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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:.
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…which contained this much water… 5,000,000 litres
The Economics of the Ruataniwha Dam – Is it the son of Clyde? A paper for the New Zealand Agricultural and Resource Economics Society Conference Nelson 28-29 August 2014
Contents • Outline of the Ruataniwha Dam proposal • Side-by-side comparison – Clyde and Ruataniwha • Project economics • Farm economics • Alternative for consideration • Conclusions
What’s being proposed? The scheme consists of a 96 million m³ 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 boththe public and private sector.
Side-by-side comparison Clyde Ruataniwha Water 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 – there’s an earthquake fault here too Hey – is there a buyer for the water? Hey - private sector already pulled out And… project evaluation numbers are awful • Without 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 awful Unmitigated Disaster
Project evaluation summary • >$600m scheme comprising a $300m dam construction cost • -$27m NPV over 35 years using 8% discount rate (PSDR) But let’s proceed anyway with building the dam anyway…
Why did private investors walk? • For investors to get a return means a water price farmers can’t 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 cumec • Assume 25 cents cumec is available for distributions – so $24m in total. On a $300m project, exactly an 8% return • Either 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)
Public Sector Funding Option • Is 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% return • Public 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?
Farming economics 1 • Option 1: Irrigation as drought insurance • Don’t need water every year but still have to pay for it • If, for example, water is only required every second year then effective water cost is 54 cents per cumec • Cost of irrigated grass is >70 cents kgDM, but supplements are only ~40 cents KgDM – so supplements are both cheaper and more flexible
Farming economics 2 • Option 2: Irrigation to boost production • Increasing per cow production or per HA production? • If latter, the constraint of an October-March growing window bites, as there is a April-September feed deficit. • Given supplements are cheaper than irrigated grass (40 cents kgDM v. 70 cents kgDM) would be cheaper and easier simply to build a feed pad.
Alternatives • Enhanced drystock farming? The key to change has been drought-proofing the property, not with an expensive irrigation system, but a plant called lucerne. "The plant shows you don't have to drain a river to run a profitable farm.”
Conclusions • One of the key lessons from Clyde is there were ‘off-ramps’ that should have been taken but were not – similar off-ramps are emerging with the RWSS • For investors to get a commercial return implies a water cost that is unaffordable to farmers or the public sector takes a haircut – either way, at the fixed water price offered the returns are too low, leaving the public sector to finance the dam in its entirety • To meet the PSDR, 100% of claimed water must be subject to take and pay contracts – this looks questionable • A more realistic – albeit lower – level of contracted water means the PSDR is not met. However, the project is still possible if debt is secured at the PSFRF • Such a project is probably better led by farmers – as commercial incentives regarding risk and reward are better aligned • However, irrigated grass is significantly more expensive than feeding out supplements – so farmers are unlikely to sign the contracts in sufficient numbers to make financing of the dam possible (even at ‘knock down’ rates) • Investigation of options such as lucerne may be a less risky, less disruptive and more cost effective alternative
