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Here’s a man…. …who won two of these things…. …in two of these things…. …which contained this much water…. 5,000,000 litres. …which is enough for one of these…. …for this long…. …during which time 5000 of these will get filled…. …and each bottle has a farm-gate value of:. - PowerPoint PPT Presentation

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PowerPoint Presentation

Today I will present the key findings from a paper that examines the economic and commercial viability of the proposed Ruataniwha Dam.

Before I start talking about the Ruataniwha Dam I want to just set the context.

Underpinning this presentation is a very simple resource story about the use and management of water because the dam makes absolutely no sense without the large scale land use change to intensive dairying because dairying is a water hungry industry and the Tukituki catchment is increasingly drought prone.

However, while I am extremely sceptical about this particular project, I am even more concerned about the continued practice zero pricing of water from a resource rental perspective because, in my view, it is little short of criminal.

So without an further ado, lets hit start button set the context.1Heres a man

2who won two of these things

3in two of these things

4which contained this much water5,000,000 litres5which is enough for one of these

6for this long

7during which time 5000 of these will get filled

8and each bottle has a farm-gate value of:

If you missed it along the way the salient fact is this:

it takes 1000 litres of water to produce 1 litre of milk; and that litre of milk currently has a farm gate value of 50 cents.

This is not meant to shock you its simply a biological fact. In other words, it just is.

The reason weve never thought about these ratios is that weve never had to because in traditional dairying areas rain provided pretty much all the water required.

However, as dairying has spread into less traditional and less climatically friendly localities, the issue of irrigation and its respective costs and benefits become very real issues.

Its with this in mind I want to now get on with an examination of the economics of the RWSS (in general) and the Ruataniwha Dam (in particular).9The Economics of the Ruataniwha Dam Is it the son of Clyde?A paper for the New Zealand Agricultural and Resource Economics Society ConferenceNelson28-29 August 2014

Id just like to acknowledge both Barrie and Warren. In particular, Id like the thank Barrie for a number of runs he did looking at the relative feed cost of irrigated grass v. supplements v. grass that were critical for both the paper and this presentation.

Also, for the conference members under 35, a brief explanation of the reference to the son of Clyde.

Clyde refers to the Clyde High Dam, which dammed the Clutha River at Cromwell and created Lake Dunstan.

Construction started in the early 1980s and was part of the Third National Government's suite of Think Big projects. The short story is that the project was a disaster that should never have been built and has remained a bi-word for project failure ever since.

Critically, there was sufficient off ramps at the time whereby the project could have, and should have, been abandoned. It wasnt, primarily for political reasons.

10ContentsOutline of the Ruataniwha Dam proposalSide-by-side comparison Clyde and RuataniwhaProject economicsFarm economicsAlternative for considerationConclusions

11Whats being proposed?The scheme consists of a 96 million m storage reservoir located in the upper Makaroro River, storing water during periods of high flow and over winter.

Water from the scheme can then be released improving river flows in the Tukituki Catchment through summer for aquatic life and other river users, while at the same time providing secure water to irrigators.

The scheme will be funded by both the public and private sector.

But lets park Clyde for a moment and focus on the dam part of the RWSS.

The passage above is taken directly from the HBRCs website.

Therere basically three limbs here:

Claimed water storage capacity of 96m cumecs (remember this number)The ability to satisfy both the irrigation needs of farmers whist improving water flows during the summerFunding from the public sector and private investors

12Side-by-side comparisonClydeWithout development, hydro potential wasted zero price water

Water hydro power aluminium

Boost export earnings

Stem the decline of Dunedin

But an earthquake fault led to massive cost overruns and delay

But No buyer for the power

But Private sector pulled out

And project evaluation numbers were awfulRuataniwhaWater is going into the sea so wasted zero price water

Irrigation milk solids powder

Boost export earnings

Stop Hawkes Bay sliding to third world status

Hey theres an earthquake fault here too

Hey is there a buyer for the water?

Hey - private sector already pulled out

And project evaluation numbers are awfulUnmitigated DisasterNow lets compare the historical experience of Clyde with the prospective experience regarding Ruataniwha.

There are similarities in terms of planning and intent that are eerily familiar. However, the three issues I want to draw you attention to are:

The findings of the project evaluation commissioned by HBRCThe potential reasoning why the private sector investors withdrew their supportWhether theres a buyer for the water13Project evaluation summary>$600m scheme comprising a $300m dam construction cost-$27m NPV over 35 years using 8% discount rate (PSDR)

But lets proceed anyway with building the dam anyway

Lets start with the entire RWSS.

The simple story here is that the HBRCs argument that the RWSS is some kind of regional or national economic game changer is simply illusionary.

In short, this should be the last slide in this presentation as we already have an answer, and that answer is the scheme is not viable from HBRCs own numbers.

However, lets gloss over this and see whether we can get the dam built anyway and if the answer is yes, what that anyway looks like.14Why did private investors walk?For investors to get a return means a water price farmers cant afford to pay$150m/$300m private (16%), $150m/$300 mpublic (8%) means servicing cost of $36m per annum, and given 96m cumecs means a water price of 37.5 cents cumec

HBRC fixed water price at 27 cents cumecAssume 25 cents cumec is available for distributions so $24m in total. On a $300m project, exactly an 8% returnEither private sector partner gets paid (while public sector partner gets nothing) or the private sector investor walks (and leaves financing of the dam solely to the public sector)

To be fair to HBRC, they always stated a price to farmers at between 25-30 cents per cumec.

This means a price of 37.5 cents a cumec is untenable for farmers so something has to give and someone needs to take a haircut (which is a subsidy).

While theres no surprise that the water price has been fixed at 27 cents per cumec, the corollary is that there are now insufficient cash flows to retain private sector involvement.

Assuming that 25 of the 27 cents are available for distributions and theres 96m cumecs to distribute then theres $24m pa to service capital costs.

Given an initial capital cost of $300m, this is an 8% return.

However, given private sector investors are likely to want a 16% return, for them to get paid on their $150m means they take the entire $24m available, which leaves nothing for the public sector partner.

The result is an implicit public sector subsidy of $243.75m (basically writing off the initial $150m and the NPV of the stream of borrowing costs).

However, if the public sector wants to get paid too then theres simply not enough money to go around so the private sector walks (which is exactly whats happened).15Public Sector Funding OptionIs there enough water?Need to issue 30 year take or pay contracts for the entire 96m cumecs to meet the PSDR of 8%

Scenario based on ~85% of claimed capacity 83m cumecs means a 6.9% returnPublic sector walks too, unless it chooses to finance the entire project at the PSRFR (5%)1.9% spread permits debt to repaid over 26 years

Better by farmers?A irrigation coop?

Given participation is dependent of achieving the 8% PSDR, and achieving that depends on contracting the entire claimed volume at a fixed price for 30 years, the key question becomes whether there is sufficient water to sell.

Questions

Is 96m cumecs an actual contractible volume of water or a theoretical maximum capacity?Can contracted volumes of 96 cumecs and addition summer flows both be achieved?Even if it is available, will farmers sign up 30 year take or pay contracts for the entire 96m cumecs tranche from year 1?

Alternative based on 83m cumecs.

However, this fails to meet the PSDR (6.9% v. 8%).

Maybe the scheme would be better run by farmers?

May be willing to accept a lower return (as gains would be capitalised into land prices)They provide the effective underwrite via the take and pay contractsNice alignment of commercial risk with commercial reward underpinned by a tangible and ever-present bottom line

But:

Can they access funds at the PSFRF?Will they buy the water?

16Farming economics 1Option 1: Irrigation as drought insuranceDont need water every year but still have to pay for itIf, for example, water is only required every second year then effective water cost is 54 cents per cumecCost of irrigated grass is >70 cents kgDM, but supplements are only ~40 cents KgDM so supplements are both cheaper and more flexible

17Farming economics 2Option 2: Irrigation to boost productionIncreasing per cow production or per HA production?If latter, the constraint of an October-March growing window bites, as there is a