concludes that under the most-likely case the project will return a negative $16M to those entities funding the dam: Project Net Present Value ($millions) Irrigation -$16.8 Hydro 0.7 Total -$16.0 Economic
Evaluation December 2002 Volume Assumption: The analysis assumes the initial demand of 15,500 ML/year will be reached over the four year period after completion of the dam. From that point the demand for water is assumed to continue to increase reaching a level of 24,000 ML/year within ten years. The maximum demand level of 15,500 ML/year estimated in the feasibility study was based on the two surveys conducted and consideration of the price to be charged for water. It is difficult to conceive of a rationale that would change this key assumption and indeed the Economic Analysis has provided none. Will the price of water be reduced? Will more land than anticipated be brought into production? Will off-river users elect to pay $169/ML for water? Will irrigators be asked to pay for all water used rather than only the additional demand?
The following illustrates the difference between the two volume assumptions : Price Assumption: The Economic Evaluation did not explicitly forecast the price of water. It was assumed that the cost of water to irrigators is $55/Ml. This price has been assumed to apply to the total level of water demanded. However it may not be appropriate to apply this price to volumes in excess of 15,500 ML/year, since the Survey showed this as being the maximum level demanded at that price. A significant reduction in the price would be required to boost demand 55% as forecast. The lower price would reduce the Project’s value. Based on the information provided in the Economic Evaluation, WWF prepared a Discounted Cash Flow analysis (exhibit 2b) to determine the projects financial viability. Despite the more optimistic assumptions shown in exhibit 2a, the value of the project for those funding the dam remains negative: Project Net Present Value ($ Million) Irrigation -$12.3 Hydro 2.1 Total -$ 10.2 If the assumption on the maximum volume demanded is reduced to 15,500ML/yr,the level supported by the survey information, the resulting Net Present Value of the project will decline to negative $13M: Project Net Present Value ($ Million) Irrigation -$15.4 Hydro 2.1 Total -$ 13.3
Does
the Proposed Meander Dam meet COAG requirements? The Council has included both externalities (environmental costs) and taxes as direct costs that should be recovered in investment in new infrastructure. These costs have not been included in the analysis and their inclusion will have a further negative impact on the project. The consultants’ report has identified direct environmental costs due to changed geomorphology, impacts on threatened plants and impacts on threatened animals but mitigation costs have not been estimated or included in the analysis. TCT has identified loss of habitat for the Spotted Tail Quoll (Dasyurus maculatus) and environmental harm to the rare plant species Epacris (Epacris aff. Exserta) as key environmental impacts. Revenue from the Dam is required to cover these specific mitigation costs and broader resource management costs. Inclusion of these costs is likely to significantly reduce the value of the Project. The council has also indicated the taxes or tax equivalents should be included in project costs. Commercial investor’s gains on the project would clearly be subject to taxation. It can also be argued that the Government’s returns should be subjected to a Tax Equivalent Regime in the interests of Competitive Neutrality. It is clear that revenue generated by the proposed Meander dam will be insufficient to cover direct costs and provide a return to investors, it is therefore considered not to have meet COAG’s obligation to achieve economic viability as defined in clause 3(d) (iii). In addition, full cost recovery will not be achieved at the proposed price of $55/ML and price increases above this level will reduce demand and total revenue, therefore the project will not meet the obligations in clause 3(d)(i.) Broader
economic considerations The consultants have made a significant effort to quantify the benefits to the community in terms of flood mitigation, water quality and recreation. These have been valued at an NPV of $2.2 million. Unfortunately the costs to the community particularly the environmental impact due to construction of the Dam, increased irrigation, disruption of flows and sedimentation, have not been quantified. The report also shows that the dam will provide a significant benefit to individual irrigators. However, the analysis excluded any consideration of the price irrigators would be required to pay for water. Use of 24,000 ML a year was assumed, but the survey indicated that a maximum of 15,500 ML would be demanded at a price of $55/ML. At higher prices, the volume of water demanded by irrigators drops precipitously. The assumption that additional water will provide a significant benefit to irrigators is not supported by the willingness or irrigators to Pay for additional water as indicated by the survey. Based on the information provided, WWF concludes that economic analysis is incomplete, since no costs to the community have been included and benefits to irrigators are not supported by survey data. In addition there are issues on the distribution of costs and benefits, with the majority of benefits accruing to irrigators, while cost are absorbed by the general community. As a consequence, WWF considers that there is no justification for the Government subsidising the construction of the Meander Dam based on it providing public benefits. Other issues
Conclusion On the evidence provided, WWF concludes that the project is not economically viable and therefore will not meet COAG requirements specified in clause 3(d) (iii):
WWF considers that full costs will not be recovered at the proposed price of $55/ML. There is no scope for increasing the price, since any price above this level has been demonstrated to reduce demand and total project revenue. Therefore the project will not meet COAG obligations defined in clause 3(d)(i.).
References Davey & Maynard, Deloitte Touche Tohmatsu, Serve-Ag (2002) Meander Dam Feasibility Study-Agricultural and Economic Report Prepared for Department of Primary Industries Water and Environment Davey & Maynard (2002) Meander Dam Proposal-Draft Economic Evaluation Prepared for Department of Primary Industries Water and Environment Green G (2003) Meander Dam Proposal to go to Parliament www.media.tas.gov.au NCC (National Competition Council) (2003) The 2003 National Competition Policy Assessment Framework for Water Reform Ausinfo, Canberra. NCC (2001a) Background Paper- Rural Water Pricing Ausinfo, Canberra. NCC (2001b) Background Paper- New Investment in Rural Water Infrastructure Ausinfo, Canberra. WCD (World Commission on Dams) (2000) Dams and Development: A new framework for Decision Making http:// www.dams.org |
